The Unlimited Potential of Embedded Banking

With fewer resources and smaller customer bases, community banks often find themselves on the losing end of a tug-of-war game when getting involved in emerging technologies. But that’s where embedded banking is a game-changer.

Embedded banking offers every financial institution — regardless of size — a chance to grab market share of this relatively untapped, billion-dollar opportunity.

Embedding financial services into non-financial applications is a market that could be worth almost $230 billion in revenues by 2025, according to a report from Lightyear Capital. That means forward-thinking community banks could see a big upside if they make the strategic investment — as could their non-bank partners. And those companies that are orchestrating integrations behind the scenes could also reap rewards in the form of subscription or transactional services. And ultimately, end users will benefit from the seamless experience this technology provides. While it’s a winning proposition for all, a successful embedded finance operation involves preparation and strategy. Let’s take a closer look at the four players who stand to benefit with embedded banking.

Community Banks: Building Reach
As community banks retool their strategies to adapt to more digital users, they also face growing challenges from digital-only neobanks and fintechs to retain their existing customers. They will need innovative features on-par with their big-budgeted competitors to thrive in the space.

Embedded banking is a legitimate chance for these banks to stake out a competitive advantage. Embedded banking, a subset of banking as a service (BaaS), allows digital banks and other third parties to connect with banks’ systems directly via application programming interfaces, or APIs. Today, 70% of banks that sponsor BaaS opportunities have less than $10 billion in assets. The cost to compete is low, and the services that non-bank entities are seeking are already available on banking platforms.

To start, institutions work with a technology company that can build APIs that can extend their financial services, then identify partners looking to embed these services on their digital platform. A best-case scenario is finding a digital banking partner that can deliver the API piece and has connections with potential embedded banking partners. Once a bank has an embedded banking strategy in place, expansion opportunities are unlimited. There are numerous non-bank partners across many industry verticals, offering entirely new customers at a lower cost of a typical customer acquisition. And these partnerships will also bring new loans, deposits and payment transactions that the bank wouldn’t otherwise have.

Nonbanks: Retaining Customers, Bolstering Satisfaction
Companies outside of the finance industry are rapidly recognizing how this technology can benefit them. Customer purchases, loans or money transfers can all be facilitated using services from a bank partner via APIs. Companies can offer valuable, in-demand financial services with a seamless user experience for existing customers — and this innovation can fuel organic growth. Additionally, the embedded banking partnership generates vast amounts of customer data, which companies can use to enhance personalization and bolster customer loyalty.

Consumers: Gaining Convenience, Personalization
Making interactions stickier is key to getting consumers to spend more time on a website. Sites should be feature-rich and comprehensive, so users don’t need to leave to perform other functions. Embedding functionality for relevant financial tasks within the platform allows users to both save time and spend more time, while giving them valuable financial products from their trusted brand. They also benefit from data sharing that generates personalized content and offers.

Tech Companies: Growing Partnerships, New Opportunities
Technology providers act as the conduit between the financial institution’s services and the non-bank partner’s experience. These providers — usually API-focused fintech companies — facilitate the open banking technology and connections. By keeping the process running smoothly, they benefit from positive platform growth, the creation of extensible embedded banking tools that they can reuse and revenue generated from subscription or transaction fees.

Everyone’s a Winner
This wide-open embedded banking market has the potential to be a game changer for so many entities. The good news is there is still plenty of room for new participants.

FinXTech’s Need to Know: Charitable Giving Platforms

In the wake of disaster, people give back.

Less than twenty-four hours after Russian President Vladimir Putin announced a “special military operation” in neighboring Ukraine, Ukrainian-based charity Come Back Alive received over $673,000 in donations — $400,000 of which was in bitcoin. At the time of this newsletter, over $50 million has been donated to Ukraine in cryptocurrency.

Whether it’s a global catastrophe or an organization closer to home, U.S. consumers want easy ways to give to the causes that are important to them. Banks are in a perfect position not only to highlight local charities for their customers, but also to facilitate donations to them in a safe, efficient and trackable manner.

And financial technology companies can provide the software to make it possible.

Fintechs that specialize in charitable giving help embed donation capabilities directly into a bank’s digital banking platform via application programming interfaces (APIs), avoiding lengthy core integration timelines. Once live, bank customers can choose which charities to give to, how often they donate and, of course, how much.

Charleston-based in/PACT offers a white-labeled giving solution for banks called GoodCoin. GoodCoin allows customers to give in multiple ways: one-off donations, recurring gifts (monthly, bi-weekly, etc.) or “round up,” which rounds up a user’s card payments to the nearest dollar and donates the change.

These fintechs also keep track of each customer’s donations for the year. Users can access exportable receipts during tax season, or whenever a donation is made. And using a giving-based fintech allows users to access how much they’ve given starting at the start of the year or since they started giving so they can track their impact.

Pinkaloo, another charitable giving platform, operates accounts for charitable donations that are similar to a health savings account. Customers can fund the account, donate to a selected charity and immediately receive a tax receipt for the transactions — all under the bank’s brand. Customers can even convert their credit card rewards points into charitable dollars.

On a larger scale, CyberGrants, which was acquired by Apax Partners in June 2021, helps banks to manage, track and report on all of their corporate philanthropic efforts. It also has a front-end interface that allows employees to sign up for payroll donations or track volunteer hours and nonprofits to apply for bank grants.

Here are four customer- and bank-facing benefits of implementing a giving-based fintech:

  • It provides audit-ready, real-time and exportable tax receipts. All of a customer’s giving lives in one place. Banks can even use certain platforms to track enterprise-level giving. 
  • It promotes giving, locally and globally. There are over 1.5 million 503(c)3 nonprofit organizations registered with the IRS. in/PACT has over 1.2 million of them on its platform for users to search and donate to. Banks can also use the platforms to match customer donations to specific charities.
  • It can realign or reinforce corporate philanthropy. Collecting donation data can show banks what charities or causes are important to their community. They can later choose to incorporate or emphasize those organizations into their corporate giving strategy.
  • It drives digital engagement and brand loyalty. Consumers like aligning themselves with brands that provide opportunities to give back (and give back themselves). Having a donation platform as an integral part of a mobile banking experience can keep customers engaged and coming back.

Banks that implement a giving platform can help customers increase their charitable donations on their time and dime.

Pinkaloo, in/PACT and CyberGrants are included in FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.

Creating a Better Business Banking Experience

Banks should be positioning themselves to be trusted partners for entrepreneurs, helping their businesses run smoothy, from account onboarding and beyond.

Too often however, what many business owners experience are complex, inefficient processes that require a litany of repetitive details and data points that can take days — or even weeks — to complete. In many cases, small and medium business owners have been forced to look to other institutions as a result of slow, manual process at their existing bank. The industry has seen how those institutions that invested in automation and better business banking experiences actually grew in terms of customers during the pandemic. But the growing number of banks that recognize the need to offer better experiences through enhanced user interfaces and automation must overcome the main hurdle of how best to implement it.

Today’s business owners expect the same quick and simple banking experiences they receive from their personal accounts from their business accounts. Banks that recognize this need often still fail to close the gaps. A major issue is that most of the process is still driven by paper forms. By automating some of these more manual and tedious steps, banks can speed up and streamline the process. Allowing the customer to directly fill out the necessary information online, all at once, rather than have them complete PDFs that need to be rekeyed by a bank employee later can save vast amounts of time.

Even once the account is live, business banking can still often be a clunky and complicated experience, especially on the back-end where each function lives on a different platform or service hosted by different vendors. Electing these options may take the user out of the bank’s system, with an environment that may look and function very differently than the initial account interface. Banks want systems that are attractive, transparent and user-friendly on the front-end, but still have all the functionality and capabilities users need.

The truth is that there is no single platform currently available that can check every box and solve every issue. However, banks should focus on the full end-to-end experience and look for solutions that can support their most current, important needs and offer the flexibility to adapt as the bank grows. Banks need to build architecture that reflects a more modern, app store that keeps the user in its cultivated experience without an obvious and often jarring transition between functions or screens, creating an overall better experience for the business banking user. Solutions and platforms that are flexible and scalable mean that banks can adjust these looks and functions as both the technologies and user needs shift, changing and controlling the experience to match it.

While some banks would prefer to develop their solutions in house, they may lack the dedicated talent and resources to do so, but “off-the-shelf” solutions may not have the necessary flexibility and scalability. For many community banks, this has increased interested in partnering with fintechs. Banks considering this option must ensure the fintech can meet all their functionality needs, as well as their risk and regulatory requirements — no small feat. A good place to start is by evaluating how a fintech’s level of compatibility with the bank’s existing core system.

Fortunately, there are a growing number of “core agnostic” fintechs that can work effectively with a variety of technology platforms and organizations, offering malleable products that can match the individual rules and procedures of each bank. Banks can then control the user experience and tailor it to their specific client demographic. From a cost-effectiveness standpoint, recent “low-code” or “no-code” solutions from an innovative fintechs give banks the ability to handle these changes in-house, without an extensive IT team. These solutions can bring greater efficiencies for banks that are now able to manage and shape their technology systems to solve complications that once required advanced technology experts.

Building and strengthening the relationships with business account holders is becoming a bigger priority for all banks. Banks that prioritize their needs and expectations by focusing on the end-to-end user experience and offering their business customers a better, faster and seamless experience will be positioned to meet their demands, possibly changing the road map of its technology future.

What’s New in Payments?

Following a number of rollouts and innovations, 2022 could finally be the year where the speed of digital payments equals their convenience.

A number of developments, combined with the coronavirus pandemic and changing consumer habits, could hasten changes to the payments landscape — as well as banks’ ability to participate. Altogether, they could address some of the payment pain points for community bank customers.

“The pandemic may have helped to spur growth of innovative payment methods, such as in-person contactless card, digital wallet and [person-to-person] payments,” the Federal Reserve Board wrote in a December 2021 payments study, adding that payment behavior “changed sharply” in 2020.

Digital payments are becoming the primary way that customers interact with their bank, and the number of such payments is accelerating, says Jason Henrichs, CEO of Alloy Labs Alliance. But for all its convenience and security compared to cash and checks, digital payments suffer from two major problems: they are slow and fragmented. Two innovations are making headway on addressing those problems, allowing for greater convenience for customers in timing and directing payments.

“There’s a huge opportunity and overlapping need from bank customers who aren’t in the digital payment world yet, and from those who are but are frustrated because it’s a series of closed networks,” he says. “What if, from your bank app, you could push money to anyone? And they don’t have to subscribe to anything, they don’t have to download an app, they don’t have to create an account?”

A community bank consortium brought together by Alloy Labs is attempting to solve that with CHUCK, an open peer-to-peer payments network. At the end of January, Reading Cooperative Bank, a $661.7 million bank based in Reading, Massachusetts, went live on the network.

CHUCK’s open nature simplifies sending and receiving digital payments. In most payment networks, both a payer and payee often need to use the same platform to send and receive funds. For example, customers can only send money over Zelle to other participating banks, and a Cash App user can’t send money to someone’s PayPal account. With CHUCK, a customer can log into their bank mobile app and send money to one of their contacts using the person’s phone number or email; the recipient, who does not have to belong to a CHUCK bank, is notified they have received money and selects where to deposit it.

CHUCK is in beta testing at several other banks in the consortium and is available nationwide to banks that are not members of Alloy Labs. Henrichs says its per-transaction pricing is designed to be cheaper for small banks than Zelle; smaller banks tend to have fewer P2P digital payments and pay more per transaction done over Zelle compared to biggest banks.

Another area of payment innovation is the continued adoption of instant payments, and subsequent customizations. The first instant payments system in the U.S., Real Time Payments or RTP, was introduced by The Clearing House in November 2017. There are now more than 190 financial institutions that offer RTP and all federally insured U.S. depository institutions are eligible to use it. The network processed 123 million real time payments in 2021, almost double what it processed in 2020. This growth comes as the Fed continues to work on FedNow, its own instant payment capabilities, ahead of its slated 2023 launch.

Already, RTP has powered a number of payment innovations, says Steve Ledford, senior vice president of products and strategy at The Clearing House. He lists faster insurance payments and mortgage closings, disbursements from digital wallets from nonbanks, employers that pay employees outside a traditional pay cycle and industries like transportation and trucking that have long invoicing periods. All incorporate RTP functionality in their payment processing. RTP can be used in digital invoicing called “Request for Pay,” which could make it easier for consumers to pay bills when they have funds available and reduce overdraft fees associated with misaligned timing and deposits.

“Folks are expecting payments to move now in real time; now that you can, you’re going to seeing more of it,” he says.

These innovations and continued adoption could solve some payments problems for customers. Payments remains an area of experimentation and innovation for banks and nonbanks alike, and groups like The Clearing House and Alloy Labs are continuing to chip away at these issues.

“I don’t know if CHUCK solves the problem of payments, but it gets us on a path that has a shot,” Henrichs says.

Bankers’ Perspectives: Better Banking for Small Businesses

Digital trends predating the Covid-19 pandemic vastly accelerated as a result of the crisis, with clients moving further away from in-person experiences. Small businesses increasingly expect more from their financial institution as fintech providers outside the traditional banking space chip away at market share. Bank leaders have to act quickly to provide better services, products and experiences. In this video, Bank Director Vice President of Research Emily McCormick interviews three bankers about how they’re approaching these circumstances: Shon Cass of $986 million Texas Security Bank, based in Dallas; Stacie Elghmey of $1.7 billion Hawthorn Bank in Jefferson City, Missouri; and Cindy Blackstone of Tyler, Texas-based Southside Bank, with $7.1 billion in assets.

Derik Sutton of Autobooks also provides his point of view, based on the technology company’s background in working with banks and small businesses across the U.S.

Investing in technology isn’t just dollars and cents, says Cass, and banks need to rethink return on investment in the digital age. “How does [technology] build a better bank for the future?”

Topics discussed include:

  • Meeting the Needs of Small Business Clients
  • The Changing Competitive Landscape
  • Working With Technology Vendors to Meet Strategic Goals
  • Looking Ahead to 2022

For more on serving small business customers today, access the Small Business Insights report developed by Bank Director and sponsored by Autobooks.

Leveraging Artificial Intelligence in 2022

Around a quarter of bank executives and board members reported that their institution used artificial intelligence (AI) and/or machine learning in Bank Director’s 2021 Technology Survey — leaving room for more banks to adopt these technologies over the next few years. Slaven Bilac, CEO of Agent IQ, shares use cases for AI and offers advice for bank leaders seeking to add these solutions.

  • AI Applications
  • Requirements for Adoption
  • Overcoming Barriers
  • Questions to Ask

What the Heck is Web3?

With increased interest around Web3, making sense of the latest and newest technology trend — and its potential impact on financial services —  could add value to strategic discussions as leadership teams and boards consider their long-term strategies.

For early and seed stage venture capital, the top 15 firms invested $1.3 billion in Web3 and decentralized finance in the third quarter 2021, according to Pitchbook. The research company said investment in the space — which includes $900 million into the cryptocurrency exchange FTX and $120 million in Offchain Labs, a blockchain-based, smart contracts platform — beat out the separate fintech category, which landed in the No. 2 spot with $860 million invested.

Not everyone is convinced. In a December 2021 tweet, Tesla CEO Elon Musk called Web3 “more marketing buzzword than reality right now.” He was responding to a video of a 1995 interview of Microsoft Corp. founder Bill Gates with David Letterman, in which the TV host asked, “What about this internet thing?”

That question seems quaint today. Amazon.com had just opened for business as an online bookstore; Mark Zuckerberg would start Facebook roughly a decade later.

Facebook represents the current state of the internet, characterized by centralized platforms that own or leverage user content. But the web continues to evolve; venture capital firms and tech titans are using the term “Web3” to discuss this next phase. These changes encompass concepts that bank leadership teams and boards should be watching and regularly discussing.

“Web3 is really just a rebranding of a lot of the things we’ve already been talking about for a while,” says Alex Johnson, director, fintech research at Cornerstone Advisors. “It’s the collision of the internet and crypto in a way that allows for users of the internet to have verifiable ownership over the companies and products that they interact with.”

The expansion of digital assets underpinned by blockchain — including cryptocurrency and non-fungible tokens (NFTs), which represent ownership in art, music or even real estate — are reshaping the way that internet users think about ownership.

“There will now be the capability to give verifiable ownership — over content, over relationships, over access to special features, over [intellectual property] — to customers or users. And the potential impact of that is that companies that do that will have a significant marketing advantage and retention advantage,” says Johnson. Companies could use tokens to build loyalty and community, granting partial ownership to customers of products or ideas, similar to a referral bonus or share of stock.

Leveraging blockchain technology, investor Ryan Zacharia envisions consumers and businesses building digital identities. “People are going to effectively own and control their own identities and information, and hold that information in a digital wallet,” providing access when applying for a loan, for example. Zacharia is general partner at JAM Special Opportunity Ventures, which invests in up-and-coming bank technologies on behalf of partner institutions.

At the same time, a few banks are using blockchain to power real-time transactions. Last month, I watched the first real-time interbank transfer of stablecoins — cryptocurrency pegged to a stable currency or commodity — between two banks, $53 billion Western Alliance Bancorp., based in Phoenix, and $2.5 billion Coastal Financial Corp. in Everett, Washington. The transaction was facilitated by Tassat Group, which provides blockchain-based payment solutions for banks.

“The ability to have programmable money is a game changer for the whole economy,” says Chris Nichols, director of capital markets for SouthState Bank. “It’s the first time where you have value, the message and the ability to program all in one unit of code. … [T]his opens up a whole new set of products for banks.” Signature Bank, JPMorgan Chase & Co., Customers Bancorp and New York Community Bancorp are among the banks exploring blockchain-based products and services focused on payments and asset securitization.

Fintechs competing with banks are also taking advantage of the disintermediation trends promised by a Web3 economy. In March 2021, Block (formerly Square) acquired TIDAL. The artist-centered music streaming platform allows the Jack Dorsey-led digital payments provider to tap into another niche. In a press release, current TIDAL head and Square executive Jesse Dorogusker said the two platforms would “explore new artist tools, listener experiences, and access to financial systems that help artists be successful.”

Musicians and artists have been early movers on NFTs. Just last month, Ozzy Osbourne launched a “CryptoBatz” collection of NFTs, commemorating the notorious 1982 gig where the rocker bit the head off a bat. Earlier in 2021, the band Kings of Leon released the first NFT album.

“There is an opportunity for content creators, music creators, owners and writers and musicians to eliminate intermediation, connect directly to their fans [and] sell their music as NFTs,” says Zacharia. “That can generate revenue for the musician, and the NFT holders can receive programmatic royalties based on [a song] being played …  or what have you.”

Web3 requires an open mind and a firm foot in reality. Research into these concepts quickly unearth ideas that seem more like science fiction than traditional economics and finance. Facebook, for example, recently changed its corporate name to Meta Platforms as Zuckerberg expects people to interact more in the metaverse. Will part of the economy take place in a digital world, where we interact via avatars in a virtual space?

”It’s important to have conversations that contemplate what the world could look like in five or 10 years,” says Zacharia. The metaverse is an unlikely next step for a typical bank, but he could see an early-mover advantage for an enterprising financial institution that figures out how to bank the space. And despite the sci-fi luster, the evolution of the web promises to soldier on, bringing opportunities and risks for banks to consider, including fraud and cybersecurity. “There’s a tremendous amount of talent and effort and capital that’s going into this,” he says. “Frankly, I don’t think it’s a fad.”

Why the Time is Right to Enable Payments on Real-Time Rails

Despite strong adoption worldwide, U.S. financial institutions have been slow to embrace real-time payments.

This reluctance is largely due to the complexity of the financial landscape, established consumer payment habits and lack of a federal mandate driving change. But the coronavirus pandemic fueled greater demand for real-time payments, as consumers and businesses increasingly transact digitally. As the share of real-time payment transactions in the U.S. doubled in 2020, financial institutions have an opportunity to launch real-time services that meet demand and enhance the customer experience.

Real-time payments are irrevocable, account-to-account payments that can be initiated through any device — laptop, mobile, or tablet. Because they are cleared and settled nearly instantly, 24 hours a day, seven days a week, 365 days a year, the funds are available to the recipient immediately. This has significant cash flow and liquidity advantages over traditional payment options.

More than 60 countries are live with real-time payment systems today, and real-time payments grew 41% globally from 2019 to 2020. The U.S. ranks ninth worldwide with 1.2 billion transactions; well behind real-time leader India, which had 41 million real-time transactions per day in 2020.

The Clearing House was an initial driver of real-time in the U.S., launching its RTP® network in 2017. Currently reaching more than 60% of U.S demand deposit accounts, RTP is open to any federally insured depository institution. The Federal Reserve’s FedNow, which is now live with a pilot program, will drive further adoption when it launches in 2023. 

Real time payments have been primarily driven by person-to-person (P2P) and consumer-to-business (C2B) uses cases. Services like Zelle®, which was introduced in 2017 by Early Warning Services (EWS), have propelled adoption by making it easy for consumers to pay digitally; for example, paying a friend for dinner or making a rent payment on the day it’s due. In late 2020, Zelle® was integrated with RTP, making these transactions truly real time.

EWS reported a 51% year-over-year increase in Zelle® transactions in the third quarter of 2021, noting growing use of its service by businesses. Having the flexibility to pay rent, process payroll or pay for supplies in real time has particularly strong benefits for small businesses with liquidity challenges.

Disbursements also represent a growing use case, with businesses taking advantage of the ability to efficiently send refunds and make other payments in real time. An insurance company paying claims following a car accident or hurricane could avoid the overhead associated with processing paper checks. At the same time, real-time disbursements boost customer satisfaction by making funds available immediately. Payroll is another example, with the gig economy companies particularly benefitting from the ability to pay workers instantly.

Nowhere has the need for real-time payments been more apparent than in issuance of pandemic stimulus checks. As Federal Reserve Board Governor Lael Brainard said, “The rapid expenditure of COVID emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cash flow constraints.”

Request for Payment
Popular in countries like India, Request for Payment is emerging as a convenient tool to facilitate real-time payments on a mobile device. A push notification and short series of prompts detail the payment request, and the payee can authorize payment from a banking app within a few clicks.

Businesses using Request for Payment benefit from immediate funds availability and a more efficient, cost-effective billing process; consumers gain convenience and control. Consumers issuing Requests for Payment can use it to avoid awkward reminders to friends or colleagues by simply sending a request digitally when money is owed.

Establishing a Real-Time Strategy
As financial institutions look to broaden their real-time payments offering, it’s important to consider the technological infrastructure needed to support them. As transactions and use cases continue to grow, both consumers and businesses will come to expect real-time options from their financial institution, and availability of well-established services like Zelle® and newer tools like Request for Payment will become table stakes.

A partnership with a digital banking provider that not only prioritizes real-time payment offerings today, but also has plans for future integrations with real-time focused fintechs, will prove critical to long-term success.

A Battle Plan for Successful Small Business Lending

Community banks that are considering entering the small business lending space are already challenged by several barriers to entry:

  • Inefficiencies in traditional loan processing.
  • Changing regulatory guidance.
  • The belief that small business loans are not profitable.
  • A lack of quality lending opportunities to put their deposits to work.
  • New competition from emerging categories, including fintechs, challenger banks and neobanks.

Given these obstacles, it’s not surprising that many community financial institutions have chosen to steer clear of small business lending — but there is a solution powerful enough to overcome all of these obstacles. This solution allows community financial institutions to profitably offer small business loans that are efficient, convenient and compliant. And that is the power of a digital loan platform.

Digital lending platforms leverage end-to-end, cloud-based technology to automate the entire lending process — from application and underwriting to set up, review and renewal. Banks gain the competitive muscle to provide small business loans efficiently, quickly and profitably.

Here is our 12-part battle plan for small business lending victory:

1. Save Time and Cost
A turnkey platform is automated, reducing the lengthy manual processes involved and eliminating the need for additional loan officers. It costs significantly less to originate each loan, even the smaller loans.

2. Automate Booking
A good digital platform gives banks the ability to import loan files directly into the core to book and fund the loans. It should also integrate with numerous third-party systems to automate booking and funding the loan.

3. Expand the Pipeline View
The platform should offer the analytics and the ability to track how many people are viewing, starting and completing a loan application, so you can do a better job forecasting the week ahead.

4. Use a Dynamic, Intelligent Application
Digital applications usually employ a rules engine to guide the borrower through each step and identify exceptions or incomplete sections. The best platforms will recommend the most appropriate types of loans or redirect users to other channels.

5. Your Underwriting Policy
A digital platform will use your institution’s specific underwriting standards for each specific loan product. It will not force adoption of its own embedded underwriting standards.

6. Track Loan Status
A platform can give bankers better visibility to the stages that have been completed at each step of the process, helping to facilitate cross-departmental communication and accelerate the loan’s processing time.

7. Renew and Review
For a bank’s existing portfolio, a digital platform will automate the collection of data, send communications to borrowers and provide a dashboard view of annual renewals or interim reviews, reducing time and cost by as much as 50%.

8. Automate Financial Analysis and Spreading
Cloud-based software solutions eliminate the need to manually spread deals. The lending cycle becomes more productive, since applicant qualification is determined in seconds.

9. Manage Documents Effortlessly
All documents should be housed in one central location. This creates a user-friendly portal for both the customer and lender, where all materials can easily be collected, requested, shared, processed and tracked.

10. Maximize Loan Volume
Not only can a digital, automated system increase the profitability of each loan, but the bank will be able to dramatically increase loan volume. A digital application is like having an army of loan officers at the ready 24/7.

11. Aggregate Data, Minimize Risk
Digital technology collects and aggregates all of the data a financial institution needs to decide on a loan, then compares that data to its unique credit policy and risk rating metrics.

12. Utilize Third-Party Data and Analytics
Any digital platform should be integrated with the industry’s leading third-party sources to access necessary information more efficiently, such as small business credit data, tax records, regulatory and compliance updates and more.

Digital Deniers Need Not Apply

There are few bankers who understand the process of digital transformation better than Mike Butler.

Beginning in 2014, Butler oversaw the evolution of Boston-based Radius Bancorp from a federally chartered, brick-and-mortar thrift to one of the most tech-forward banks in the country. Radius closed all its branches except for one (federal thrifts are required to have at least one branch) and adopted a digital-only consumer banking platform.

The digital reinvention was so successful that in February 2020, LendingClub Corp. announced a deal to buy Radius to augment that marketplace lender’s push into digital banking. Now Butler is off on another digital adventure, this time as president and CEO of New York-based Grasshopper Bancorp, a five-year-old de novo bank focused on the small business market. Like Radius, Grasshopper operates a digital-only platform.

Butler will moderate a panel discussion at Bank Director’s upcoming Acquire or Be Acquired Conference focusing on the importance of integrating bank strategy with technology investments. The conference runs Jan. 30-Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

Butler says that successful transformation begins with the bank’s executive management team and board of directors, where discussions about technology need to be an integral part of strategic planning. And most importantly, management and the board need to see digital transformation as crucial to the bank’s future success. Butler says there are still plenty of “digital deniers” among bankers who believe they can be successful without strengthening their institution’s digital capabilities.

“Have you embraced the kinds of changes that are taking place inside the industry?” Butler says. “And do you have a very strong cultural commitment to be a part of that change? When you do that, you start to look to technology as the enabling driver to get you to that place.”

Management teams that are just starting out on a path to digital transformation can easily find themselves overwhelmed by the sheer number of potential projects. “The most important thing to do is to prioritize and recognize that you cannot do this all at once,” Butler says. “It would be a mess if you tried. Pick two to three things that you think are critically important.”

A third element of a successful transformation process is finding the right person to lead the project. “You’ve got to have the right talent to do it,” Butler says. “That leader better be somebody who has been pushing it rather than you push it on them as CEO. You can’t say, ‘Joe, you’ve been running branches for 30 years, do you believe in digital? Eh, kind of. Okay, I want you to put in a digital platform.’ That’s not going to work.”

Butler goes so far as to say that only true believers should run those fintech projects. “You cannot do this without people that have the passion and the belief to get to the other side, because you will hit a lot of roadblocks and you’ve got to be able to bust through those roadblocks,” he says. “And if you don’t believe, if you don’t have the passion, there’s a lot of reasons to stop and go a different way.”

Butler might not seem the most likely person to be a digital change agent. He spent 13 years at Radius and pursued a branch banking strategy in the early years. Prior to joining Radius, Butler was president of KeyCorp’s national consumer finance business. He did not come from the fintech sector. He has a traditional banking background. And yet as Butler is quick to point out, Radius didn’t reinvent banking, it reinvented the customer experience.

The fact that Butler lacked a technology background didn’t deter him from pursuing a transformational strategy at Radius. He was smart enough to see the changes taking place throughout the industry, so he understood the business case, and he was also smart enough to surround himself with highly committed people who did understand the technology.

In building out its digital consumer banking platform, Radius worked with a number of third-party fintech vendors. “I wasn’t making technology decisions about whose technology was better, but I surely was making decisions about the companies that we were partnering with and what type of people we were willing to work with,” Butler says. “I met every single CEO of every company that we did business with, and that was a big part of our decision as to why we would partner with them.”

At Grasshopper, Butler says he prefers the challenge of building a new digital bank from scratch rather than converting a traditional bank like Radius to a digital environment. Sure, there are all the pain points of a startup, including raising capital. But the advantages go beyond starting with a clean piece of paper from a design perspective. “It’s really hard to transform a culture into something new inside of an organization,” Butler says. “So, I’d say the upside is that you get to start from scratch and hire the right people who have the right mindset.”