Finding Fintechs: A Choose Your Own Adventure Guide

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In my role as editor-in-chief, I attend countless off-the-record conversations with bankers who confess their experiences with financial technology companies. Sometimes, those experiences are anything but good, including a host of empty promises, botched integrations and disillusioned bank staff. It’s like the fintechs took off on the rocket ship but never made it to the moon, after all.

For one, banks and fintechs have a hard time speaking each other’s language. Banks, by nature and necessity, are focused on regulatory compliance. By contrast, technology companies tend to focus on growth, driven by nature and necessity to promise the world to their clients.

That seems to be changing. In the current economy and amid falling valuations for fintechs, many of them are focusing on profitability rather than growth for its own sake. And banks are changing, too. Small community banks, which we’ll define loosely as those below $10 billion in assets, historically have been reluctant to engage directly in partnerships with fintech companies unless those companies are offered by their core processors.

Traditionally, banks’ own policies forbid contracting with young firms that lack several years of audited financial statements, a fact that has excluded the vast majority of early-stage fintechs. But as fintechs mature in terms of compliance with banking regulations and as banks try to incorporate better technology into their systems, there is more room to meet in the middle.

This report is intended as a guide to help more banks take advantage of the offerings of financial technology companies to improve efficiency, customer relationships and to facilitate growth, and to do it in a way that mitigates risk.

First, though, I start with some terminology. Partnership gets batted around an awful lot. But what is it?

The Federal Reserve’s 2021 report, “Community Bank Access to Innovation Through Partnerships,” defines partnerships broadly to include traditional vendor relationships as well as more expansive arrangements that include shared objectives and outcomes, such as revenue sharing. We’ll adopt the Fed’s definition here, for ease of discussion.

In your journey to see what the universe may offer, Godspeed.

Evaluating Digital Banking In 2023

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Platforms that offer future flexibility, as opposed to products with a fixed shelf life, should be part of any bank’s digital transformation strategy for 2023, says Stephen Bohanon, co-founder and chief strategy and product officer at Alkami Technology. Chatbots and artificial intelligence can deflect many simple, time-consuming customer queries — saving time and costs — but digital channels can go further to drive revenue for the organization. To do that, bankers need to invest in data-based marketing and account opening capabilities.

Topics include:

  • Platforms Vs. Products
  • Sales Via Digital Channels
  • Advantages of Live Service

What’s Embedded Banking and Why Does It Matter?

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The financial technology industry is notorious for its ever-changing nature. Silicon Valley’s breakneck pace is enough to make some industry veterans’ heads spin. Advancements in technology and changes in economic incentives can create ripple effects that shift the entire fintech industry at a moment’s notice. It can be a lot to keep up with: Web3, blockchain, crypto, NFTs, buy now, pay later, digital ID, know your customer and anti-money laundering laws, two-factor authentication… the list goes on.

Among the latest fintech phenomena to garner attention is embedded banking, a term that sounds both banal and confounding at first blush. Embedded finance has received some attention, but embedded banking remains a little-known concept among banks that have some of the biggest opportunities in the space.

Embedded banking is a model where banks can provide purpose-built digital services to their customers, including retail and small- to medium-sized businesses (SMBs). Embedded banking enables banks to offer a bespoke technology solution through an open framework that can meet the expanding business requirements of their SMBs customers. As opposed to embedded finance, where businesses access financial services through a third-party platform that is not a specific solution from a financial services company, embedded banking places the bank at the heart of an SMB’s operations. Embedded banking both helps strengthen an SMB’s technology and its relationship to their bank.

Embedded banking is not completely novel. The concept has existed for a few years now, but recent innovations have completely revolutionized the field. Embedded banking is moving from an “inside out” model to an “outside in” model. The inside out model of embedded banking used siloed digital channels per customer segment and direct integration with core banking systems. For example, each individual business segment — like SMB, commercial and treasury management — needed their own separate digital channel. Through an outside in approach, a bank can offer their SMBs one secure environment and a unified digital experience for integrating data from multiple backend systems.

The outside in approach to embedded banking is both more flexible and provides more robust services for customers. Outside in embedded banking also offers the customer an open view of multiple financial institution relationships and streamlines access to a portfolio of services through a unified user experience. This gives SMBs access to a much wider array of services to fit their unique needs, all through the bank’s digital channel.

Outside in embedded banking is the perfect solution for banks that want to provide top-of-the-line financial services in a constantly changing economic environment that requires small businesses everywhere to adopt more efficient technology. Inflation and interest rates increases means money is becoming tighter than ever; small businesses are the most at risk in an economic slump. In particular, SMBs want more payments options and faster access to their cash, while solutions like flexible invoicing options, expedited collection of payments and automated data exchange could become vital for a business’s survival.

Outside in embedded banking represents a chance for SMBs to modernize their digital experiences and streamline operations, and for banks to form stronger relationships with their SMB partners. Banks are perfectly positioned to throw a lifeline to their small business customers. Embedded banking might still be relatively unknown to many bankers, but it may just be thing that helps countless SMBs get through the imminent economic crunch.

Building a Robust Digital Ecosystem, Regardless of Size

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Let’s get right to the punch: Size should not limit how progressive your bank can be with its digital innovation strategy. Don’t let asset size fool — or limit — you.

As a 2022 ICBA ThinkTECH Accelerator graduate, we’ve had the opportunity to speak to over 150 banks of every shape and size, and here is what we’ve heard. Not all banks are created equal. However, large or small, asset size shouldn’t box you in and prevent you from giving your customers and teams the digital experiences they expect.

That’s because asset size doesn’t correlate to a more-advanced digital ecosystem. We’ve seen $105 million banks act like $5 billion banks, and $8 billion banks act like $250 million banks. Every bank is at a different stage of its digital transformation journey. So, what’s the difference?

Smaller banks may not have as large of a budget for tech, but they are often able to move faster and experiment more easily because there are fewer stakeholders who need to buy-in. These banks are increasingly having to decide if they are going to grow and stay independent or become a more attractive acquisition target. Either way, digital systems are critical to their future.

Larger banks, on the other hand, usually have larger budgets, but more stakeholders involved in the decision-making process and more entrenched operations. Turning the Titanic can take time if the organization does not have a history of supporting experimenting with innovative technology solutions.

No matter the size, banks should assess whether their current technology stack is driving efficiency or dragging the team down due to platform fatigue or lack of clean integrations. In fact, banks have the ability to use digital innovation to decrease the efficiency ratio and increase returns on investment. In our experience, there are a few key things any institution needs to consider when evaluating digital platforms:

  • Does it create a delightful experience?
    Any platform you’re exploring should provide a clean, easy and delightful experience for both your borrowers and employees. Any sense of friction for either group and your institution could lose leads or operational efficiency.
  • Can the platform support a fully integrated environment?
    Platforms should not only be configured to align with your institution’s operational process, but also able to directly connect to essential technology providers: the core, customer relationship management software, know your customer or business solutions, credit providers and spreading platforms, among others. A well-integrated solution should eliminate duplicate work for your team and provide a 360-degree view of the customer, allowing staff to more effectively maximize each customer relationship.
  • Does it do more with the same size team?
    Digital solutions shouldn’t be used to justify letting employees go. They should elevate team members out of busy work to their best and highest use: establishing and growing customer relationships. Having a robust technology stack can help attract and retain top talent in today’s environment.
  • Can the platform scale with the bank?
    Digital platforms should help drive the efficiency ratio down and scale as your bank grows. Below are how two banks on different ends of the asset spectrum have embraced this concept.

Andrew Black, CEO of $105 million Princeville State Bank, based in Illinois, says, “We don’t let our asset size define how we want to serve our customers and team members. At the end of the day, we want to make sure we’re providing a customer-centered, easy experience that helps us continue to grow and expand our customer base. Digital banking capabilities are table stakes for any bank these days, regardless of how large they are.”

Allan Rayson, American Banker’s digital banker of the year and chief innovation officer at Arkansas-based Encore Bank has seen some of the fastest organic growth of any bank in the country. The $2.8 billion bank has a goal of hitting $5 billion in assets with a team of fewer than 400 people — and they’re on track to do it.

“We’re not trying to be the biggest bank in every market, but a bank that delivers an exceptional customer experience. The key is focusing on partnering with best-of-breed technology partners to make that happen. What we have seen with this approach is incredible growth, a transformation of our operations that supports our bank team members and an increase in our overall efficiency,” says Rayson.

Cornerstone Advisors’ annual report states that 86% of banks say their spend on tech is going to be somewhat or significantly higher this year. It’s not a question of “If,” but when and how your team tackles creating a digital ecosystem. Don’t let your asset size dictate what you think your institution can and can’t do. Make sure you’re partnering with a platform that meets you where you are and can scale with you as your bank grows.

Leveraging Innovations to Double Down Where Fintechs Can’t Compete

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For years, financial technology companies, or fintechs, have largely threatened the domain of big banks. But for community banks — perhaps for the first time — it’s getting personal. As some fintechs enter the lending domain, traditional financial institutions of all sizes can expect to feel the competitive impact of fintechs in new ways they cannot afford to ignore.

The good news is that fintechs can’t replicate the things that make local community banks special and enduring: the relational and personal interactions and variables that build confidence, trust and loyalty among customers. What’s even better is that local financial institutions can replicate some of the fintechs playbook — and that’s where the magic happens.

It’s likely you, the board and bank management understand the threat of fintech. Your bank lives it every day; it’s probably a key topic of conversation among the executive team. But what might be less clear is what to do about it. As your institution navigates the changing landscape of the banking industry, there are a few topics to consider in creating your bank’s game plan:

  • Threat or opportunity? Fintechs give consumers a number of desirable and attractive options and features in easy-to-navigate ways. Your bank can view this as a threat — or you can level up and find a way to do it better. Your bank should start by identifying its key differentiators and then elevating and leveraging them to increase interest, engagement and drive growth.
  • It’s time for a culture shift. Relationships are not built through transactions. Banks must move from transactional to consultative by investing time, talent and resources into the relational aspects of banking that are best done in-person. They also need to find ways to meet the transactional needs of consumers in low friction, efficient ways.
  • It’s not about you … yet. Step outside of the services your bank directly provides. Think of your institution instead as a connector, a resource and trusted advisor for current and prospective consumers. If your bank doesn’t provide a certain service, have a go-to referral list. That prospect will continue to come back to you for guidance and counsel and one day soon, it will be for the service you provide.
  • What’s in your toolbox? What is the highest and best use of your team’s time? What are your team members currently spending time on that could be accomplished more efficiently through an investment in new, different or even fintech-driven tools? By leveraging technology to streamline operations, your bank can benefit from efficiencies that create space and time for staff to focus on relationship-building beyond the transaction.
  • Stop guessing. You could guess, but wouldn’t you rather know? Banks have access to an incredible amount of data. Right now, many financial institutions are sitting on a treasure trove of data that, when activated appropriately, can help target and maximize growth efforts. Unlocking the power of this data is key to your financial institution’s growth and evolution; data drives action, offering valuable insight into consumer behaviors, preferences and needs.

Your bank can adopt a view that fintechs are the enemy. Or it can recognize that fintechs’ growth stems from an unmet consumer need — and consider what it means for your bank and its products and services. The key is doubling down on the who, what and why that is unique to your brand identity, and capitalizing on the opportunity to highlight and celebrate what makes your bank stand out, while simultaneously evolving how your institution determines and delivers against your consumers’ needs.

Managing Risk When Buying Technology for Engagement

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No bank leader wants to buy an engagement platform, but they do want to grow customer relationships. 

Many, though, risk buying engagement platforms that won’t grow relationships for a sustained period of time. Most platforms are not ready-made for quality, digital experience that serve depositors and borrowers well, which means they threaten much more than a bank’s growth. They are a risk to the entire relationship with each customer.  

Consumers are increasingly expressing a need for help from their financial providers. Less than half of Americans can afford a surprise $1,000 expense, according to a survey from Bankrate; about 60% say they do not have $1,000 in savings. One in 5 adults would put a surprise expenditure on a credit card, one of the most expensive forms of debt. More than half of consumers polled want more help than they’re getting from their financial provider. However, the 66% of those  who say they have received communication from their provider were unhappy about the generic advice they received. 

This engagement gap offers banks a competitive opportunity. Consumers want more and better engagement, and they are willing to give their business those providers who deliver. About 83% of households polled said they would consider their institution for their next product or service when they are both “satisfied and fully engaged,” according to Gallup. The number drops to 45% if the household is only satisfied. 

Banks seeking to use engagement for growth should be wary of not losing customer satisfaction as they pursue full engagement. As noted earlier, about 66% of those engaged aren’t satisfied with the financial provider’s generic approach. What does that mean for financial institutions? The challenge is quality of engagement, not just quantity or the lack thereof. If they deliver quantity instead of quality, they risk both unsatisfied customers as well as customers who ignore their engagement. 

According to Gallup, only 19% of households said they would grow their relationship when they are neither satisfied nor fully engaged. This is a major risk banks miss when buying engagement platforms: That the institution is buying a technology not made for quality, digital experiences and won’t be able to serve depositors and borrowers well any time soon. 

But aren’t all engagement platforms made for engagement? Yes — but not all are made for banking engagement, and even fewer are made with return on investment in mind. Banking is unique; the tech that powers it should be as well. Buyers need to vet platforms for what’s included in terms of know-how. What expertise does the platform contain and provide for growing a bank? Is that built into the software itself?

A purpose-built platform can show bankers which contact fields are of value to banking engagement, for example, and which integrations can be used to populate those fields. It can also show how that data can become insights for banks when it overlaps with customers’ desired outcomes. And it offers the engagement workflows across staff actions, emails, print marketing and text messaging that result in loan applications, originations, opened accounts or activated cards.   

Previously, the only options available were generic engagement platforms made for any business; banks had to take on the work of customizing platforms. Executives just bought a platform and placed a bet that they could develop it into a banking growth tool. They’d find out if they were right only after paying consultants, writers, designers, and marketing technologists for years.  

Financial services providers no longer need to take these risks. A much better experience awaits them and their current and prospective customers clamoring for a relationship upgrade.

2022 Technology Survey: Complete Results

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Bank Director’s 2022 Technology Survey, sponsored by CDW, surveyed 138 independent directors, chief executives, chief operating officers and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2022, and primarily represents banks under $10 billion in assets. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category.

The survey finds that most respondents (81%) say their bank increased its 2022 technology budget over last year, reporting a median 11% increase. Banks have primarily prioritized investments in new technology features and updates in areas like security, or where customers frequently interact with the bank, like payments or digital loan applications. 

Leveraging technology to create a more competitive and efficient organization requires internal know-how, and directors and executives find this to be a key area for concern: 48% worry about an inadequate understanding within the bank of emerging technologies. Forty-five percent say they’re worried about their organization’s reliance on outdated technology. 

While directors aren’t involved in day-to-day decisions about the bank’s technology, the board needs to align technology with strategy and ensure that the bank has the resources it needs to achieve its goals. Forty-two percent of respondents say their board has at least one member they would consider to be an expert in technology, including digital transformation, user experience or data analytics. 

Click here to view the complete results.

Key Findings

The Competitive Landscape
Fifty-six percent of all respondents view local banks and credit unions as their top competitive threat, followed by big and superregional banks, at 46%. One-third worry about competition from big tech companies such as Apple, while an equal number are concerned about competition from digital, nonbank business lenders. 

Hit-or-Miss on Digital Applications
Nearly half of respondents say their bank has a fully digital process for opening retail deposit accounts, with larger shares representing banks over $1 billion reporting as much. Far fewer respondents report a fully digital process for retail loans, small business deposits or loans, or commercial loans. 

Generational Divides
Just 25% of the directors and executives surveyed say their bank has the tools it needs to effectively serve Generation Z (16-25 years old), and half believe their institution can effectively serve millennials (26-40). Eighty-five percent say as much about Generation X (41-56), and 93% say this of baby boomers (57-75). 

All-In on the Cloud
Eighty-eight percent say their bank uses cloud technology to generate efficiencies internally; 66% use application programming interfaces (APIs), which allow different applications or systems to exchange data. Robotic process automation (32%) and artificial intelligence or machine learning (19%) are far less commonly used. 

New Frontiers
Three-quarters say their board or leadership team has discussed risks or opportunities related to cryptocurrency or digital assets in the past 18 months. Sixty-four percent say the same of banking as a service (BaaS), and 69% say that of environmental, social and governance issues. Cannabis, on the minds of 58%, has been more commonly discussed at banks under $5 billion of assets. 

Views on Collaboration
More than half of respondents view technology companies as vendors only, as opposed to collaborating with or investing in these firms. Thirty-nine percent, primarily representing banks over $1 billion in assets, say their institution has collaborated with technology providers on specific solutions. Twenty percent have participated in a venture fund that invests in technology companies, and 11% have directly invested in one or more of these companies. 

2022 Technology Survey Results: Investing in Banking’s Future

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In mid-July, at the peak of second quarter earnings, large regional banks showed off an array of technology initiatives. 

Providence, Rhode Island-based Citizens Financial Group, with $227 billion in assets, highlighted a new mobile app for its direct-to-consumer digital bank. And $591 billion U.S. Bancorp in Minneapolis realized the benefits of its ongoing investments in digital payments capabilities over the years, reporting $996 million in payments services revenue, or a year-over-year increase of nearly 10%.

Community banks, with far fewer dollars to spend, have to budget wisely and invest where it makes the most sense. For many, that means prioritizing new technology features and updates in areas like security, or where customers frequently interact with the bank, like payments or digital loan applications.

Bank Director’s 2022 Technology Survey, sponsored by CDW, delves into some of these strategies, asking bank senior executives and board members about the concerns and challenges that their institutions face, and where they’ve been investing their resources in technology.

Eighty-one percent of respondents say their bank increased its 2022 technology budget over last year, reporting a median 11% increase. Asked where their bank built more efficient processes by deploying new technology or upgrading capabilities in the past 18 months, 89% named cybersecurity as a key area for investment, followed by security and fraud (62%). During the same time period, 63% implemented or upgraded payments capabilities to improve the customer experience; 54% focused on enhancing digital retail account opening.

Leveraging technology to create a more competitive and efficient organization requires internal know-how, and directors and executives find this to be a key area for concern: 48% worry about an inadequate understanding within the bank of emerging technologies. Forty-five percent say they’re worried about their organization’s reliance on outdated technology.

While directors aren’t involved in day-to-day decisions about the bank’s technology, the board needs to align technology with strategy and ensure that the bank has the resources it needs to achieve its goals. Forty-two percent of respondents say their board has at least one member they would consider to be an expert in technology, including digital transformation, user experience or data analytics.

Following on the heels of Bank Director’s 2022 Compensation Survey, which found technology talent in demand, the 2022 Technology Survey indicates that most banks employ high-level executives focused on technology, particularly in the form of a chief information security officer (44%), chief technology officer (43%) and/or chief information officer (42%). However, few have a chief data officer or data scientists on staff — despite almost half expressing concerns that the bank doesn’t effectively use or aggregate the bank’s data.

Key Findings

The Competitive Landscape
Fifty-six percent of all respondents view local banks and credit unions as their top competitive threat, followed by big and superregional banks, at 46%. One-third worry about competition from big tech companies such as Apple, while an equal number are concerned about competition from digital, nonbank business lenders.

Hit-or-Miss on Digital Applications
Nearly half of respondents say their bank has a fully digital process for opening retail deposit accounts, with larger shares representing banks over $1 billion reporting as much. Far fewer respondents report a fully digital process for retail loans, small business deposits or loans, or commercial loans.

Generational Divides
Just 25% of the directors and executives surveyed say their bank has the tools it needs to effectively serve Generation Z (16-25 years old), and half believe their institution can effectively serve millennials (26-40). Eighty-five percent say as much about Generation X (41-56), and 93% say this of baby boomers (57-75).

All-In on the Cloud
Eighty-eight percent say their bank uses cloud technology to generate efficiencies internally; 66% use application programming interfaces (APIs), which allow different applications or systems to exchange data. Robotic process automation (32%) and artificial intelligence or machine learning (19%) are far less commonly used.

New Frontiers
Three-quarters say their board or leadership team has discussed risks or opportunities related to cryptocurrency or digital assets in the past 18 months. Sixty-four percent say the same of banking as a service (BaaS), and 69% say that of environmental, social and governance issues. Cannabis, on the minds of 58%, has been more commonly discussed at banks under $5 billion of assets.

Views on Collaboration
More than half of respondents view technology companies as vendors only, as opposed to collaborating with or investing in these firms. Thirty-nine percent, primarily representing banks over $1 billion in assets, say their institution has collaborated with technology providers on specific solutions. Twenty percent have participated in a venture fund that invests in technology companies, and 11% have directly invested in one or more of these companies.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category. If you want to find out how your bank can gain access to this exclusive report, contact [email protected].

FinXTech’s Need to Know: Debt Collections and Recovery

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The Covid-19 pandemic may have stalled debt collection efforts for two years, but a partial economic recovery — paired with a looming recession — could soon send unprepared borrowers and their loans to collections.

Missed payments on certain loans are already on the rise. The Wall Street Journal reported that borrowers with credit scores below 620 — also known as subprime — with car loans, personal loans or credit cards that are over 60 days late are “rising faster than normal.” Eleven percent of general purpose credit cards were late, as compared to 9.8% in March 2021. Personal loan delinquencies have hit 11.3% versus 10.4% last year, and delinquent auto loans hit a record high of 8.8% in February.

As a result, banks may be seeing an influx in their collections and recoveries activity. It may be an opportune time to enhance and better your bank’s collections practices — doing so could help at-risk borrowers avoid collections altogether, and give your institution the chance to show customers that they are more than the debt they owe. 

Debt collections practices and agencies generally don’t have a good reputation among consumers: A quick Google search will uncover countless 2-star reviews and repulsive anecdotes. And while the Fair Debt Collections Practices Act (FDCPA) protects consumers from harsh, unfair and threatening collections tactics, a good experience with a collection agency is far from guaranteed. 

Banks exacerbate the issue by not conducting proper and continual due diligence on the third-party agencies they work with. With over 7,000 to choose from, this can be difficult to execute, but is a necessary task that could be the difference between retaining a customer and losing one.

A technology company may be able to provide your bank with the high-touch element with consumers during the collections process.

Fintechs have a few things banks might not offer (or have upgraded versions of): Predictive analytics software, APIs, rules-based platforms, self-upgrading machine learning, among others. These technologies can and should be harnessed to find problem loans before they become delinquent and reach consumers within their preferred method of communication. Traditional collection agencies can have difficulties navigating within FDCPA protections — fintechs can use their enhanced technologies to thrive within the compliance. 

Some fintechs even offer their products and services underneath the bank’s brand, which could be a strategic move if providing educational services and resources could get a customer back on track with payments.

Here are three fintechs that can help banks with their collections and recovery efforts.

TrueAccord has two products of interest to banks: Retain and Recover. Retain is a proactive solution for delinquent accounts that works with borrowers to keep the account from moving to collections. Retain primarily uses text, email and voicemail and communication methods, as preferred to cold calling.

When Retain fails to resolve the payment with a customer, banks can turn to TrueAccord’s Recover solution. Recover is primarily a self-servicing software, meaning that customers engage with Recover, and not the bank, to find a solution. Again, communication is through SMS, Facebook messaging, emails or text.

In addition, TrueAccord is a licensed collections agency.

Birmingham-based FIntegrate offers a software-as-a-service (SaaS) solution — Fusion CRS — for delinquency collections through charge-off recoveries and delinquency management. The software tracks and manages any type of account in any status, including but not limited to: commercial real estate loans, Small Business Administration loans, Paycheck Protection Program loans, deposit and share drafts, and consumer loans that are in repossession, bankruptcy, foreclosure, or have negative balances or become real estate owned.

Fusion CRS also assigns tasks, creates rules-based sequences and monitors special collection cases and statuses. It automatically generates letters, emails, texts, phone calls or other means of communication to account holders and other involved entities (such as a repossession or insurance company).

Collections technology can’t operate without customer information, which is where a company like Intellaegis can help. Its masterQueue product harnesses big data to gather, organize and track available data on a borrower. MasterQueue collects public record data and open source information from the web to track the borrower’s digital footprint and pinpoint a borrower’s whereabouts, online activity and associates.

The software then scores the data that represents the likelihood of locating the borrower based on its quantity and quality — users can then go down the list and attempt contact.

Consumers are spending more than during the pandemic, and debt levels are increasing in tandem even as rates rise and a potential recession looms. Technology can not only help banks handle the influx of overdue and delinquent accounts, but can aid in preserving and enhancing vulnerable relationships with customers as well.