Global fintech investment hit $98 billion in the first half of 2021, promising a return to pre-pandemic levels, according to KPMG. So what can we expect for fintech M&A in 2022? Ritika Butani leads corporate development at the technology platform Toast, which provides payments and other services to the restaurant sector. She leverages her background to provide her expectations for fintech M&A, including cross-border transactions. Butani also shares her perspective on the traits of a great technology acquisition.
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 [email protected].
5 Key Factors for Fintech Partnerships
As banks explore ways to expand their products and services, many are choosing to partner with fintech companies to enhance their offerings. These partnerships are valuable opportunities for a bank that otherwise would not have the resources to develop the technology or expertise in-house to meet customer demand.
However, banks need to be cautious when partnering with fintech companies — they are subcontracting critical services and functions to a third-party provider. They should “dig in” when assessing their fintech partners to reduce the regulatory, operational and reputational risk exposure to the bank. There are a few things banks should consider to ensure they are partnering with third party that is safe and reputable to provide downstream services to their customers.
1. Look for fintech companies that have strong expertise and experience in complying with applicable banking regulations.
- Consider the banking regulations that apply to support the product the fintech offers, and ask the provider how they meet these compliance standards.
- Ask about the fintech’s policies, procedures, training and internal control that satisfy any legal and regulatory requirements.
- Ensure contract terms clearly define legal and compliance duties, particularly for reporting, data privacy, customer complaints and recordkeeping requirements.
2. Data and cybersecurity should be a top priority.
- Assess your provider’s information security controls to ensure they meet the bank’s standards.
- Review the fintech’s policies and procedures to evaluate their incident management and response practices, compliance with applicable privacy laws and regulations and training requirements for staff.
3. Engage with fintechs that have customer focus in mind — even when the bank maintains the direct interaction with its customers.
- Look for systems and providers that make recommendations for required agreements and disclosures for application use.
- Select firms that can provide white-labeled services, allowing bank customer to use the product directly.
- Work with fintechs that are open to tailoring and enhancing the end-user customer experience to further the continuity of the bank/customer relationship.
4. Look for a fintech that employs strong technology professionals who can provide a smooth integration process that allows information to easily flow into the bank’s systems and processes.
- Using a company that employs talented technology staff can save time and money when solving technology issues or developing operational efficiencies.
5. Make sure your fintech has reliable operations with minimal risk of disruption.
- Review your provider’s business continuity and disaster recovery plans to make sure there are appropriate incident response measures.
- Make sure the provider’s service level agreements meet the needs of your banking operations; if you are providing a 24-hour service, make sure your fintech also supports those same hours.
- Require insurance coverage from your provider, so the bank is covered if a serious incident occurs.
Establishing a relationship with a fintech can provide a bank with a faster go-to-market strategy for new product offerings while delivering a customer experience that would be challenging for a bank to recreate. However, the responsibility of choosing a reputable tech firm should not be taken lightly. By taking some of these factors into consideration, banks can continue to follow sound banking practices while providing a great customer experience and demonstrating a commitment to innovation.
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.
The Do’s and Don’ts of Digital Lending Transformation
For many mid-size community banks, the shift to technology has been slower than expected. There can be a resistant mindset when it comes to implementing financial technology practices, hindering any results that the technology can provide. Bankers try to make the tech fit to their existing processes, rather than the other way around.
If you’re already considering a digital transformation, you might be tempted to run out and overhaul your entire system right away. However, this can be an overwhelming approach, destining the project for failure. One recent study finds that most financial institutions that have partnered with fintech firms have seen moderate gains, but there is still a need to distribute more dedicated resources to a true digital lending transformation. However, there are a few quick do’s and don’ts that every institution can benefit from:
Don’t try to overhaul the entire thing at once. Take an assessment of not only your bank’s current technology state, but also of your current practices and approaches. Too often, financial institutions want to focus on “the way it’s always been done,” rather than looking to see how digital solutions can make processes easier and more efficient. Keep what works in today (and tomorrow’s) environment and find ways to adapt the rest.
Do start with the most profitable areas. One of the best ways to see the most return on an investment in digital is to begin with the areas that drive revenue and profit to the institution. Your back office and credit department will benefit the most from technology that allows them to operate more efficiently and make decisions faster, making them logical starting points.
Don’t try to mix and match solutions. When it comes to implementing technology into the branches, many choose to try and piecemeal different products and systems together. While you might think this approach saves money by only buying certain products from certain vendors, your bank is most likely losing key integrations that can come from having a single solution.
Do trust your technology partners to guide you. Finding a partner that understands what it means to work in a bank, with these current processes, ensures that you’re getting support from folks that understand what you’re trying to do. The key here is trust. Too often, banks are resistant to the idea that their technology partners might be able to teach them a more efficient way.
Don’t try to change the technology. Rather than looking at how the bank can adopt the tech to its processes, consider leveraging technology partners to explore how your bank can simplify processes through technology. When you purchase a solution from a financial technology provider, you’re also paying for their expertise. Don’t throw your money away.
Do adjust your mindset when it comes to tech. Tech in the banking industry has made giant leaps in the last five years, let alone in the decades prior to that. If your bank’s mindset when it comes to implementing or adding technology into your processes is that certain things can’t be changed because it’s always been done this way, you’re setting yourself up to achieve fewer desirable results.
When the coronavirus pandemic sent everyone to their homes for months in 2020, many banks were forced to recognize that an online portal or a mobile app wasn’t going to cut it anymore. Adapting to a fully automated process has become necessary, not optional. Now is the time to learn from this and to take control of your technology. Don’t wait until the next unexpected issue forces you to adapt, when you can get ahead of the game.
About Baker Hill
Baker Hill empowers financial institutions to work smarter, reduce risk and drive more profitable relationships. The company delivers a single unified platform with modern solutions to streamline loan origination and risk management for commercial, small business and consumer lending. The Baker Hill NextGen® platform also delivers sophisticated analytics and marketing solutions that support sound business decisions to mitigate risk, generate growth and maximize profitability. For more information, visit www.bakerhill.com.
Four Ways Banks Can Cater to Generational Trends
As earning power among millennials and Generation Z is expected to grow, banks need to develop strategies for drawing customers from these younger cohorts while also continuing to serve their existing customer base.
But serving these younger groups isn’t just about frictionless, technology-enabled offerings. On a deeper level, banks need to understand the shifting perspective these age groups have around money, debt and investing, as well as the importance of institutional transparency and alignment with the customer’s social values. Millennials, for instance, may feel a sense of disillusionment when it comes to traditional financial institutions, given that many members of this generation — born between 1981 and 1996, according to Pew Research Center — entered the workforce during the Great Recession. Banks need to understand how such experiences influence customer expectations.
This will be especially important for banks; Gen Z — members of which were born between 1997 and 2012 — is on track to surpass millennials in spending power by 2031, according to a report from Bank of America Global Research. Here are four ways banks can cater to newer generational trends and maintain a diverse customer base spanning a variety of age groups.
1. Understand the customer base. In order to provide a range of services that effectively target various demographics, financial institutions first need to understand the different segments of their customer base. Banks should use data to map out a complete picture of the demographics they serve, and then think about how to build products that address the varying needs of those groups.
Some millennials, for instance, prioritize spending on experiences over possessions compared to other generations. Another demographic difference is that 42% of millennials own homes at age 30, versus 48% of Generation X and 51% of baby boomers at the same age, according to Bloomberg. Banks need to factor these distinctions into their offerings so they can continue serving customers who want to go into a branch and engage with a teller, while developing tech-driven solutions that make digital interactions seamless and intuitive. But banks can’t determine which solutions to prioritize until they have a firm grasp on how their customer base breaks down.
2. Understand the shifting approach to money. Younger generations are keeping less cash on hand, opting to keep their funds in platforms such as Venmo and PayPal for peer-to-peer transfers, investing in Bitcoin and other cryptocurrencies and other savings and investment apps. All of these digital options are changing the way people think about the concepts of money and investing.
Legacy institutions are paying attention. Bank of New York Mellon Corp. announced in February a new digital assets unit “that will accelerate the development of solutions and capabilities to help clients address growing and evolving needs related to the growth of digital assets, including cryptocurrencies.”
Financial institutions more broadly will need to evaluate what these changing attitudes toward money will mean for their services, offerings and the way they communicate with customers.
3. Be strategic about customer-facing technology. The way many fintech companies use technology to help customers automatically save money, assess whether they are on track to hit their financial goals or know when their balance is lower than usual has underscored the fact that many traditional banks are behind the curve when it comes to using technology to its full potential. Institutions should be particularly aggressive about exploring ways technology can customize offerings for each customer.
Companies should think strategically about which tech functions will be a competitive asset in the marketplace. Many banks have an artificial intelligence-powered chatbot, for instance, to respond to customer questions without involving a live customer service agent. But that doesn’t mean all those chatbots provide a good customer experience; plenty of banks likely implemented them simply because they saw their competitors doing the same. Leadership teams should think holistically about the best ways to engage with customers when rolling out new technologies.
4. Assess when it makes sense to partner. Banks need to determine whether the current state of their financial stack allows them to partner with fintechs, and should assess scenarios where it might make sense — financially and strategically — to enter into such partnerships. The specialization of fintech companies means they can often put greater resources into streamlining and perfecting a specific function, which can greatly enhance the customer experience if a bank can adopt that function.
The relationship between a bank and fintech can also be symbiotic: fintech companies can benefit from having a trusted bank partner use its expertise to navigate a highly regulated environment.
Offering financial products and services that meet the needs of today’s younger generations is an ever-evolving effort, especially as companies in other sectors outside of banking raise the bar for expectations around tailored products and services. A focus on the key areas outlined above can help banks in their efforts to win these customers over.
How Fintechs Can Help Advance Financial Inclusion
Last year, the coronavirus pandemic swiftly shut down the U.S. economy. Demand for manufactured goods stagnated while restaurant activity fell to zero. The number of unbanked and underbanked persons looked likely to increase, after years of decline. However, federal legislation has created incentives for community banks to help those struggling financially. Fintechs can also play an important role.
The Covid-19 pandemic has affected everyone — but not all equally. Although the number of American households with bank accounts grew to a record 95% in 2019 according to the Federal Deposit Insurance Corp.’s “How America Banks” survey, the crisis is still likely to contribute to an increase in unbanked as unemployment remains high. Why should banks take action now?
Financial inclusion is critical — not just for those individuals involved, but for the wider economy. The Financial Health Network estimates that 167 million America adults are not “financially healthy,” while the FDIC reports that 85 million Americans are either unbanked or “underbanked” and aren’t able to access the traditional services of a financial institution.
It can be expensive to be outside of the financial services space: up to 10% of the income of the unbanked and underbanked is spent on interest and fees. This makes it difficult to set aside money for future spending or an unforeseen contingency. Having an emergency fund is a cornerstone of financial health, and a way for individuals to avoid high fees and interest rates of payday loans.
Promoting financial inclusion allows a bank to cultivate a market that might ultimately need more advanced financial products, enhance its Community Reinvestment Act standing and stimulate the community. Financial inclusion is a worthy goal for all banks, one that the government is also incentivizing.
Recent Government Action Creates Opportunity
Recent federal legislation has created opportunities for banks to help individuals and small businesses in economically challenged areas. The Consolidated Appropriations Act includes $3 billion in funding directed to Community Development Financial Institutions. CDFIs are financial institutions that share a common goal of expanding economic access to financial products and services for resident and businesses.
Approximately $200 million of this funding is available to all financial institutions — institutions do need not to be currently designated as a CDFI to obtain this portion of the funding. These funds offer a way to promoting financial inclusion, with government backing of your institution’s assistance efforts.
Charting a Path Toward Inclusion
The path to building a financially inclusive world involves a concerted effort to address many historic and systemic issues. There’s no simple guidebook, but having the right technology is a good first step.
Banks and fintechs should revisit their product roadmaps and reassess their innovation strategies to ensure they use technologies that can empower all Americans with access to financial services. For example, providing financial advice and education can extend a bank’s role as a trusted advisor, while helping the underbanked improve their banking aptitude and proficiency.
At FIS, we plan to continue supporting standards that advance financial inclusion, provide relevant inclusion research and help educate our partners on inclusion opportunities. FIS actively supports the Bank On effort to ensure Americans have access to safe, affordable bank or credit union accounts. The Bank On program, Cities for Financial Empowerment Fund, certifies public-private partnership accounts that drive financial inclusion. Banks and fintechs should continue joining these efforts and help identify new features and capabilities that can provide affordable access to financial services.
Understanding the Needs of the Underbanked
Recent research we’ve conducted highlights the extent of the financial inclusion challenge. The key findings suggest that the underbanked population require a nuanced approach to address specific concerns:
- Time: Customers would like to decrease time spent on, or increase efficiency of, engaging with their personal finances.
- Trust: Consumers trust banks to secure their money, but are less inclined to trust them with their financial health.
- Literacy: Respondents often use their institution’s digital tools and rarely use third-party finance apps, such as Intuit’s Mint and Acorns.
- Guidance: The underbanked desire financial guidance to help them reach their goals.
Financial institutions must address both the transactional and emotional needs of the underbanked to accommodate the distinct characteristics of these consumers. Other potential banking product categories that can help to serve the underbanked include: financial services education programs, financial wellness services and apps and digital-only banking offerings.
FIS is committed to promoting financial inclusion. We will continue evaluating the role of technology in promoting financial inclusion and track government initiatives that drive financial inclusion to keep clients informed on any new developments.
Reimagining Small Business Checking
If you could start your own bank and design it from the ground up, what would it look like?
And if you’re a business banker with a focus on small business clients, how would your reimagined bank, and its core product offerings, differ from your current ones?
This is the challenge plaguing banks today. For the most part, business banking products have become a commodity — it’s virtually impossible to differentiate your bank’s offerings from the ones being sold by your competitor down the street. For that matter, it may be hard to draw meaningful differences between your various accounts, such as with your retail and commercial offerings. That’s one reason why 27% of business owners rely solely on a personal account. And it’s also why only 38% of small to medium business owners believe that business banking services offer extra benefits compared to their personal account.
One way for banks to break out of this current dilemma may be to shift their focus. This approach is already working for fintech challengers. Instead of focusing solely on transactional products or in-person services, they worked on understanding customer workflows and solving digital pain points. In the process, they have captured the imagination and the pocketbooks of small business owners.
If your bank has prioritized small business customers, or plans to, the best way to make this shift is by focusing on the business owner. Start with this simple question: What do you need from your bank to make meaningful progress with your business?
Their response likely won’t have anything to do with your existing products or services. Instead, they may share a problem or pain point: I need help tracking which customers have paid me and which have not.
There’s no mention of products or account features like fees, balance requirements and e-statements. A response like this reminds us of the quote popularized by Harvard Business School Professor Theodore Levitt: “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.”
In our case, it goes something like this: Business owners don’t want a list of transactional ranges, fees or digital banking tools. They want to know if their bank can help them better track and accept customer payments, so they can maximize their time running their business.
Increasingly, the process of accepting payments is moving from in person to online. But when small business owners turn to their financial institution for assistance, the bank lacks a simple solution to meet this fundamental need.
This leaves the business owner with four options for moving forward — options that require either minimal involvement or no involvement from a bank.
- If a small business decides that it’s not worth dealing with cards, they can simplify their receivables by only accepting cash and checks, closing themselves off to customers who prefer to pay in other ways.
- If a small business decides to accept credit cards, it can accommodate more paying customers, but must now track payments across bank statements (for checks) and external payment tools (for credit cards).
- If a small business relies on external invoicing or accounting tools, it can invoice and accept digital payments, but must now track payments across multiple platforms and reconcile those funds back to its bank account.
- If a small business consolidates all of its financial needs with one provider like a fintech challenger, they can resolve the complexity of dealing with multiple tools and/or platforms but lose out on the expertise and high-touch support of a business banker.
The two middle options involve a bank at the outset but can often lead to reduced deposits over the long term. Over time, fintech challengers may disintermediate banks by offering similar, competing products like integrated deposit accounts. The fourth option, born out of frustration, removes the bank entirely from the relationship.
Clearly, no option listed above is ideal. Nevertheless, it is still possible to help the business owner make progress with accepting digital payments. And, even better, there is an emerging solution for small business owners that may lie with your most straightforward business product: your small business checking account. Watch out for part two to learn more.
2020’s Growth All-Stars
Low interest rates pressured net interest margins in 2020, but they also produced outsized growth for banks with a strong focus on mortgage lending.
“From a nominal — that is, not inflation-adjusted perspective —  was the biggest year in the history of the [mortgage] industry, and it was driven heavily by the fact that mortgage rates fell to 2.5%” for customers with good credit history, says Douglas Duncan, senior vice president and chief economist at Fannie Mae. Single-family mortgage originations totaled $4.54 trillion, he says. Almost two-thirds were mortgage refinancing loans; the remaining loans were used for purchases. His tally represents an estimate — the U.S. government doesn’t calculate total mortgage loan volume.
But Duncan’s estimation is reflected in the countless press releases I’ve read from banks boasting record mortgage volume — and revenues — over the past few months. And mortgages are a major factor that fueled 2020 growth for the fastest-growing banks.
Using data from S&P Global Market Intelligence, Bank Director analyzed year-over-year growth in pre-provision net revenue (PPNR) at public and private banks above $1 billion in assets to identify the banks that have grown most quickly during the pandemic. We also included return on average assets, calculated as a three-year average for 2018, 2019 and 2020, to reward consistent profitability in addition to growth. The analysis ranked both factors, and the numeric ranks were then averaged to create a final score. The banks with the highest growth and profitability had the lowest final scores, meaning they ranked among the best in the country.
Among the best was eighth-ranked $2.4 billion Leader Bank. President Jay Tuli credits low interest rates with driving outsized growth at the Arlington, Massachusetts-based bank. Its sizable mortgage operation helped it to take advantage of demand in its market, roughly doubling mortgage volume in 2020 compared to the previous year, says Tuli.
“With rates coming down during Covid, there was a big surge in mortgage demand for refinances,” explains Tuli. Most of those mortgage loans were sold on the secondary market. “That produced a substantial increase in profitability.”
Mortgage lending also significantly lifted revenues at Kansas City, Missouri-based NBKC Bank, according to its chief financial officer, Eric Garretson.
The $1.2 billion bank topped our ranking, and it’s one of the two banks in this analysis that have become specialists of sorts in banking-as-a-service (BaaS). The other is Celtic Bank Corp., which is also a Small Business Administration lender that funded more than 99,000 Paycheck Protection Program loans.
NBKC’s BaaS program grew in 2020, says Garretson, though “this was dwarfed by the increase in revenue from mortgage lending.” Right now, NBKC focuses on deposit accounts, allowing partner fintechs to offer these accounts under their own brand, issue debit cards and deliver similar banking services. Lending products are being considered but aren’t currently offered, says Garretson.
As the financial technology space continues to grow, the opportunities should increase for banks seeking to partner with fintech companies, says Alex Johnson, director of fintech research at Cornerstone Advisors. Banks like NBKC and Celtic Bank Corp. have developed the expertise and skills needed to partner with these companies. They also have a technology infrastructure that’s fintech friendly, he explains, allowing for easy integration via standard, defined application programming interfaces (APIs) and a microservices architecture that’s more modular and decentralized. Put simply — a good BaaS bank will have the same tech capabilities as its fintech client.
“There’s a very clear model for how to do this, and there’s growing demand,” says Johnson. “One thing that tends to characterize banks that do well in the banking-as-a-service space are the ones that build a specialization in a particular area.” These banks have a track record for building these products, along with the requisite processes and contracts.
“When a company comes to them, it’s as easy [a process] as it could possibly be,” says Johnson. “The more of that work they do, the more that ripples back through the fintech ecosystem. So, when new fintech companies are founded, [and venture capitalists] are advising them on where to go — they tend to point to the banking-as-a-service partners that will work well.”
Top 10 Fastest-Growing Banks
|Bank Name/Headquarters||Total Assets (millions)||ROAA
|PPNR growth YoY||Score|
Kansas City, MO
|Plains Commerce Bank
|The Federal Savings Bank
Grand Rapids, MI
|Celtic Bank Corp.
Salt Lake City, UT
|Union Savings Bank
|North American Savings Bank, F.S.B.
Kansas City, MO
|Leader Bank, N.A.||$2,419.6||2.46%||61.63%||32.67|
|BNC National Bank
Source: S&P Global Market Intelligence. Total assets reflect first quarter 2021 data. Average three-year return on average assets reflects year-end data for 2018, 2019 and 2020 for the largest reporting entity. Year-over-year pre-provision net revenue (PPNR) growth reflects year-end data for 2019 and 2020. Bank Director’s analysis of the fastest-growing banks ranked PPNR growth and average ROAA at banks above $1 billion in assets; scoring reflects an average of these ranks.