How to Respond to LendingClub’s Bank Buy

For me, the news that LendingClub Corp. agreed to purchase Radius Bancorp for $185 million was an “Uh oh” moment in the evolution of banking and fintechs.

The announcement was the second time I could recall where a fintech bought the bank, rather than the other way around (the first being Green Dot Corp. buying Bonneville Bank in 2011 for $15.7 million). For the most part, fintechs have been food for banks. Banks like BBVA USA Bancshares, JPMorgan Chase & Co and The Goldman Sachs Group have purchased emerging technology as a way to juice their innovation engines and incorporate them into their strategic roadmaps.

Some fintechs have tried graduating from banking-as-a-service providers like The Bancorp and Cross River Bank by applying for their own bank charters. Robinhood Markets, On Deck Capital, and Square have all struggled to apply for a charter. Varo is one of the rare examples where a fintech successfully acquired a charter, and it took them two attempts.

It shouldn’t be surprising that a publicly traded fintech like LendingClub just decided to buy the bank outright. But why does this acquisition matter to banks?

First off, if this deal receives regulatory approval within the company’s 12 to 15 month target, it could forge a new path for fintechs seeking more control over their banking future. It could also give community banks a new path for an exit.

Second, banks like Radius typically leverage technology that abstract the core away from key digital services. And deeper pockets from LendingClub could allow them to spend even more, which would create a community bank with a dynamic, robust way of delivering innovative features. Existing smaller banks may just fall further behind in their delivery of new digital services.

Third, large fintechs like LendingClub don’t have century-old divisions that don’t, or won’t, communicate with each other. Banks frequently have groups that don’t communicate or integrate at all; retail and wealth come to mind. As a result, companies like LendingClub can develop and deploy complementary banking services, whereas many banks’ offerings are limited by legacy systems and departments that don’t collaborate with each other.

The potential outcome of this deal and other bifurcations in the industry is a new breed of bank that is supercharged with core-abstracted technology and a host of innovative, complementary technology features. Challenger banks loaded with venture capital funds and superior economics via bank ownership could be potentially more aggressive, innovative and dangerous competitors to traditional banks.

How should banks respond?

Start by making sure that your bank has a digital channel provider that enables the relatively easy and cost-effective insertion of new third-party features. If your digital channel partner can’t do this, it’s time to draft a request for proposal.

Next, start identifying and speaking to the myriad of enterprise fintechs that effectively recreate the best features of the direct-to-consumer fintechs in a white-label form for banks. Focus on solutions that offer a demonstrable path to revenue retention, growth and clear cost savings — not just “cool” features.

After coming up with a plan, find a partner to help you market the new services either through  the third-party vendors you select or another marketing partner. Banks are notorious for not doing the best job of marketing new products and features to their clients. You can’t just build it and hope that new and existing customers will come.

Finally, leverage the assets you already have: physical branches, a mobile banking app that should be one of the top five on a user’s phone, and pricing advantage over fintechs. Most fintechs won’t be given long runways by their venture capital investors to lose money in order to acquire clients; at some point, they will have to start making money via pricing. Banks still have multiple ways to make money and should use that flexibility to squeeze their fintech competitors.

Change is the only constant in life — and that includes banking. And it has never been more relevant for banks that want to stay relevant in the face of rapidly developing technology and industry-shifting deals.

AI: The Slingshot for Small Banks

Regional and community banks are struggling with growth and profitability in the face of competitive pressure from large national banks and fintech startups. Executives at these institutions are instructed to invest in technology, and to leverage data and artificial intelligence to compete more effectively.

While that sounds good, smaller banks are often constrained by a dependence on legacy core vendors that limits their IT potential, encounter difficulties in accessing their own data, lack skilled data scientists, and have no clear vision on where to start.

This conundrum came up during Bank Director’s 2020 Acquire or Be Acquired conference in Phoenix. I rubbed shoulders with fellow conference attendees over the course of three days, sharing ideas about the state of the banking sector and how community banks could leverage data and AI to drive business results. The talent gap was a frequent topic. Perhaps unsurprisingly, only a miniscule number of community banks have hired data scientists. The majority of banks have not prioritized data science capabilities; the few who are actively recruiting data scientists are struggling to attract the right talent.

But even if community banks could arm up with data scientists, what volume of data will they be working on to derive insights to fuel their business strategy? A $1 billion asset bank may have 50,000 to 75,000 customers — not a lot of data to start with. Furthermore, a number of bankers point to the difficulties they encounter in accessing their data in their legacy core systems.

As we were having these discussions, conversations were raging about the need for smaller banks to prepare for an existential threat. At the World Economic Forum in Davos, attendees were assessing comments from Bank of America Corp. Chairman and CEO Brian Moynihan that the bank could double its U.S. consumer market share. Back-of-envelope calculations indicate that if Bank of America manages to accomplish that growth, more than 1,000 community banks could be out of business. Can technology enable these banks to retain their core customer base, grow and avoid this fate? I think so.

One promising area of AI application for community banks is loan and deposit pricing. Community banks have little or no analytic tools beyond competitive rate surveys; most rely on anecdotal feedback from customers and front-line bankers. But price setting and execution on both assets and liabilities is one of the most important levers a bank can use to drive both growth and improve its net interest margin. Community banks should take advantage of new tools and data to level the playing field with the big banks, which are already well ahead of them in adopting price optimization technology.   

Small banks can gain the upper hand in this “David versus Goliath” scenario because accessible cloud-based technology works in their favor. True, big banks have worked with price optimization technology and leveraged large amounts of customer behavioral data for years. But community banks tend to have stronger customer relationships and often better pricing power than their larger competitors. Now is the time for community banks to take control of their destiny by adopting new technology and tools so they can better compete on price.

There are three reasons why cloud computing and the power of AI will be the slingshot of these ‘David’ banks:

  1. Scalable computing power, instantly on tap. Cloud-based computing and pre-configured pricing solutions are affordable and can be implemented in days, not months.
  2. Big data — as a service. Community banks can quickly leverage AI-based pricing models that have been trained on hundreds of millions of transactions. There is no need to build their own analytic models from a small customer footprint.
  3. Plug-and-play IT. It’s much easier today to integrate cloud-based platforms with a bank’s core system providers, which makes accessing their own data and implementing smarter pricing feasible.

Five years ago, it would have seemed crazy to think that in 2020, community banks would be applying AI to compete against the nation’s top banks. But the first wave of early adopters are already deploying AI for pricing. I predict we’ll see more institutions embracing AI and machine learning to improve their NIM and increase growth over the coming years.

Developing a Future-Proof Bank

Banks are growing more fintech-friendly, giving them an avenue to strengthen their capabilities. In this video, Mbanq CEO Vlad Lounegov shares how traditional financial institutions can better compete with tech-savvy upstarts in the financial space.  

  • The Changing Relationship Between Banks & Fintechs
  • Examining Core Systems
  • Four Qualities of a Good Solution

Defending Commercial Deposits From Emerging Risks

The competition for commercial deposits has become fiercer in the new decade.

The rate of noninterest deposits growth has been declining over the last three years, according to quarterly reports from the Federal Deposit Insurance Corp. The percentage of noninterest deposits to total deposits has also dropped over 250 basis points since 2016. This comes as the cost of funding earning assets continues to rise, creating pressure on banks’ net interest margins.  

At the same time, corporate customers are facing changes in their receipt of payments. Emerging payment trends are shifting payers from paper-based payments to other methods and avenues. Checks and paper-based payments — historically the most popular method — continue to decline as payers’ preferred payment method. Electronic payments have grown year-over-year by 9.4%.

Newer payment channels include mobile, point of presentment and payment portals. However, these new payment channels can increase the cost of processing electronic payments: 88% of these payments must be manually re-keyed by the accounting staff, according to one study. This inefficiency in manually processing payments increases costs and often leads to customer service issues.

Treasurers and senior corporate managers want automated solutions to handle increased electronic payment trends. Historically, banks have served their corporate customers for years with wholesale and retail lockbox services. But many legacy lockbox services are designed for paper-based payments, which are outdated and cannot handle electronic payments. Research shows that these corporate customers are turning to fintechs to solve their new payment processing challenges. Payments were the No. 1 threat that risked moving to fintechs, according to a 2017 Global Survey from PricewaterhouseCoopers.

Corporate customers are dissatisfied with their current process and are looking to use technology to modernize, future-proof, and upgrade their accounts receivable process. The top five needs of today’s treasurer include: enterprise resource planning (ERP) integration, automated payment matching, support for all payment channels, consolidated reporting and a single historical archive of their payments. 

Integrated receivables have three primary elements: payment matching, ERP integration and a single reporting archive. Automation matches payments from all channels using artificial intelligence and robotic process automation to eliminate the manual keying process. The use of flexible business rules allows the corporate to tailor their operation to meet their needs and increase automated payments over time. A consolidated payment file updates the corporates’ ERP system after completing the payment reconciliation process. Finally, integrated receivable provides a single source of all payment data, including analytics and reporting. An integrated receivables platform eliminates many disparate processes (most manual, some automated) that plague most businesses today. In fact, in one recent survey, almost 60% of treasurers were dissatisfied with their company’s current level of AR automation.

Banks can play a pivotal role in the new payment world by partnering with a fintech. Fintechs have been building platforms to serve the more-complex needs of corporate treasury, but pose a threat to the banks’ corporate customers. A corporate treasurer using a fintech for integrated receivables ultimately disintermediates the bank and now has the flexibility to choose where to place their depository and borrowing relationships. 

The good news is that the treasurer of your corporate customer would prefer to do business with their bank. According to Aite Research, 73% of treasurers believe their bank should offer integrated receivables, with 31% believing the bank will provide these services over the next five years. Moreover, 54% of the treasurers surveyed have planned investments to update their AR platform in the next few years. 

Many fintechs offer integrated receivables today, with new entrants coming to market every year. But bankers need to review the background and experience of their fintech partner. Banks should look for partners with expertise and programs that will enable the bank’s success. Banks should also be wary of providers that compete directly against them in the corporate market. Partnering with the right fintech provides your bank with a valuable service that your corporate customers need today, and future-proofs your treasury function for new and emerging payment channels. Most importantly, integrated receivables will allow your bank to continue retaining and attracting corporate deposits.

Winners Announced for the 2019 Best of FinXTech Awards


Awards-9-10-19.pngBanks face a fundamental paradox: They need to adopt increasingly sophisticated technology to stay competitive, but most have neither the budget nor the risk appetite to develop the technology themselves.

To help banks address this challenge, a legion of fintech companies have sprung up in the past decade. The best of these are solving common problems faced by financial institutions today, from improving the customer experience, growing loans, serving small business customers and protecting against cybersecurity threats.

To this end, we at Bank Director and FinXTech have spent the past few months analyzing the most innovative solutions deployed by banks today. We evaluated the performance results and feedback from banks about their work with fintech companies, as well as the opinions of a panel of industry experts. These fintechs had already been vetted further for inclusion in our FinXTech Connect platform. We sought to identify technology companies that are tried and true — those that have successfully cultivated relationships with banks and delivered value to their clients.

Then, we highlighted those companies at this year’s Experience FinXTech event, co-hosted by Bank Director and FinXTech this week at the JW Marriott in Chicago.

At our awards luncheon on Tuesday, we announced the winning technology solutions in six categories that cover a spectrum of important challenges faced by banks today: customer experience, revenue growth, loan growth, operations, small business solutions and security.

We also announced the Best of FinXTech Connect award, a technology-agnostic category that recognizes technology firms that work closely with bank clients to co-create or customize a solution, or demonstrated consistent collaboration with financial institutions.

The winners in each category are below:

Best Solution for Customer Experience: Apiture

Apiture uses application programming interfaces (APIs) to upgrade a bank’s digital banking experience. Its platform includes digital account opening, personal financial management, cash flow management for businesses and payments services. Each feature can be unbundled from the platform.

Best Solution for Revenue Growth: Mantl

MANTL developed an account-opening tool that works with a bank’s existing core infrastructure. Its Core Wrapper API reads and writes directly to the core, allowing banks to set up, configure and maintain the account-opening product

Best Solution for Loan Growth: ProPair

ProPair helps banks pair the right loan officer with the right lead. It integrates with a bank’s systems to analyze the bank’s data for insights into behaviors, patterns and lender performance to predict which officer should be connected with a particular client.

Best Small Business Solution: P2BInvestor

P2Binvestor provides an asset-based lending solution for banks that helps them monitor risk, track collateral and administer loans. It partners with banks to give them a pipeline of qualified borrowers.

Best Solution for Improving Operations: Sandbox Banking

Sandbox Banking builds custom APIs that communicate between a bank’s legacy core systems like core processors, loan origination, customer relationship management software and data warehouses. It also builds APIs that integrate new products and automate data flow.

Best Solution for Protecting the Bank: Illusive Networks

Illusive Networks uses an approach called “endpoint-focused deception” to detect breaches into a bank’s IT system. It plants false information across a bank’s network endpoints, detects when an attacker acts on the information and captures forensics from the compromised machine. It also detects unnecessary files that could serve as tools for hackers.

Best of FinXTech Connect: Sandbox Banking

The middleware platform, which also won the “Best Solution for Improving Operations” category, was also noted for working hand-in-hand with bank staff to create custom API connections to solve specific bank issues. In addition, banks can access three-hour blocks of developer time each month to work on special projects outside of regular technical support.

Banks, Fintechs Share This Three-Letter Word


technology-9-6-19.png“Try.”

This one humble word reflects the mindset I encounter in nearly every high-performing executive today. And it might just be the theme at next week’s Experience FinXTech Conference at the JW Marriott Chicago.

Simple as it first appears, breaking away from the known and attempting to explore what’s possible requires leadership, conviction and a commitment to try something new.

While other fintech-oriented conferences highlight “funding paths” or “successful exits,” we built this event for bank leaders seeking growth and efficiencies through the application of financial technologies. Over two days, we’ll look closely at the implications of technology on the banking business, and explore how and where traditional brick-and-mortar institutions can generate top-line growth and bottom-line profits through new business relationships.

A word of encouragement to those joining us from community banks: Don’t let your asset size limit your aspirations.

Yes, technology companies continue to impact consumer expectations and challenge existing business models. And yes, this is changing the basis of competition in the industry. But it’s your mindset, not the size of your bank’s balance sheet, that will dictate its future. That’s why Experience FinXTech brings banking peers together from across the country to share how they pursue collaboration and creativity.

There’s something for all of us to learn.

For those attending from the technology sector, I urge you to tell us stories that demonstrate your resiliency, curiosity and resourcefulness. I continually hear that banks prize anecdotes that reflect a tenacity of purpose — a trait that many technology companies joining us can rightfully claim.

Ahead of Experience FinXTech, I’m inspired and intrigued by three companies making waves in the financial space:

  • Aspiration, which offers socially responsible banking and investment products and services, and has attracted 1.5 million customers as of June 2019.
  • Chime, which advertises itself as one of the fastest-growing bank accounts in America.
  • N26, a German direct bank that promises to provide real-time payments information and early access to paychecks to woo new U.S. consumers.

Executives should think about what these companies hope to accomplish, how they are building their presence and how it could impact community banks across the country.

At the conference, we’ll talk about companies like these, as well as the technology firms that have gained traction with banks. We look at the choices and challenges facing small and mid-size banks as they apply to payments, lending, data and analytics, security and digital banking. We’ll explore changing the basis of competition when it comes to earnings, efficiency and engagement.

Given that many community banks specialize in particular verticals or business lines to remain competitive, we’ll also talk about how they can cultivate a culture that prizes creativity and authenticity. We’ll look at tools and strategies to help them grow. Throughout the program, we’ll encourage conversations about inspiration and transformation.

The underlying theme is to encourage attendees to try something new in order to build something great.

For those joining us at the JW Marriott Chicago, you’re in for a treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #FinXTech19.

Leveraging Fintechs to Do More with Less

Fintech is often viewed as a disrupter to the banking industry, but it greatest influence may be as a collaborator.

Financial technology companies, often called fintechs, can provide benefits both banks and themselves, especially when it comes to lending. But banks need to be prepared for the potential challenges that can arise when forming and executing these partnerships.

Partnerships between community banks and fintechs makes sense. For community banks, the cost of building or buying their own online loan origination platform can be prohibitive. A partnership with a fintech can help banks achieve more with less risk.

Banks can partner with fintechs to improve services at a significantly lower capital expenditure, reducing the cost of doing business and reaching market segments that would otherwise not meet their credit criteria. Collectively, these relationships advance not only the business of community banks, but also their mission.

Partnering with banks offers fintech firms brand exposure, allows them to more quickly scale their business and increases their access to capital and liquidity, which can translate to better company returns.

Community banks and fintech firms should be natural allies, given the market dynamics and growth in online lending, the underfunding of small businesses and the increased competition facing smaller institutions.

Community banks are also ideal first movers in the bank-fintech partnership space, given the personal nature of the business, low cost of capital and ability to move quicker than regional banks. Community banks are the preferred source of funding for small- and medium-sized enterprises, and consistently receive high marks from clients for customer service and overall experience.

However, there can be challenges. Bank respondents cited their firms’ overall preparedness as a point of concern when considering a fintech collaboration, according to a recent paper on bank-fintech partnerships from law and professional services firm Manatt. The Office of the Comptroller of the Currency and Consumer Financial Protection Bureau mandate that banks must implement appropriate oversight and risk management processes for third-party relationships and service providers.

Other issues that could arise for community banks when pursuing a fintech partnership include data security, staff training and technology integration with legacy systems. It’s imperative that community banks are clear about the responsibilities, requirements and protections that will contribute toward a successful partnership in conversations with a fintech firm.

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Despite their desire to fund local businesses, community banks sometimes encounter significant pressures that prevent them from doing so. These issues are amplified by various market forces and longstanding structural inefficiencies such as consolidation, slower economic expansion, increased regulation and more-stringent credit requirements. Consumer expectations around new channels and banking services compound the situation. Community banks need to adapt to this new dynamic and complex ecosystem. Without a strategy that includes technological vision, banks risk becoming irrelevant to the communities they serve.

Fintech firms — reputed as industry disruptors — can be powerful collaborators and allies in this land grab. They can help banks expand their borrower market by reaching customers with alternative credit profiles and providing technology-driven improvements that enhance the customer experience. The inherent advantages held by community banks make them well positioned to not only capitalize on these opportunities, but to lead the next wave of fintech innovation.

2019 Survey Results! Here’s How Banks Are Spending Money on Technology

The desire to streamline customers’ experience and improve efficiency is driving bank technology strategies across the industry, as most executives and directors believe their offerings are “adequate,” according to Bank Director’s 2019 Technology Survey, sponsored by CDW.

The survey, conducted in June and July 2019, reflects the views of CEOs, technology executives and independent directors. It seeks to better understand bank strategies, staffing and budgets around technology and innovation, as well as banks’ relationships with legacy core providers and newer vendors.

Seventy-eight percent of survey respondents say that improving the customer experience is a top objective driving their bank’s strategy around the investment, development and implementation of technology. Seventy-two percent say that fueling efficiency is a top objective.

These strategic objectives are driving where banks are investing in technology: 68% say they’re investing in automation in fiscal year 2019, and 67% are investing money to enhance the bank’s digital channels.

Most banks rely on their core provider to advance these goals. The cores are the primary providers for many of the technologies used by banks today, including application programming interfaces (68% say that API technology is provided by the core), business process automation (43%), data aggregation (42%) and peer-to-peer (P2P) payments (47%).

That relationship isn’t stopping many banks from searching for new potential partners; 60% are willing to work with newer fintech startups. The survey finds that the use of alternate providers is gaining ground, in particular when it comes to the cloud (57%), data aggregation (25%) and P2P payments (29%).

Despite the rise of the digital channel, 51% of respondents say the branch is equally important to online and mobile channels when it comes to growing the bank. More than half indicate they’re upgrading branch and ATM technology.

Just 30% say that driving top-line growth fuels their technology strategy, which indicates that most banks see technology as a way to save money and time as opposed to generating revenue.

Key Findings

  • Loyal to the Core. More than half of respondents say their core contract expires within the next five years. Sixty percent say they’re unlikely to switch to a new provider.
  • But Banks Aren’t Satisfied. Just 21% say they’re completely satisfied with their core provider.
  • Technology Pain Points. Sixty percent say their current core provider is slow to provide innovative solutions or upgrades to their bank, and almost half cite difficulty in implementing new solutions. These are major sticking points when 60% rely on their core provider to introduce innovative solutions.
  • It’s All on IT. Almost three-quarters point to the senior technology executive as the individual responsible for identifying, developing and implementing technology solutions. Almost half task a management-level committee to make decisions about technology.
  • Rising Budgets. Forty-five percent say their technology budget has risen between 5% to 10% for FY2019. Almost one-quarter report an increase of more than 15%. Responding banks budgeted a median of $750,000 for FY2019.
  • Where the Money’s Going. In addition to automation, digital enhancements and branch improvements, banks are hiring consultants to supplement in-house expertise (50%), and bringing on additional employees to focus on technology and innovation (43%).
  • Data Gap. Almost half describe their bank’s data analytics capabilities as inadequate.
  • More Expertise Needed. Fifty-three percent say technology is on the agenda at every board meeting — up three points from last year’s survey. Yet, 80% say the board needs to enhance its technology expertise. Forty-three percent say they have a technology expert on the board.
  • Cybersecurity Top of Mind. Protecting the bank from cyberattacks dominates board technology discussions, according to 96% of respondents. Many boards also focus on process improvements (63%) and implementing innovative customer-facing technology (46%).

To view the full results of the survey, click here.

How Community Banks Can Compete Using Fintechs, Not Against Them


fintech-7-15-19.pngSmaller institutions should think of financial technology firms as friends, not foes, as they compete with the biggest banks.

These companies, often called fintechs, pose real challenges to the biggest banks because they offer smaller firms a way to tailor and grow their offerings. Dozens of the biggest players are set to reach a $1 billion valuation this year—and it’s not hard to see why. They’ve found a niche serving groups that large banks have inadvertently missed. In this way, they’re not unlike community banks and credit unions, whose people-first philosophy is akin to these emerging tech giants.

Ironically, savvy fintechs are now smartly capitalizing on their popularity to become more like big banks. These companies have users that are already highly engaged; they could continue to see a huge chunk of assets move from traditional institutions in the coming year. After all, what user wouldn’t want to consolidate to a platform they actually like using?

The growth and popularity of fintechs is an opportunity for community banks and credit unions. As customers indicate increasing openness to alternative financial solutions, these institutions have an opportunity to grab a piece of the pie if they consider focusing on two major areas: global trading and digital capabilities.

Since their creation, community banks and member-owned organizations have offered many of the same services as their competitors. However, unlike fintechs, these financial institutions have already proved their resilience in weathering the financial crisis. Community banks can smartly position themselves as behind-the-scenes partners for burgeoning fintechs.

It may seem like the typical credit union or community banking customer would have little to do with international transactions. But across the world, foreign payments are incredibly common—and growing. Global trading is an inescapable part of everyday consumer life, with cross-border shopping, travel and investments conducted daily with ease. Small businesses are just as likely to sell to a neighbor as they are to a stranger halfway around the globe. Even staunchly conservative portfolios may incorporate some foreign holdings.

Enabling global trades on a seamless digital scale is one of the best avenues for both community banks and credit unions to expand their value and ensure their continued relevance. But the long list of requirements needed to facilitate international transactions has limited these transactions to the biggest banks. Tackling complex regulatory environments and infrastructure can be not only intimidating, but downright impossible for firms without an endless supply of capital earmarked for these such investments.

That means that while customers prefer community banks and credit unions for their personalization and customer service, they flock to big banks for their digital capabilities. This makes it all the more urgent for smaller operations to expand while they have a small edge.

Even as big banks pour billions of dollars into digital upgrades, an easy path forward for smaller organizations can be to partner with an established service that offers competitive global banking functions. Not only does this approach help them save money, but it also allows them to launch new services faster and recapture customers who may be performing these transactions elsewhere.

As fintechs continue to expand their influence and offerings, innovation is not just a path to success—it’s a survival mechanism.