Leveraging Embedded Fintech for Small Businesses

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Small businesses are increasingly looking for more sophisticated financial solutions, like digital payments. Yet, many community banks haven’t adapted their products and services to meet these demands. Banks that don’t address their small business clients’ pain points ultimately risk losing those customers to other financial providers. Derik Sutton, vice president at Autobooks, describes how community banks can bridge that gap with embedded fintech.  

  • How Small Business Needs are Changing
  • Confronting Competition 
  • First Steps to Embedded Fintech 

Autobooks’ cloud-based platform is built on Microsoft Azure.  

Crafting a Modern Customer Service Strategy

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Customers increasingly demand immediacy and accountability in their service interactions, whether that means ordering a pair of shoes from Amazon.com or a pizza from Domino’s Pizza.

Financial institutions are not immune to this standard; as customer expectations evolve, so too must banks’ approach to customer service. To retain relevance and customer loyalty, bank executives must prioritize the digitalization and personalization of customer service. If institutions are not working towards this transformation, they’re already behind.

Leveraging capabilities like digital customer service can enhance the customer and employee experience while diminishing the risk of complacency — strengthening a bank’s overall competitive position.

Many banks still employ a phone-centric approach to customer support, which can be inefficient and cumbersome for all involved. Even though bank transactions are frequently initiated or occur on digital devices, customers are often required to dial into a contact center when they encounter issues or have questions. Recent research from Bankmycell found 81% of millennials experience anxiety when making a phone call. But this dislike for phone calls isn’t unique to younger generations; a study by Provision Living found that baby boomers made even fewer phone calls than millennials do on their smartphones.

The customer service bar is set by the likes of Apple, Netflix and Meta Platform’s Facebook: companies that facilitate seamless, uninterrupted interactions with as little friction as possible. It’s time for bankers to be able to meet customers in the digital domain and empower them with choice on how to communicate, whether it’s through chat, video or voice. Such an approach boosts the customer experience and fosters long-term loyalty.

Digital customer service can improve the employee experience as well. The customer service agent role has traditionally been one of low satisfaction and high churn, which is especially concerning as the country continues to experience the Great Resignation. Digital customer service allows frontline agents to join a digital interaction in progress on the customer’s own screen, eliminating the risk of miscommunication and expediting resolution time. Such technology even allows agents to guide customers in how to solve the issue themselves next time. As a result, agents shift from customer care representatives to become a teacher or coach, instilling confidence in users to solve future issues through digital self-service. Digitalized customer service and a seamless on-screen experience allows agents to complete tasks with greater speed and efficiency — while making the role itself more enjoyable and fulfilling.

Complacency is both a common barrier and a looming threat for bank executives; many keep legacy processes and strategies in place because of comfort and fear of change. But the failure to innovate can be a death knell for banks when it comes to keeping up with competitors. And technology continues to shorten the innovation cycle — making complacency that much more dangerous.

Financial institutions are at the vanguard of innovation in the consumer-driven market; experiences are the key differentiator. Customer service, and how customer-facing employees work, are experiencing dramatic digital transformation. As a result, financial institutions must examine, reconsider and frequently adapt to new technologies as they emerge.

The banks that recognize the urgency of modernizing customer service and act accordingly will benefit from a competitive advantage for years to come. Those that fail to act risk falling behind competitors and face significant customer attrition.

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.

5 Things Banks Can Do Right Now to Protect Older Customers

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Your bank’s most valuable customers are also its most vulnerable.

Americans born before 1965 hold 65% of bank deposits in the U.S., according to the American Bankers Association 2021 Older Americans Benchmarking Report. They are also routinely targeted by criminals: Adults ages 60 and older reported losing more than $600 million to fraud in 2020 alone, according to the Federal Trade Commission.

Banks’ role in protecting these customers is quickly becoming codified into law. More than half of states mandate that financial institution’s report suspected elder financial exploitation to local law enforcement, adult protective services or both.

However, banks need to go further to keep older adults’ money safe. Not only will these efforts help retain the large asset base of these valuable customers, but it can drive engagement with their younger family members who are involved in aging loved ones’ financial matters. Banks can do five things to support and protect their older adult customers.

1. Train employees to detect and report elder financial exploitation.
Although most banks train employees to spot elder financial exploitation, there’s confusion around reporting suspected exploitation due to privacy concerns, according to the Consumer Financial Protection Bureau. And when banks do file reports, they often aren’t filed directly with law enforcement or state Adult Protective Services agencies.

Executives must ensure their bank has clear guidelines for employees on reporting suspected exploitation. Training employees to detect and report fraud can help reduce the amount of money lost to exploitation. A study by AARP and the Virginia Tech Center for Gerontology found that bank tellers who underwent AARP’s BankSafe training reported five times as many suspicious incidents and saved older customers 16 times as much money as untrained tellers did.

2. Use senior-specific technology to monitor for fraud and financial mistakes.
Standard bank alerts don’t go far enough to protect against elder fraud. Banks should offer a financial protection service that:

  • Recognizes senior-specific risks such as unusual transfers, unfamiliar merchants and transactions that could be related to scams.
  • Monitors accounts to determine what is “normal” for each individual.
    Detects changes in transactional behavior and notifies customers of suspicious activity and their own money mistakes.
  • Bank Director identified companies and services, like Carefull, that can offer added protection by analyzing checking, savings and credit card accounts around the clock, creating alerts when encountering signs of fraud and other issues that impact older adults’ finances, such as duplicate or missed payments, behavior change and more.

3. Ensure older customers have trusted contacts.
The CFPB recommends that financial institutions enable older account holders to designate a trusted contact. If your bank isn’t already providing this service, it should. Technology gives banks a way to empower users to add trusted contacts to their accounts or grant varying levels of view-only permissions. This helps banks ensure that their customers’ trusted contacts are informed about any potential suspicious activity. It’s also a way for banks to connect with those contacts and potentially bring them on as new customers.

4. Create content to educate older customers.
Banks should inform older customers how to safeguard their financial well-being. This includes alerting them to scams and providing time-sensitive planning support, video courses and webinars about avoiding fraud.

Banks must also provide older customers with information about planning for incapacity, including the institution’s policy for naming a power of attorney. And banks must accept legally drafted power of attorney documents without creating unnecessary hurdles. Having a policy here allows for this balance.

5. Create an ongoing engagement strategy with older customers.
The days of banks simply shifting older adults to “senior checking accounts” are fading. Banks should take a more active role in engaging with older customers. Failing to do so increases the risk that this valuable customer base could fall victim to fraud, which AARP estimates totals about $50 billion annually.

Banks need a strategy to combine training, technology and content to generate ongoing senior engagement. Working with a trusted partner that has a proven track record of helping banks engage and protect older customers could be the key to implementing this sort of holistic approach.

Why Embedded Finance Is the Next Area of Digital Revolution

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The four decades after the internet made information readily accessible has led to inventions and innovations like smart devices, mobile apps and the ability to be constantly connected. Today, companies are focusing on harnessing technology to build smoother, richer and deeper customer experiences.

As the information age evolves to the experience age, the next digital revolution will be embedded finance. Embedded finance enables any brand, business or merchant to rapidly, and at a low cost, integrate innovative financial services into new propositions and customer experiences. Embedded finance is driven by consumers’ desire for more convenient and frictionless financial services. Several use cases that underline the demand for embedded financial experiences include:

  • Billing payments as part of the experience. Businesses are already using payment options, like buy now, pay later, to differentiate their offering, increase sales and empower buyers at checkout.
  • Growing popularity of Point-of-Sale financing. The volume of installment-based, flexible payment and instant credit options has increased significantly in the past five years, indicating a desire for instant access to short-term borrowing.
  • Mainstreaming of digital wallets. As more people use their mobile phones to purchase products and services, it makes sense that consumers want to access other financial services seamlessly within apps.

There is potential for embedded finance in almost every sector; in the U.S. alone, embedded finance is expected to see a tenfold revenue increase over the next five years. Financial institutions are in a position to provide branded or white-label products that non-banks can use to “embed” financial services for their customers. Banks must evolve rapidly to take advantage of this new market opportunity.

The front-runners will be institutions that can offer digital real-time payments or instant credit with minimal friction and optimum convenience to customers. But providing this requires new core technologies, cloud capabilities and flexible application programming interfaces, or APIs and other infrastructure to support new business models. Banks will also have to become much more collaborative, working closely with fintechs that may own or intermediate the customer relationship.

Embedded finance allows nonbank businesses to offer their customers additional financial services at the point of decision. Customers can seamlessly pay, redeem, finance or insure their purchase. This can look like buying, financing, and insuring a TV from a store’s shopping app, securing a mortgage through the estate agent’s website as part of a house purchase or obtaining health insurance from a fitness app. This does not mean that every retailer or e-commerce business will become a bank, but it does mean that many more will be equipped with the potential to offer more financial capabilities to customers as a way to compete, differentiate and engage more effectively.

In May 2021, Mambu surveyed 3,000 consumers and found the following:

  • 81% would be interested in purchasing health insurance via an app, and almost half of these would pay a small premium.
  • 60% would prefer to take out an education loan directly from their academic institution rather than a bank.
  • 86% would be interested in purchasing groceries from a cashier-less store.

How these capabilities are delivered and consumed is changing constantly. Consumers want to use intuitive and fast financial services via online and mobile banking channels. Digitalization and cloud services are reinventing back-office functions, automating and streamlining processes and decision-making. At the same time, legislation, open banking and APIs are driving new ecosystems. These changing markets and increased competition make it more difficult for banks to meet evolving customer demands, prevent churn and sustain growth.

We are living in the world of the continuous next. Customers expect financial service providers to anticipate and meet their requirements — sometimes even before they know what they want — and package those services in a highly contextual and personalized way. At the same time, new digital players are setting up camp in the bank space. Tech giants are inching ever closer to the banking market, putting bank relationships and revenue pools are at risk. On an absolute basis, this could cost the industry $3.7 trillion, according to our research.

Incumbent banks need to adopt a foundation oriented toward continuous innovation to keep pace with changing customer preferences. Embracing innovations such as embedded finance is one way that banks can unlock new opportunities and raise new revenue streams.

3 Ways to Drive Radical Efficiency in Business Lending

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Community banks find themselves in a high-pressure lending environment, as businesses rebound from the depths of the pandemic and grapple with inflation levels that have not been seen for 40 years.

This economic landscape has created ample opportunity for growth among business lenders, but the rising demand for capital has also invited stiffer competition. In a crowded market, tech-savvy, radically efficient lenders — be they traditional financial institutions or alternative lenders — will outperform their counterparts to win more relationships in an increasingly digitizing industry. Banks can achieve this efficiency by modernizing three important areas of lending: Small Business Administration programs, small credits and self-service lending.

Enhancing SBA Lending
After successfully issuing Paycheck Protection Program loans, many financial institutions are considering offering other types of SBA loans to their business customers. Unfortunately, many balk at the risk associated with issuing government-backed loans and the overhead that goes along with them. But the right technology can create digital guardrails that help banks ensure that loans are documented correctly and that the collected data is accurate — ultimately reducing work by more than 75%.

When looking for tools that drive efficiency in SBA lending, bank executives should prioritize features like guided application experiences that enforce SBA policies, rules engines that recommend offers based on SBA eligibility and platforms that automatically generate execution-ready documents.

Small Credits Efficiencies
Most of the demand for small business loans are for credits under $100,000; more than half of such loans are originated by just five national lenders. The one thing all five of these lenders have in common is the ability to originate business loans online.

Loans that are less than $100,000 are customer acquisition opportunities for banks and can help grow small business portfolios. They’re also a key piece of creating long-term relationships that financial institutions covet. But to compete in this space, community institutions need to combine their strength in local markets with digital tools that deliver a winning experience.

Omnichannel support here is crucial. Providing borrowers with a choice of in person, online or over-the-phone service creates a competitive advantage that alternative lenders can’t replicate with an online-only business model.

A best-in-class customer experience is equally critical. Business customers’ expectations of convenience and service are often shaped by their experiences as consumers. They need a lending experience that is efficient and easy to navigate from beginning to end.

It will be difficult for banks to drive efficiency in small credits without transforming their sales processes. Many lenders began their digital transformations during the pandemic, but there is still significant room for continued innovation. To maximize customer interactions, every relationship manager, retail banker, and call center employee should be able to begin the process of applying for a small business loan. Banks need to ensure their application process is simple enough to enable this service across their organization.

Self-Service Experiences
From credit cards to auto financing to mortgages, a loan or line of credit is usually only a few clicks away for consumers. Business owners who are seeking a new loan or line of credit, however, have fewer options available to them and can likely expect a more arduous process. That’s because business banking products are more complicated to sell and require more interactions between business owners and their lending partners before closing documents can be signed.

This means there are many opportunities for banks to find efficiency within this process; the right technology can even allow institutions to offer self-service business loans.

The appetite for self-service business loans exists: Two years of an expectation-shifting pandemic led many business borrowers to prioritize speed, efficiency and ease of use for all their customer experiences — business banking included. Digitizing the front end for borrowers provides a modern experience that accelerates data gathering and risk review, without requiring an institution to compromise or modify their existing underwriting workflow.

In the crowded market of small business lending, efficiency is an absolute must for success. Many banks have plenty of opportunities to improve their efficiency in the small business lending process using a number of tools available today. Regardless of tech choice, community banks will find their best and greatest return on investment by focusing on gains in SBA lending, small credits and self-service lending.

What Does a Tech-Forward Bank Look Like?

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You wouldn’t think Jill Castilla would have trouble getting a bank loan. After all, she’s the CEO of Citizens Bank of Edmond, a $354 million institution in Edmond, Oklahoma. But as a veteran of the U.S. Army married to retired lieutenant colonel Marcus Castilla, she figured they would qualify to get a VA home loan from a bank other than Citizens, which doesn’t offer VA loans.

After 60 days stretched to more than 90 days, the big bank still hadn’t said yes or no, and the seller was getting increasingly anxious. To get the house they wanted, the couple switched gears and got a loan from Citizens instead.

After abandoning the attempt to get a VA loan, Castilla vowed to help other veterans. Her bank has partnered with several technology companies, including Jack Henry Banking, Teslar Software and ICE Mortgage Technology to start a lending platform on a national basis called Roger.

Bank of Edmond hit on a problem the market hadn’t solved: How to make the process of getting a VA loan quicker and easier, especially in a hot real estate market where veterans are more likely to lose bids if they can’t be competitive with other buyers. As Managing Director Sam Kilmer of Cornerstone Advisors put it at Bank Director’s FinXTech Experience conference recently, borrowing from Netflix co-founder Marc Randolph, “the no. 1 trait of an innovator is recognizing what causes other people pain.” Many banks like Castilla’s are trying to solve customer problems and remake themselves with the help of technology, particularly from more nimble financial technology, or “fintech” partners.

In fact, investors already view banks differently based on their approaches to technology, said William “Wally” Wallace IV, a managing director and equity analyst at Raymond James Financial, who spoke at the conference. Wallace categorized banks in three groups: the legacy banks, the growth banks and the tech-enabled banks.

The legacy banks aren’t growing and trade close to book value or 1.5 times book, Wallace said. The growth banks emphasize relationships and are technologically competent. They trade at 1.5 to 2.5 times book. But the tech-enabled banks use technology offensively, rather than defensively. Tech-enabled banks look to create opportunities through technology. Their stocks command a median tangible to book value of 2.5 times. They have more volatile stock prices but they have outperformed other indexes since 2020, with an average return of 104%, he said. Wallace predicts such banks will out-earn other banks, even growth banks, in the years ahead. He estimates their earnings per share will enjoy average compound annual growth rates of about 24% over a five-year period starting next year, compared to 7% for small-cap banks on average.

Take the example of banking as a service, where a bank provides financial services on the back end for a fintech or another company that serves the customer directly. Wallace said those banks have a fixed cost in building up their risk management capabilities. But once they do that, growth is strong and expenses don’t rise at the same rate as deposits or revenue, generating positive operating leverage.

But, as banks try to remake themselves in more entrepreneurial and tech-forward ways, they’re still not tech companies. Not really. Technology companies can afford to chase rabbits to find a solution that may or may not take off. Banks can’t, said Wallace. “You have to be thoughtful about how you approach it,” he added. But, he suggested that tech-enabled banks that invest in risk management will have large payoffs later. “If you guys prove you can manage the risks, and not blow up the bank, investors will start to pay for that growth,” he said.

Customers Bancorp is positioning itself as one of those tech-forward banks but it’s already seeing results. The West Reading, Pennsylvania-based bank reported a core return on common equity of 24% and a return on average assets of 1.63% in the first quarter of 2022.

Jennifer Frost, executive vice president and chief administrative officer at $19.2 billion Customers Bank, spoke at the conference. “We had some pretty sophisticated platforms, but we didn’t have a way to unlock the power with the people who knew how to use them,” she said. Since the Paycheck Protection Program proved the bank could pivot to providing digital loans quickly, the bank began ramping up its capabilities in small business and commercial lending. Instead of limiting itself to buying off-the-shelf platforms from technology providers, its strategy is to carefully pick configurable programs and then hire one or two developers who can make those programs a success.

“Take what you’ve learned here and start a strategy,” she warned the crowd of some 300 bankers and fintech company representatives at the conference. “If you’re not starting now, it’s going to be a dangerous season.”

The Key to Creating Transformational Financial Products, Services

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Banks need to offer products that address unmet needs of current and prospective customers to gain a meaningful competitive advantage and retain market share.

But upgrading the “front end” experience is just one piece of the puzzle when it comes to competing in this increasingly crowded financial services landscape. Still, this can often be a nearly impossible step for banks with legacy delivery and core systems; these dated technologies typically don’t enable banks to customize products and services or have the combination of capabilities that they require to meet niche needs of customers.

To truly launch impactful products and services, banks must first fully understand who their customers are and where the gaps lie. This doesn’t just mean creating generic customer segments, such as Generation Z, urban dwellers and mass affluent, among others. It means determining niche groups based on their unmet needs. It’s time to look beyond traditional demographics like age, household income, gender and life cycle to uncover narrow customer behaviors.

Executives can ascertain such insight from mining many data sources, including the bank’s delivery channels, payment systems and core banking systems. However, it’s often necessary for banks to identify and use previously untapped data sources as well, such as payroll, assets or even health insurance. To effectively do so, banks must have the proper infrastructure and technology in place. But facing existing challenges like constraints on resources and tech talent shortages, many financial institutions instead rely on trusted fintech partnerships to collect, organize and analyze the data.

Once banks or their partners analyze the data, they can form niche groups based on what unique user needs are not being met with traditional financial services. This segmentation gives banks the opportunity to provide new value for those customers by offering meaningful, relevant features or products that can fill the gaps. This is a stark contrast to the generic mass mailing offer for a debit card or auto loan that some institutions send out on a regular basis.

For example, some customers value sustainability as one their core principles. These customers might drive hybrid cars, only shop at small businesses or prefer organic produce. Banks can use this insight to create empathetic products and services that support these customers’ lifestyles and beliefs. Maybe the bank decides to provide loans for purchases that directly support clean energy. Such innovative products and services show that the bank understands and shares their customers’ values, building stronger customer relationships.

Or, consider that a bank uncovers a niche group of young adults that tend to take advantage of buy now, pay later (BNPL) services. To meet this group’s specific needs, a bank might develop a feature within its digital banking interface that notifies the user when a new BNPL charge appears on their statement. The bank could provide a more holistic view of the customers’  BNPL purchases and upcoming payments by tracking and categorizing each purchase. Or, perhaps the bank could recommend credit cards to help build the user’s credit instead of using BNPL programs. In these scenarios, the bank is offering products and services that meet this niche group’s specific situation and needs.

In both examples, the new products and services resonated with customers because they demonstrate the institution’s empathetic understanding of the niche group’s unmet needs. These are the types of digital transformations banks need in order to remain competitive in a landscape full of disruptors. Those banks that are carefully evaluating their data, launch products and services designed for niche groups and are tapping trusted, proven consultants and fintech partners for analysis and development when needed will be well positioned to increase wallet share and increase and deepen customer loyalty.

Busting Community Bank Credit Card Myths

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Credit card programs continue to be among the most significant opportunities for the nation’s largest banks; is the same true for community banks?

After a slowdown in 2020, credit card applications grew back to pre-pandemic levels in 2021. It is projected that credit cards will experience strong growth in 2022, particularly in small business and commercial segments. While a few community banks recognize the business opportunity in credit cards, according to Federal Deposit Insurance Corp. reports, over 83% do not own any credit card assets on their books.

The potential rewards of issuing credit cards are huge. Customers who have more financial products with their bank show improved retention, with more activity across the products, leading to higher profitability. It can help community banks serve their local community and improve their customers’ financial health. And community banks can realize a high return on assets (ROA) from their credit card program.

Despite these benefits, community bank executives hold back their institutions from issuing credit cards due to several myths and misconceptions about the space. Credit card issuing is no easy task — but with available technology and servicing innovations makes it possible to bust these myths.

Myth 1: The Upfront Investment is Too High
While it would be a significant investment for a financial institution to put together a credit card program from scratch, there is no need to do that. A bank can leverage capabilities built and offered by companies who offer credit cards as a service. In fact, community banks need to make little to no upfront investment to add innovative solutions to their offerings.

Myth 2: Customers are Well Served by Agent Banks
In the past, many community banks opted to work with an agent bank to offer credit cards because it was the only option available. But participating in an agent bank referral program meant they essentially lost their customer relationship to the issuing bank. Additionally, the community banks cannot make their own credit decisions or access the credit card data for their own customers in this model. Alternative options means that banks should consider whether to start or continue their agent bank credit card offering, and how it could affect their franchise in the long run.

Myth 3: Credit Card Programs are Too Risky
A handful of community banks have chosen to issue subprime credit cards with high fees and interest rates — and indeed have higher risk. However, sub-prime lending is not the focus of vast majority of community banks. Relationship lending is key; credit cards are a great product to deepen the relationships with customers. Relationship-based credit card portfolios tend to have lower credit losses compared to national credit card programs, particularly in economic downturns. This can provide comfort to conservative bankers that still want to serve their customers.

Myth 4: Credit Card Programs are Unprofitable
This could not be further from the truth. The average ROA ratio overall for banks increased from 0.72% in 2020 to 1.23% in 2021, according to the Federal Deposit Insurance Corp.; credit cards could be five times more profitable. In fact, business credit cards and commercial cards tend to achieve an ROA of 8% or higher. Commercial cards, in particular, are in high demand and expected to grow faster due to digital payment trends that the pandemic accelerated among businesses. Virtual cards provide significant benefits to businesses; in turn, they increase spend volume and lead to higher interchange and lower risk to the bank.

Myth 5: Managing Credit Cards is Complex, Time-Consuming and Expensive
Banks can bust this myth by partnering with a organizations that specialize in modern technology and program management of credit cards. There is technology available across all card management disciplines, including origination, credit decision making, processing, sales/servicing interfaces, detailed reporting, integrated rewards, marketing and risk management. Partners can provide expertise on policies and procedures that banks will require for the program. Community banks can launch and own credit card programs in 120 days or less with innovative turnkey solutions — no new hires required.

Considering the past challenges and perceptions about credit cards, it is no surprise that these misconceptions persist. But the future of credit cards for community banks is bright. Community banks armed with knowledge and foresight will be positioned for success in credit cards. Help from the right expertise will allow them to enhance their customer experiences while enjoying high profitability in the long run.

Use Cases, Best Practices For Working With Fintechs

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Bank leadership teams often come under pressure to quickly establish new fintech relationships in response to current market and competitive trends.

The rewards of these increasingly popular collaborations can be substantial, but so can the associated risks. To balance these risks and rewards, bank boards and senior executives should understand the typical use-case scenarios that make such collaborations appealing, as well as the critical success factors that make them work.

Like any partnership, a successful bank-fintech collaboration begins with recognizing that each partner has something the other needs. For fintechs, that “something” is generally access to payment rails and the broader financial system — and in some cases, direct funding and access to a bank’s customer base. For banks, such partnerships can make it possible to implement advanced technological capabilities that would be impractical or cost-prohibitive to develop internally.

At a high level, bank-fintech partnerships generally fall into two broad categories:

1. Customer-facing collaborations. Among the more common use cases in this category are new digital interfaces, such as banking-as-a-service platforms and targeted online offerings such as deposit services, lending or credit products, and personal and commercial financial management tools.

In some collaborations, banks install software developed by fintech to automate or otherwise enhance their interactions with customers. In others, banks allow fintech partners to interact directly with bank customers using their own brand to provide specialized services such as payment processing or peer-to-peer transactions. In all such relationships, banks must be alert to the heightened third-party risks — including reputational risk — that result when a fintech partner is perceived as an extension of the bank. The bank also maintains ultimate accountability for consumer protection, financial crimes compliance and other similar issues that could expose it to significant harm.

2. Infrastructure and operational collaborations. In these partnerships, banks work with fintechs to streamline internal processes, enhance regulatory monitoring or compliance systems, or develop other technical infrastructure to upgrade core platforms or support systems such as customer onboarding tools. In addition to improving operational efficiency and accuracy, such partnerships also can enable banks to expand their product offerings and improve the customer experience.

Although each situation is unique, successful bank-fintech partnerships generally share some important attributes, including:

  • Strategic and cultural alignment. Each organization enters the collaboration for its own reasons, but the partnership’s business plan must support both parties’ strategic objectives. It’s necessary that both parties have a compatible cultural fit and complementary views of how the collaboration will create value and produce positive customer outcomes. They must clearly define the roles and contributions and be willing to engage in significant transparency and data sharing on compatible technology platforms.
  • Operational capacity, resilience and compatibility. Both parties’ back-office systems must have sufficient capacity to handle the increased data capture and data processing demands they will face. Bank systems typically incorporate strict controls; fintech processes often are more flexible. This disparity can present additional risks to the bank, particularly in high-volume transactions. Common shortcomings include inadequate capacity to handle customer inquiries, disputes, error resolution and complaints. As a leading bank’s chief operating officer noted at a recent Bank Director FinXTech event, improper handling of Regulation E errors in a banking-as-a-service relationship is one of the quickest ways to put a bank’s charter at risk.
  • Integrated risk management and compliance. Although the chartered bank in a bank-fintech partnership inevitably carries the larger share of the regulatory compliance risk, both organizations should be deliberate in embedding risk management and compliance considerations into their new workflows and processes. A centralized governance, risk, and compliance platform can be of immense value in this effort. Banks should be particularly vigilant regarding information security, data privacy, consumer protection, financial crimes compliance and dispute or complaints management.

Proceed Cautiously
Banks should guard against rushing into bank-fintech relationships merely to pursue the newest trend or product offering. Rather, boards and senior executives should require that any relationship begins with a clear definition of the specific issues the partnership will address or the strategic objective it will achieve. In addition, as regulators outlined in recent guidance regarding bank and fintech partnerships, the proposed collaboration should be subject to the full range of due diligence controls that would apply to any third-party relationship.

Successful fintech collaborations can help banks expand their product offerings in support of long-term growth objectives and meet customers’ growing expectations for innovative and responsive new services.