Why Soccer And Restaurant Reviews Are Becoming Part of Digital Banking


fintech-9-27-18.pngFor years banks have looked to fintechs to make their digital offerings more convenient, an area where legacy core systems have been slow to develop. That remains a primary goal for some institutions that have been slower to adopt modern digital capabilities.

Banks attending Finovate Fall Sept. 24-26 in New York City were looking for fintech partners that could help them bolster their main value proposition: deep customer relationships and personalized customer service. Several companies are serving up unique capabilities such as providing restaurant recommendations or basing savings goals on how well your favorite soccer team performs.

Dan Latimore, senior vice president of banking at the research firm Celent, tweeted that customer experience was the leading topic of discussion at this year’s fintech-heavy U.S. conference, but it’s not just the conveniences of a robust mobile app that banks are rolling out. Some banks are working with fintechs to build unusual but highly personalized capabilities in their digital experience to drive human interaction and improve the quality of their customer relationships.

Three unique examples of bringing the bank and its customers closer together involve recommendations from the bank through its fintech partner.

Tinkoff Bank – Tinkoff Bank, a branchless Russian bank with $278 billion in assets according to its most recent disclosure, bills itself as a “digital ecosystem of financial and lifestyle products.” The bank’s mobile app goes beyond traditional banking services to provide things like restaurant recommendations, user tips and troubleshooting advice. Tinkoff engages its user base of about 7 million customers through stories that are similar to those used in popular social media apps like Instagram.

Meniga – This London-based fintech’s transaction categorization engine helps banks personalize their digital channels. Meniga presented at the conference with client Tangerine Bank, a Canadian direct bank and subsidiary of Toronto-based Scotiabank with $38 billion in total assets. The bank’s app recommends personalized savings goals.

For example, Tangerine’s app will notice if a user is a fan of a particular soccer team based on their purchasing history. The app can then automate a savings challenge for the user that will move money from their checking account to savings every time the team scores a goal.

Bond.AI – One of several chatbots in attendance at Finovate, Bond brands itself as an “empathy engine” that understands the context of financial data. In addition to answering basic banking inquiries, Bond proactively recommends behaviors users should take and products that fit their lifestyle.

Meniga and Bond.AI were both awarded Best in Show by conference attendees. They represent an emerging focus on understanding a customer’s lifestyle through transaction data and then making helpful recommendations to them based on that information, which are often described as artificial intelligence or machine learning. This is the latest stage in the innovation of fintech capabilities, which began by making the bank’s digital experience more convenient and friendly to mobile users.

These capabilities have been popular topics at national conferences, including Bank Director’s FinXTech Summit, held in May at The Phoenician in Phoenix, Arizona.

There’s no doubt that the challenges of partnering with fintechs was a much different proposition than when fintech firms were stood up some 10 years ago. Now, more than a decade into some fintech life cycles, the firms have matured.

Fintechs have learned to work within the regulatory framework, core system capabilities and other legacy issues banks have long been familiar with. Banks, on the other hand, have become more open to partnership with smaller, nimble tech companies.

The technology banks need to engage customers on a meaningful level has arrived. Fintechs have established themselves as viable business partners. Consumers are demanding more convenient digital experiences and many banks are progressing in meeting those demands, but those who don’t continue to lose ground in being able to grow or remain competitive.

The Big Future of Small Business Banking


fintech-8-28-18.pngAccording to the U.S. Small Business Administration Office of Advocacy, there are currently 29.6 million micro and small businesses in the United States. Of those, 80 percent are one-person businesses, and 22 percent are made up of 10 employees or fewer. Businesses that fall within these parameters span every industry from freelancers and bloggers, to designers, developers, and start-up entrepreneurs. All are seeing a boom in sales and dependency from consumers due to the so-called “gig economy.”

A lot has been done by banks and alternative lenders when it comes to providing financing for these micro and small businesses, but given this data, it begs the question: how do they all bank?
Traditionally, banking for micro and small businesses has been limited at best and inadequate at worst. In most cases, small business owners have had no other option but to visit a physical bank branch, fill out endless paperwork, provide documentation, and then transfer items back and forth to the bank through the mail or by email. The technology is typically clunky, out of date, and inconvenient – all adjectives a far cry from how these businesses would describe themselves, and how they need to operate. In addition, these owners are, at their core, consumers. They experience cutting-edge products and technology with their own personal banking accounts, but that same innovation is not replicated on the business side.

To alleviate this burden, the banking industry has a lot of soul searching to do. Some banks have spent a lot of time and energy discussing digital banking disruption in the consumer world. The time has come for the next frontier in the small business market, which has inspired and driven forward-thinking banks to develop customized solutions for small business customers.

For banks considering entering—or reimagining their approach to—the small business segment, it begins with a solid strategic plan. Understanding the demographics and banking needs of your target market will help guide the product development and customer experience process. This covers everything from developing a product suite that will be appealing to both the market and your bottom line, to thinking through the journey as a business going from being a prospect to a customer.

At Radius, we took some learnings from our experience in the digital consumer banking space and used it to build the framework for our small business offering. While small business owners may need a little more complexity with their money management tools than consumers, designing something that was simple and straightforward was the key. The result for us was the Tailored Checking Account, which any small business can now apply for online and get opened in minutes thanks to a partnership we established with Treasury Prime, a San Francisco-based fintech.

Radius isn’t alone in its quest to help business owners better manage their finances. In addition to our offering, we’ve noticed several other fintechs focused and working to fill the void that many small business owners are experiencing. For example, Autobooks helps small businesses manage their receivables, payables, payments and accounting entirely online. Brex creates business debit cards that operate like credit cards without the need for a personal guaranty. And Rocket Dollar helps individuals unlock their retirement savings for things like funding a startup or making a small business loan.

Overall, the sheer amount of micro and small businesses requires the banking industry’s attention. Consumers are increasingly turning to shopping local and supporting small businesses, only hastening the need for small business owners to manage their money on their terms—a trend that won’t decline anytime soon. This is a market that all banking professionals should be paying attention to, as the market only continues to grow. I look forward to seeing the outcome over the next year and am eager to see what the future holds for us and the rest of the small business banking industry.

New Big Bank Digital Ventures Could Threaten Community Banks


big-banks-8-14-18.pngAs if community banks don’t have enough to worry about, along comes Finn. And Access. And in the not-too-distant future, Greenhouse. All three are new digital banking platforms that have been introduced or are being test run by some of the country’s largest banks—JPMorgan Chase & Co., Citizens Financial Group and Wells Fargo & Co., respectively—and they mark a significant escalation in the digital banking space, with more new entrants to come. For example, Citigroup—at $1.9 trillion in assets, the country’s third largest bank—announced in late March that it plans going nationwide with a new mobile banking platform, although it hasn’t disclosed an exact release date.

The digital banking space is already crowded with countless fintech neobanks that work with bank partners behind the scenes to offer banking services along with unique personal financial management capabilities to millennials and other digitally-savvy consumers. Included in the mix are somewhat older challenger banks, like Simple, which is owned by BBVA Compass Bancshares (which is itself owned by Spanish banking conglomerate Banco Bilbao Vizcaya Argentaria); well-established direct banks like Bank of Internet USA, a subsidiary of $10 billion asset BOFI Holdings, which started operations in 1999; and unique players like Marcus, a digital platform launched in 2016 by investment bank Goldman Sachs, which combines an automated consumer loan capability with various deposit products—all aimed at a lower-brow customer base than Goldman has traditionally focused on.

“There is not a single incumbent bank in the U.S. with more than 20 branches who would surprise me if they launched a digital subsidiary,” says Peter Wannemacher, an analyst at Forrester Research who focuses on digital strategy in the financial services space. “What I mean by that is, I think every bank in America is considering this option.”

Why so much activity now when digital banking—including mobile—isn’t exactly new? “Incumbent banks are under a lot of pressure,” Wannemacher says. “Some of that’s market pressure. A lot of it is internal pressure. That is, their boards or their C-level executives desperately want to be relevant and be talked about in the digital space.”

Finn, which is branded as “Finn by Chase,” was launched nationwide by JPMorgan Chase (the largest U.S. bank with $2.5 trillion in assets) in June of this year as an all-mobile bank that is separate and distinct from its existing consumer banking product set, including its branch, online and mobile banking distribution channels. Finn includes a checking account with a debit card, a savings account, remote deposit and a multi-featured financial management tool set. Melissa Feldsher, a managing director who heads up the Finn operation, says that Chase is responding to what its research showed was “an unmet need” by a “smaller growing portion of the country that was truly looking for an end-to-end mobile banking experience.” Feldsher says that Finn is specifically targeting all “digitally savvy” consumers rather than just millennials, although she adds that those individuals “will tend to skew younger.”

Wells Fargo, the third largest U.S. bank with $1.9 trillion assets, is developing its own standalone mobile banking app, called Greenhouse. “Greenhouse is currently in a limited customer and team member pilot, and will expand to several states for iPhone users later this year on the Apple App store,” a spokesperson wrote in an email. “We will determine the national rollout following the pilot.” According to published reports, Greenhouse offers a spending account for paying bills, a savings account, debit card and financial management tools. Like Finn, this is a separate offering than what Wells customers receive through its consumer bank.

Taking a somewhat different approach is $155 billion asset Citizens Financial, the country’s 13th largest bank, which in July launched Citizens Access, described as a “nationwide direct-to-consumer digital bank” that will operate separately from its branch operation. Unlike Finn and Greenhouse, Access will only offer savings accounts and certificates of deposit. Citizens Access President John Rosenfeld says direct bank deposits are growing three to five times faster than brick-and-mortar deposits nationally. “This is an opportunity to extend our footprint [so] we can now reach all 50 states,” he says, “whereas we couldn’t do that before with our branch-based web product,” which Rosenfeld says was only available in Citizen’s traditional market. “We didn’t have the capability to open accounts outside the states we were in. Now we do,” he adds.

As large banks target consumers nationwide with these new direct banking ventures, community banks will be under pressure to up their game. “The larger banks are investing more in digital capabilities … and I think that community banks, to compete, are going to have to really evolve their digital capabilities,” Rosenfeld says.

CBW and Yantra Bring ‘Common Sense’ to Fintech Space


CBW-5-23-18.pngIt’s not common to see global fintech firms and healthcare companies eagerly partner with a small bank in Weir, Kansas, but dozens of companies from an array of industries have done just that.

But the chief technology officer who’s led the way with a unique approach to blending technology and banking describes what he’s done over the last nine years as nothing more than “common sense.”

“The wheel was revolutionary for about a minute before everybody else realized they could do it too,” said Suresh Ramamurthi, the CTO of CBW Bank and CEO of Yantra Financial Technologies, the tech firm he established to bring efficiencies to banks and other companies who want to process payments or manage risk.

The state-chartered bank with just $33 million in assets, located in small town Weir, Kansas, is about as far from a major financial hub as any place in America, but the bank helped put the town back on the map. The town first rose to prominence as the place where the flyswatter was created. CBW remains one of the only things still remaining in the town’s center. Less than 1,000 people live there, and it’s the only branch the bank operates.

Ramamurthi and his wife, Suchitra Padmanabhan, acquired the bank in 2009, mostly with personal savings. He came from a career in the tech sector which included a brief stop at Google, while Padmanabhan had a career at Lehman Brothers. CBW had a rough balance sheet, and the two had to spend some time getting the bank back on a solid footing. Ramamurthi and Padmanabhan have been featured in The New York Times and Fortune, and have earned national awards and praise for their innovative approach to banking and technology. The praise is not because they give away cookies and cider in the branch as the Times reported, or that it still is one of the primary lenders to local farmers and home buyers, but because of what they’re doing with fintech.

Ramamurthi, leaning on his experience with Google and tech background, also started Yantra Financial Technologies, a fintech firm that initially focused on speeding up the payments process, which at that time could take days or even weeks if, for example, transfers were being made around the globe. From that beginning has evolved the Y-Labs Marketplace, which enables companies, regardless of sector, to explore banking and payments, specifically, within that marketplace.

CBW and Yantra are the winners of Bank Director’s FinXTech Innovative Solution of the Year, one of three annual awards that recognizes successful collaboration between banks and fintech companies. The awards were announced at Bank Director’s FinXTech Annual Summit, held this May in Scottsdale, Arizona.

CBW and Yantra have published about 500 application programing interfaces, or APIs, which allow third-party developers to build apps and connect them to the bank’s core data systems, while maintaining compliance, which in itself could be a huge financial and legal burden. It’s how banks can keep pace with the rapidly evolving digital marketplace without developing the apps themselves, and allows banks and other firms to come to market at a 21st century pace.

That, Ramamurthi says, is where the common sense lies.

“In banking, your core competence should be in the (area) that (is) the most expensive area for banking, which is compliance,” he says. “If you can digitize all aspects of compliance, then you have an advantage.”

The Y-Labs Marketplace, which Ramamurthi runs as the CEO, has grown its client list to more than 100 that includes mostly other fintech firms like Moven and Simple—known well in the banking industry—in addition to insurance companies, a claims processor, healthcare companies and hospitals, which have used the marketplace to improve their payments systems, while also automating their compliance verifications and other tasks that are often costly and time consuming.

The bank itself remains quite small, though it continues to grow steadily and supports the local community. Ramamurthi has been widely recognized as an innovator and is upending the industry by establishing what he describes as a foundation that will eventually lead to advances in artificial intelligence and machine learning for the banking industry.

And there’s no indication that CBW or Yantra plan on slowing the effort to innovate.

Later this year, he said they plan to launch a “very special” mobile app, which he described as “a common-sense approach to how mobile apps should be for banking.”

Although Ramamurthi declined to discuss details, the app will “rethink” the relationship between customers and the bank, which has traditionally started with common retail accounts and then developed into loans and other more complicated arrangements, he said.

Winners Announced for Bank Director’s 2018 Best of FinXTech Awards


awards-5-10-18.pngThe cultural and philosophical divides between banks and fintech companies is still very apparent, but the two groups have generally come to agree that it’s far more lucrative to establish positive relationships that benefit each, as well as their customers, than face off on opposite ends of the business landscape.

The benefits of collaboration in the fintech space, which manifest themselves in the form of improved efficiency and profitability, has led to a growing number of partnerships between banks and fintech firms. This year Bank Director and FinXTech selected 10 finalists in three categories—Best of FinXTech Partnership, Startup Innovation and Innovative Solution of the year—for its annual Best of FinXTech awards. The three category winners highlight some of the most transformative and successful partnerships between banks and fintechs that have improved operations, experience and profitability for both.

The awards were presented at Bank Director’s FinXTech Annual Summit, held May 10-11 at the Phoenician resort in Scottsdale, Arizona.

Startup Innovation:

Radius Bank and Alloy

Radius, an $1.1 billion asset bank headquartered in Boston, has been on a dedicated track to become an online-only retail bank since Mike Butler took over as CEO about 10 years ago. But Butler and his executive team knew that Radius’ customer acquisition and onboarding process was inefficient. The demand was there, but the bank’s internal onboarding processes couldn’t keep up, and the attrition rate was high.

Overhauling that process led Radius to Brooklyn, New York-based Alloy, a firm still in its relative infancy. Butler and the Radius board of directors knew that this was a risky play because Alloy was still a young startup company and they would be entrusting it to digitize its customer onboarding process, a critical move that aimed to make the process more efficient and reduce drop-offs. The bank had to bring together several departments, from data to marketing, and get them all on the same page.

It had to be just right to make their model succeed—and so far it has worked. The bank has reduced its technology cost to open an account by 50 percent, and seen a 30 percent increase in its application conversion rate. Radius also has seen a steep downward trend in fraudulent account openings, an issue that’s become increasingly prevalent with online banking.

But even with significant technology investments and improvements, there was still considerable human productivity invested in some of the bank’s core functions. Some 30 to 40 of every 100 incoming retail account applications were being tapped for manual review. With some 1,000 applications coming in each week on average, the calculus there is pretty clear about the expense the bank faced with reviewing those applications. Alloy’s technology automates much of the review process using decision engines, and has reduced that manual review by 98 percent.

Alloy’s technology automates most of the process and has reduced dropped applications on the consumer side and the human capital expense for the bank. Now, just three or four of every 100 applications on average are pinged for manual review.

Most Innovative Solution of the Year:

CBW Bank and Yantra Financial Technologies

Who would have thought a former Lehman Brothers executive and her husband with a technology pedigree that includes a stop at Google would somehow elevate a tiny bank and fintech firm in rural Kansas to national prominence?

While maybe not a possibility completely in the left-field bleachers, the partnership between CBW Bank and Yantra Financial Technologies has drawn significant attention from both the banking industry and the tech world. Suresh Ramamurthi, the CEO of Yantra and chief technology officer for the bank, and his wife, Suchitra Padmanabhan, the president and CEO of CBW, together turned the near-failing bank around after they purchased it in 2009, mostly with personal savings.

The bank, with just $33 million in assets, has maintained is rural core deposit base in the tiny town of Weir, but also launched a revolutionary global marketplace for some 500 application programming interfaces, or APIs, that enable tech firms and other companies, like those in the health care space, to experiment with finding efficiencies and maintain compliance at the same time.

Using Ramamurthi’s technological expertise, the bank developed the APIs whose application can range from developing new products that are compliant with regulatory requirements to helping the institution or fintech scale up their operations, or simply improving the bank’s core operating system.

The APIs were also applied to CBW’s own digital banking platform, which has drawn nationwide clients, including popular fintech firms like Moven and Simple, as well as companies in the health care industry.

The bank then published the APIs publicly, working with Yantra in the Y-Labs Marketplace. Common APIs results in streamlined interoperability, like a payments solution, for example, between multiple businesses in multiple industries. More than 100 companies have signed up with the Marketplace to use the APIs, including other fintechs and companies outside of financial services.

It has also allowed the bank to enhance its own digital offerings, which Ramamurthi says will result in a new app later this year that will reshape how mobile banking works.

Best of FinXTech Partnership:

Citizens Financial Group and Fundation

For two decades, Citizens Financial made business banking loans using a manual process that was heavy on the paper. But this is an extremely inefficient way of doing business and the bank’s leaders wanted a faster and less costly way of underwriting loans, particularly with new fintech marketplace lenders coming into the market—whose technology gave them a big competitive advantage.

Providence, Rhode Island-based Citizens, one of the country’s top-20 banks at $152 billion in assets, worked with Fundation, a Reston, Virginia-based credit solution provider, to reinvent how it makes small business loans, rolling out in March a new credit delivery process for small-business loans and lines of credit up to $150,000.

“This is the future,” says Jack Murphy, president of Business Banking at Citizens. The new system has automated nearly all of the decision-making for the bank, which Murphy says makes it easier on both bankers and customers alike. Bankers aren’t spending hours reviewing applications, and customers can complete the application on their own time, even in the car, Murphy jokes. The bank still controls the credit policy, which ultimately determines if a manual review is necessary.

But the partnership didn’t come about overnight, and took many months of due diligence and conventional vetting before it was finalized. The bank took a deliberate approach to ensure it was making a good decision.

“There’s not a bank today that’s not thinking about fintech and what are the right ways to go about executing a strategy around digital technology,” Murphy says.

Finalists

The following partnerships were also recognized among finalists for the three top awards:

  • MVB Financial Corp. and BillGO
  • TCF Bank and D3 Banking Technology
  • U.S. Bank and SpringFour, Inc.
  • USAA and Clinc
  • Seacoast Bank and SmartBiz Loans
  • ChoiceOne Bank and Autobooks
  • Pinnacle Financial Partners and Built

Risk/Reward: Can Insurtech Build Better Relationships With Your Bank Customers?


insurtech-5-8-18.pngThe rise of financial technology, or fintech, has not disrupted banks to the extent that many predicted it would. What it has done, however, is chip away at the number of services a given customer will seek from their bank. Instead of using their banking app to check balances and transfer funds, many use third party personal budgeting tools like Mint and peer-to-peer (P2P) payment apps like Venmo. Instead of seeking credit at their local branch, many consumers are turning to online lenders like SoFi. As customers spend less and less time engaging with their banks, brand loyalty is at risk, which is at a higher premium in today’s market.

So how can banks recapture engagement or retain loyalty? Adding an insurance offering could be an option for creating a new touchpoint with bank customers. To many bankers, this is not a new idea. The concept of bancassurance—where a bank serves as an insurance broker and directly offers products to its customers—has been around for a long time. But there is a wave of technological transformation taking place in the insurance space that could breathe new life into bank/insurance partnerships: insurtech.

Insurtech is very similar to fintech. At the core, these firms are about utilizing technology and data to shake up an incumbent industry. The end goal of insurtech is offering more targeted, consumer-centric insurance products and ways of accessing those products. Insurtech is still in the early stages of development but, according to customer experience technology firm, Quadient, most incumbent insurance firms now have a “strong plan or strategy for how they will deal with onboarding innovative technologies and channels” that they did not have just two or three years ago.

Banks utilize a few key models for incorporating insurance into their customer offerings:

Building a marketplace: The marketplace model is being pioneered by many digital-only challenger banks. For example, U.K.-based challenger banks Starling Bank and Monzo have rolled out in-app marketplaces that augment their basic checking accounts by linking customers to a bevy of outside partners, from insurance and pension providers to mortgage lenders. While it’s possible to generate referral fee income from this type of arrangement, this model has not proven to be a major revenue driver, as the banks have yet to see a month without losses.

The marketplace model does allow digital banks to offer services beyond their basic online consumer accounts without the stress of integrations and new partnerships, but that’s a challenge that most traditional banks do not face because they can typically offer payment transfers, loans, and more. While a marketplace would move incumbents closer to the Amazon-like platform model in vogue today, it doesn’t seem to offer a major value add for traditional banks.

Using white-label products: Taking the idea of an insurance marketplace a bit further, banks can also consider incorporating white-label products to help consumers access insurance or compare policies in the bank’s existing online platform. Fidor Bank, a digital institution out of Germany, created an online marketplace that allows customers to access curated fintech and insurtech products. The Fidor product, FinanceBay, is now available as a white-label product to other banks.

Many digital-first insurance providers offer ready-made affinity programs with white-label capability as well. With this increased connection between the bank and the third party insurance providers, though, liability becomes a much larger concern.

“Bancassurance,” or partnering to establish an insurance brokerage: A step even further than incorporating a white-label product to help customers find insurance would be to engage in a bancassurance model, where the bank would serve as an insurance broker actively selling insurance products to its banking clients. This form of partnership has been utilized heavily in countries such as France and Spain.

When Glass Steagal was repealed in 1999, those bank/nonbank commerce barriers were largely removed, but regulations, complicated corporate structuring questions and mixed results have largely kept the model out of the U.S. However, the recent partnership announced between Germany’s largest bank, Deutsche, and Berlin-based Friendsurance is bringing interest in this model back to the forefront.

By mid-2018, Deutsche plans to offer coverage from over 170 German insurers through its in-app insurance manager function, according to Insurance Journal. Friendsurance uses artificial intelligence to evaluate potential plans based not only on price but also on “the question of how financially stable the insurer is or how good its customer service is,” Friendsurance co-founder Tim Kunde told Handelsblatt Global in January. Deutsche will be establishing its own insurance brokerage firm run by Friendsurance as opposed to a simple referral program or marketplace tool. This differentiation, the bank hopes, will reinvigorate the bancassurance concept thanks to the added value the insurtech brings to the insurance buying experience.

However a bank/insurtech partnership takes shape, liability is a looming issue. The more deeply engrained a partnership is, the more complicated the liability analysis becomes. As with all major technology partnerships, banks should bring their regulators into the conversation early on if they’re considering a partnership with an insurtech provider.

Insurtech is a fast-growing sector, and the distribution of insurance products is becoming more prolific among retailers, utilities, lifestyle brands and more. If banks don’t begin to explore insurance partnership models, they may lose out on yet another opportunity to service their customers.

Considering Fintech Partnerships? Don’t Forget the Fundamentals


fintech-4-30-18.pngAs the benefits of partnerships between banks and financial technology (fintech) organizations have become more evident, bankers’ fears of being displaced by the wave of fintech startups have cooled.

Increasingly, bankers see that taking on a fintech partner can enable them to offer new products and services, develop new delivery models, and enhance the efficiency and effectiveness of back-office functions.

And yet, despite the growing awareness of the value of these partnerships, dispositional mismatches between banks and fintech companies have caused banks to struggle to make these partnerships work.

One of the most common sources of discord is in the area of risk management. Bank risk and compliance professionals are wired to mitigate risk rather than to manage it. The urge to shelter banks from risk through traditional risk and compliance practices, however, can dampen the innovation that is at the core of fintech’s appeal.

Banks aiming to get more out of these partnerships should review and hone their operations, aligning business goals and risk management goals across strategy, culture and information sharing.

Strategy Trumps Granular Problem-solving
Fintech companies and banks entering into partnership agreements often fail to effectively think through and communicate about their individual corporate strategies and how the partnership fits in.

Banks might approach a partnership with a problem they would like the fintech company to solve, without clearly defining how the partnership fits into their overall business strategy.

An important first step for banks is to think of a fintech engagement as a true partnership, rather than a vendor relationship.

The two organizations should sit down together to collectively identify the objectives and goals of each organization and how the partnership can advance those goals.

Going further, both organizations should establish boundaries around what they are willing to do to achieve their objectives, what resources will be made available to deal with challenges, and what will trigger the escalation of an issue to executives’ attention.

Ultimately, the purpose of the partnership must be clearly tied to the broader strategy of each organization, and at the outset, the partners should establish a process to ensure that purpose and strategy will remain aligned.

Meet at Cultural Crossroads
Fintech companies and banks often experience a culture clash at the outset of a partnership. The more traditional culture of a bank can seem starkly different from that of an innovative and fast-moving fintech company, particularly in the area of risk tolerance. While banks often view any loss adversely, fintech companies are much more comfortable with the idea of taking a small loss in the spirit of innovation and learning.

This question of culture fit rarely is considered in the traditional vendor management process. But finding a way to align the two, often disparate, cultures is critical in forging a successful partnership.

Both parties should evaluate prospective partners’ values at the outset. Once a partnership is formed, the parties should establish a set of principles that define practices and policies that are deemed acceptable on both sides. This set of principles should be viewed not as rules per se, but as broad guidelines.

Another important aspect of culture is how both organizations treat failure. Rather than taking a punitive approach to all failures, banks should be open to the idea that some failures can be positive if they advance innovation.

Information Sharing
Fintech companies sometimes are hesitant to share their data, either because they consider it proprietary or because they simply do not know what data banks want. On the other hand, banks, particularly in light of privacy regulations, might be hesitant to share information that does not directly affect the partner relationship.

Both parties should work to overcome barriers to information sharing, as the degree of transparency in a partnership is directly related to its success. With more data, partners can better assess performance and identify unforeseen compliance risks that emerge.

As in the case of strategy and culture considerations, expectations defining the process and extent of data sharing should be set up front. Banks should consider what information they can provide to fintech partners that might not be directly related to the product – but which might help grow the strategy or solution.

Competitive Advantage Through Thoughtful Partnerships
By establishing some basic principles around strategy, culture, and information sharing, bank executives can make better decisions as they enter into partnerships with fintech companies. Poor execution on fundamentals should not be allowed to hamper the successful execution and growth of these partnerships.

Why It’s Never Been Easier to Adopt a Fintech Solution


innovation-4-9-18.pngFor many banks and financial services firms (incumbents), emerging financial technology firms (fintechs) were once viewed in two camps: flash-in-the pan, one-hit wonders or serious threats institutions should avoid. Perhaps the media was partially to blame for this “us vs. them” mentality with its prolific use of words like “disruption” or its positioning of fintechs as the only companies who embraced change or were capable of innovation. Beneath the exuberant headlines espousing the promise of these new technologies and the industries they would revolutionize, there was more than a hint of negativity, a healthy dose of fear mongering, and a pretty clear message, “Dear banks, you are not invited to the party. In fact, we are coming to crash yours.”

Although those of us who worked in banking and wealth management bristled at the tone and approach of these young companies, none of us could disagree with much of what they were saying: things were broken and radical change was afoot. Yet, there was something about the disruptor’s manifesto that seemed a little naïve, a bit misguided and certainly incomplete.

There was the assumption that financial institutions were resistant to change or opposed to innovation; neither of which, I would argue, were entirely true. For a myriad of reasons companies wanted change. The unspoken matter was how could they realize it in a cost effective and compliant way without disrupting any core processing or custodial technologies. Would these technologies integrate cleanly?

Fast forward to 2018
Much has changed. Many of the disruptive fintechs with their go-it-alone, direct-to-consumer business models have pivoted to business-to-business service models and now service the very companies and industries they set out to upend. Similarly, banks who either ignored the boisterous fintechs or chose to build internally are rethinking their strategies and engaging with start-ups.

What has changed?
The quick answer is everything. The disruptors have not only proven their technologies, but the market has begun demanding their services. Furthermore, the speed of innovation, adoption and deployment has quickened at such a rate that what was once deemed new or disruptive is suddenly table stakes.

Having experienced how difficult it is to create brand identity and how expensive it is to acquire clients, many fintechs have turned their focus to servicing institutional clients. Fintechs have a deeper understanding of the complex business activities and regulatory and compliance processes with which financial services must adhere and are designing their technologies accordingly. The technology is often preconfigured, ready to integrate into existing back-end processes, and deployable at a large scale.

Us vs. Them Becomes We
Fintechs are easier to partner with and their solutions have become easier to adopt. No longer is innovation limited to the banks or organizations with large IT budgets and staffs. FinTechs have made innovation available to all financial firms, with prices and engagement models that meet most budgets.

The nimble nature of fintechs has allowed them to adapt to changes and fine-tune their technology at a much quicker rate, bringing the most scalable solutions to the market. With an emphasis on engagement and a seamless experience for both clients and institutions, fintechs are no longer serious threats but rather trusted partners bringing a necessary business function to institutions.

Lastly, and equally important, the value proposition for incumbents to adopt digital solutions is clearer and far more comprehensive than previously articulated or understood. Fintechs make it easier for institutions to launch new business services such as wealth management or lending solutions to diversify product offerings, deepen client engagement, enhance client acquisition and strengthen loyalty. This not only helps grow the overall business, but many incumbents have realized significant cost savings through the automated processing solutions these new technologies offer and the elimination of manual back-end processes. As a result, businesses are seeing improved efficiency ratios and in some cases, higher valuations.

To conclude, a new breed of fintechs has emerged, many with the same face, most with a new sophistication and a deeper understanding of integration but all with the mission to empower. Transformation through collaboration is an impressive phenomenon, one that every firm should take advantage of and fintechs provide that opportunity.

Defining, Adopting and Executing on Fintech


fintech-9-5-17.pngFintech has become a convenient (and amorphous) term applied to virtually any technology or technology-enabled process that is, or might be, applied within financial services. While the technologies are complex, the vast array of the current wave of fintech boils down to three simple dynamics: (1) leveraging technology to measure or predict customer need or behavior; (2) meeting customer need through the best customer experience possible; and (3) the ability to execute more nimbly to evolve products and services and how they are delivered.

Every reasonably well-versed person in fintech knows that the ability to predict customer need or behavior is achieved through a strong data infrastructure combined with a high-quality analytics function. But what defines the quality of the customer experience? At Fundation, we believe the quality of the customer experience within financial services is determined by the convenience, simplicity, transparency, intuitiveness and security of the process by which a product or service is delivered. The challenge for many financial services companies in developing the optimal customer experience lies in the rigidity of their legacy systems. They lack the flexibility to continually innovate products and services and how they are delivered.

The distinct advantage that fintech firms like Fundation have over traditional financial services companies is the flexibility gained from building their technology infrastructures from scratch on modern technology. With in-house application development and data operations capabilities, fintechs can rapidly engineer and, more importantly, reengineer the customer experience and their business processes. The capacity to reengineer user interface (UI), user experience (UX) and back-end processes is a major factor in the ability of financial services companies to maintain a competitive edge in the digital era where customers are accustomed to engaging with the likes of Google, Amazon, Facebook and Apple in their digital lives.

Banks Remain Well Positioned to Win With Fintech
Armed with these capabilities, we, like so many fintechs, could be thumping our chests about how we are going to transform banking. But at Fundation, we see the future differently. We believe that the biggest disruption to banking is not going to come from outside of the banking industry—it’s going to come from the inside. A handful of banks (and maybe more) will reengineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through highly integrated partnerships with fintechs. As a result, these banks will generate superior financial returns and take market share as customers migrate to firms that provide the experiences they expect.

In addition to enjoying a lower cost of capital advantage versus fintechs, we believe banks are well positioned for three other reasons. First, banks will remain the dominant choice of customers for financial products given their brand strength and existing market share. Second, banks have far more data than the average fintech that can be used to develop predictive analytics to determine customer need or behavior. Third, and perhaps most important, banks have what we at Fundation call the “trust asset:” their customers trust that they will protect their information and privacy and that they will recommend products best suited to their needs.

Be the Manufacturer or the General Contractor
Banks are in a strong position to win the fintech revolution but what remains are the complexities of how to execute. There are a few basic strategies:

  1. Do nothing
  2. Manufacture your own capabilities
  3. Operate as the general contractor, aligning your institution with third parties that can do the manufacturing
  4. Some combination of manufacturing and general contracting

For banks that are predominantly in relationship-driven lines of business rather than transactional lines of business, doing nothing is viable for now. The pressures on your business are not as severe, and a wait-and-see approach may enable you to make more informed decisions when the time is right.

For others, doing nothing is fraught with peril. Assuming that you choose one of the remaining three options, the implementation process will be hard, but what may be even harder is the change in organizational psychology necessary to execute on your decision. Resistance to change is natural.

That is why fintech initiatives should be driven top-down. Executive leadership should command these initiatives and set the vision. More important, executive leaders should explain why the institution is pursuing a fintech initiative and why it has decided to build, partner or outsource. Explaining why can reduce the natural resistance to, and fear of, change.

Manufacturing your own capabilities is hard work but has advantages. It provides maximum control over the project and limits your vendor management risk. The downside is that the skill sets required to execute are wide-ranging. That said, building in-house doesn’t mean that everything needs to be proprietary technology. Most fintech platforms are a combination of proprietary technology along with third-party customized components. Should you elect to build off of third-party software, you must ensure that the platform is highly configurable and customizable. If you don’t have significant influence over customization, you will lose the opportunity to reengineer the processes necessary to rapidly innovate and evolve.

Being the general contractor isn’t easy, either, but banks are very adept at it. You could make the argument that most banks are just an amalgamation of business lines, each of which employs a different system (mostly third-party) and are already operating as general contractors. The business line leaders we have come to know have significant experience managing critical third-party vendors and therefore have the skill set and knowledge to manage even the most innovative financial technology partners. What’s more, they often know what they would want their operating platforms to do, as opposed to what they are built to do today.

Should your institution decide to outsource services to a fintech firm, it is paramount to align interests. Banks should embrace their fintech counterparty as a partner, not simply a vendor. Welcome the flexibility that they offer, and allow them to empower your institution to innovate and evolve.

Don’t Squander the “Trust Asset”
In a world where Amazon, Google, Facebook and Apple dominate the digital landscape, deliver ideal customer experiences, and may possess a “trust asset” of their own, the status quo is not an option, no matter how painful change can be. If your financial institution intends to compete over the long term, executing on a fintech road map is vital, moving towards infrastructures with a foundation of flexibility. Over the next decade, flexibility will allow financial services companies to compete more effectively by delivering the products, services and experiences that customers will demand. Flexibility is what will allow your institution to maintain its competitive position over the long term.

Why Bank-Fintech Partnerships Are Here to Stay


partnership-8-18-17.png“Silicon Valley is coming,” Jamie Dimon, chief executive officer at J.P. Morgan Chase & Co., famously warned his bank’s shareholders two years ago. Indeed, with the rapid proliferation of fintech companies that are creating cutting-edge products, banks are asking how they can compete with these nimble startups that are reaching unbanked populations, and making routine transactions speedier and more accessible, without the same regulatory burdens shouldered by banks. While we can’t offer a silver bullet, it appears that some banks have concluded that there is considerable wisdom in the adage “if you can’t beat them, join them.”

A bank-fintech partnership is an arrangement in which a fintech company provides marketing, administration, loan servicing or other services to a bank to enable the bank to offer tech-enabled banking products. For example, a fintech company may perform loan origination services, while the bank funds and closes the loans in its own name and later sells loans it does not want to hold in portfolio to purchasers, including the fintech company. Banks have also partnered with fintech companies to provide payments services or mobile deposits. While some partnerships offer products under the fintech company’s brand, in other cases the fintech company quietly operates in the background. Some banks enter into more limited relationships with fintech companies, for example, by purchasing loans or making equity investments.

Many banks have realized advantages of bank-fintech partnerships, including access to assets and customers. Since most community banks serve discreet markets, even a relatively simple loan purchase arrangement can unlock new customer relationships and diversify geographic concentrations of credit. Further, a fintech partnership can help a bank serve its legacy customers, for instance, by enabling the bank to offer small dollar loans to commercial customers that the bank might not otherwise be able to efficiently originate on its own.

Of course, fintech companies derive significant benefits from these partnerships as well. For Fintech companies, having a bank partner eliminates barriers of market entry. With the bank as the “true lender” or money transmitter, the fintech company spares the time and expense of obtaining state licenses. Bank partners can lend uniformly on a nationwide basis and are not subject to many of the different loan term limitations that state licensed lenders are. Of course, banks must comply with their own set of lending regulations.

Though potentially beneficial, banks must be mindful of the risks that partnerships present. Banks are expected to oversee their fintech partners in a manner commensurate with the risk, as they would any service provider, following detailed regulatory guidance on oversight of third-party relationships. In June 2017, the Office of the Comptroller of the Currency (OCC) issued a bulletin communicating enhanced expectations for oversight of third parties, including, specifically, fintech companies.

Banks must perform initial and ongoing due diligence on any fintech partner to ensure that it has the requisite expertise, resources and systems. The partnership agreement should hold the fintech company accountable for noncompliance, and enable the bank to terminate the relationship without penalty in the case of any legal violation. The parties should agree to strict information security and confidentiality standards. Banks should reserve the right to conduct audits and access records necessary to maintain oversight. Adequate oversight is essential because liability for violations or errors made by the fintech company may ultimately rest with the bank.

Banks seeking to partner with lending platforms must also structure the relationship to address true lender concerns and consider how they will sell loans or receivables on the secondary market, including to the fintech company. Unless an arrangement is properly structured, a court or a regulator may conclude that the bank was not the true lender and that the interest exceeds applicable usury limits. Similarly, as a result of a ruling by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, if interest on a bank loan exceeds the rate permitted by applicable law for non-bank lenders, a non-bank purchaser may not be able to enforce the loan even if it was valid when made by the bank. Banks might address this risk by selling participation interests instead.

While competition from fintech companies may seem daunting, the proliferation of bank-Fintech partnerships suggests that banks fill a critical niche in the fintech industry. Moreover, even though some fintech companies have sought to become banks themselves and the OCC has proposed offering a special purpose bank charter to fintech companies, given the high regulatory hurdles of operating as a bank and the obstacles the OCC has encountered in advancing its proposal, it appears that bank-fintech partnerships are here to stay.