Competitive to Collaborative: How Fintech Works With Banks and Not Against Them


collaboration.png

Over the past two decades alone, the advent of new technologies has undeniably changed the way we communicate, work, travel, invest, shop and more. This has forced traditional financial institutions to adopt more efficient and modern business models. It comes as little surprise, then, that the banking industry—long renowned for its staid, traditionalist approach to business—is ripe for disruption, operates under significant financial pressure and is subject to renewed scrutiny as a result of the liquidity spiral of 2008. Enter fintech.

Fintech has come a long way since Peter Knight, a business editor at the United Kingdom’s Sunday Times, first coined the term back in the 1980s, and since early entrant PayPal first revolutionized electronic payments. In its most current iteration (circa 2007, give or take), fintech emerged as a knight in shining armor: a disruptive force ready to save us all from those —evil’ financial institutions deemed responsible for the Great Recession.

Much has changed since 2007 and it seems that, as many predicted, banks, alternative lenders and fintech companies have come full circle in how they view each other relative to the ecosystem they occupy—from perceived partners, to “frenemies” (companies that cooperate for the mutual benefit despite competing in the same industry niche) and enemies (companies that compete in the same industry niche), then back to perceived partners. An increasing number of these actors have been adopting a more collaborative rather than adversarial approach, recognizing the overlap in business objectives in everyone’s self-interest. This can be seen as an extremely positive thing; partnerships with fintech companies can provide financial institutions with the ability to serve new segments, engage new customers and expand business with efficient technological solutions.

Bottom line, when banks and fintech companies work together, they are able to bring products to market quickly and seamlessly, all while providing a significantly enhanced client experience.

But what is behind this paradigm shift? There are three main factors driving this new wave of collaboration:

The Competitive Landscape
Beholden to prohibitively complex and cumbersome financial regulations, banks have seen significant consolidation and increasing competition over the past 40 years. They responded in large part by rebalancing their business models from a strict asset transformation approach, to blended fee-based models. Now, however, when fintech and banks collaborate, they’re able to not only leverage the resources of banks, but also leverage fintech’s nimbleness in order to effectively and expediently bring products to market. Data has exposed many previously underserved market opportunities, long overlooked due to bloated cost structures riddled with antiquated IT infrastructures and heavily layered processes, impeded further by the highly siloed nature of financial institutions’ operational structures.

Traditional Customer Service Role Has Changed
Traditional banks, be they large too-big-to-fail banks or regional and community banks and credit unions, have a strong position not only from a capital perspective, but also from a customer vantage point—they have records of all of their customers’ information. This is an important distinction between traditional and well-established institutions versus new alternative finance companies—banks would have a much lower cost of customer acquisition when compared to alternative lenders that face massive marketing expenditures.

The traditional role of the bank is to take in and manage deposits, allocate that capital and service a traditional portfolio with traditional loan parameters. Banks lend, borrow and ultimately help keep money in circulation. However, unless there is commitment by senior management at these financial institutions to adapt modern technologies, success is unlikely for traditional financial institutions.

Innovation Overdue
Lastly, driven by the competitive landscape, banks seem to have recognized that they are not viewed as bastions of innovation. Many are responding accordingly by teaming up with fintech companies that are well-positioned to steer them forward into the digital age. Deals between traditional financial institutions and alternative lenders and fintech players (like JP Morgan and OnDeck or Kabbage and Santander) are illustrative of the complementary and mutually beneficial qualities that players in banking and fintech bring to the table.

These factors, in combination, will likely result in an ecosystem of fintech companies assuming 25-30 percent, if not more, of the current banking system’s value chain. Catering to both traditional and alternative financial institutions, fintech companies enable banks to focus on their individual core competencies by offering expanding toolkits of services from origination (customer acquisition and digital onboarding) to underwriting and portfolio management (know your customer, otherwise known as KYC, anti-money laundering compliance, predictive data analytics and loan management).

The financial ecosystem is changing regardless of how market participants feel. Change is the only certainty, after all. Survivors will adapt by leveraging technological innovation through fintech partnerships, creating significant value for customers and the company itself. Those that don’t will quickly be left behind and ultimately perish.

WSFS Financial and LendKey Partner to Refinance Student Debt


LendKey.png

With over $1.4 trillion in total student loan debt in the U.S., refinancing is growing in popularity as young professionals seek to get the lowest rates at manageable payment terms. With upwards of 44 million people currently paying off student loan debt, refinancing is a trend that’s quickly picking up steam.

For banks, this represents a huge opportunity to help their existing customers refinance student loans, as well as attract new ones. But with established fintech players like SoFi and CommonBond already established in the student debt refinancing space, banks are beginning to develop technology-oriented partnerships to compete in a still underserved market.

Consider the case of WSFS Financial Corp., headquartered in Wilmington, Delaware, which has 77 offices in Delaware, Pennsylvania, Virginia and Nevada. In addition to its core banking services, WSFS realized there was an opportunity to expand its consumer lending portfolio to a new generation of customers—mainly students and recent college graduates.

Given this demographic’s average student debt of $35,000, there was an obvious opportunity for the bank to offer a student loan and refinancing product. At the time, however, WSFS lacked the internal technology resources to gain traction in the market. This, in addition to regulatory and compliance hurdles related to the student lending asset class, led WSFS to seek out a technology partner with experience in the student lending space.

The result was a partnership with LendKey, a lending platform and online marketplace that enables consumers to easily refinance their student loans. New York-based LendKey works with over 300 credit union clients, with a combined loan portfolio of over $700 million, to provide technology that enables consumers to find the best refinancing options at their local credit unions.

“We were interested in partnering [with LendKey] because we didn’t really have a student loan program, and they have a very good one, as well as a good delivery method to get to borrowers,” explains Lisa Brubaker, senior vice president and director of retail strategy at WSFS. “It helped fill our product gap.”

With WSFS’s student loan refinancing offerings available on the LendKey marketplace, WSFS was in position to enter the market with an experienced technology partner. LendKey also allowed WSFS to set the credit risk and underwriting standards for all loans, ensuring a balanced lending portfolio. LendKey helped WSFS’s student refinancing program to comply with all regulations. The new venture was launched once the two companies had agreed to team up.

Initially, WSFS relied on its own internal pricing on student loan products, and although its rates and offerings were solid, WSFS had entered the market rather quietly. The promotional support was light, and pricing wasn’t competitive with many other lenders. During the first two years of the program, WSFS generated less than $1 million in total loan disbursements—not the kind of market traction that was hoped for.

What followed next is indicative of what makes WSFS’s partnership with LendKey so innovative and (now) successful. In 2016, WFSF engaged LendKey’s account management team, seeking LendKey’s expertise on how the program could be more visible and competitive, without significantly impacting credit risk. The LendKey team evaluated WSFS’ competitiveness in the student refinancing market and made some recommendations. In response, WSFS repriced its loan program and placed itself prominently on the LendKey Network, a market for lenders to both directly promote and fulfill refinancing loans. With this pivot, WSFS’s refinancing program became more readily available to borrowers in every state within the bank’s market footprint.

Since the repricing and strategic shift to the LendKey Network, WSFS has been experiencing significant success in the student loan refinancing marketplace. WSFS’s student loan portfolio volume has grown by a whopping 54,000 percent since 2013, the year prior to the initiation of the LendKey partnership. And by performing an initial credit check on all applicants, LendKey is helping WSFS make faster decisions on whether to approve individual borrowers.

Today, LendKey continues to work with WSFS to enhance its student lending products, providing additional data analysis and credit risk reporting. LendKey’s insights-driven approach is enabling WSFS to grow its portfolio and reach new customers in a highly competitive marketing—while simultaneously maintaining strong credit risk controls.

“Our view is to take the best-of-breed from marketplace lenders [like LendKey] to deliver to our customers without losing that personal touch that we value,” Brubaker says.

Why Banks Are Slow to Embrace P2P Payments


P2P-7-3-17.pngMost banks have been reluctant to offer person-to-person (P2P) payments services, although the market—which the research firm Aite Group estimates has at least $1.2 trillion in annual payments volume in the United States alone—probably deserves a closer look.

Writing in a May 2017 research report, Talie Baker, a senior analyst in Aite’s retail banking and payments practice, argues that a P2P payments capability could be a “competitive differentiator” for financial institutions as they fight for market share in a crowded mobile banking market. And it’s a market that could be heating up as both traditional banks and fintech companies with their own payments offerings jockey for competitive advantage. “The P2P payments market is seeing growth in the adoption of digital payments, and both bank and nonbank providers, including tech giants such as Facebook and Google, are looking for ways to secure a piece of the P2P payments pie,” she wrote.

Most financial institutions offer a P2P option either through the Zelle Network (formerly clearXchange), which is owned by a consortium of banks and launched its new P2P service in June, or Popmoney, which is owned by Fiserv, the largest provider of core technology services to the industry. A total of 34 institutions currently offer Zelle, including the country’s four largest banks—J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup. Alternative providers include Facebook Messenger, Google Wallet, Square, PayPal through either its PayPal.me or Venmo services, and Dublin, Ireland-based Circle.

With 83 percent of the digital P2P market share in the U.S., compared just 17 percent for the alternative providers, banks are clearly in command of the space. Some of that advantage is attributable to the industry’s large installed base of mobile customers. “They have a captive audience to start with … and that gives them a one-up on, for example, a Venmo or a Square that don’t have a captive customer base and have to go out and build their business through referrals,” says Baker. However, the banks need to be careful that their big market share advantage doesn’t result in complacency. “Alternative providers are catching up from a popularity perspective and are doing more volume, and banks probably need to step up their game a little bit from a marketing perspective to keep their market share,” Baker says.

Why hasn’t the P2P market grown faster than it has until now? For one thing, P2P providers generally will have a difficult time charging for the service since consumer adoption has been slow. “Checks are free today, it’s free to get money from an ATM, so if [the services] are not free, I don’t know if they’re going to be popular for the long haul,” Baker says.

Another obstacle is the enduring popularity—and utility—of cash. Baker says that many potential users are still comfortable using cash or checks to settle small debts with friends and family—which is still the primary use case for P2P services. “I love being able to make electronic payments personally, I just have found that my peer group is not as up on it,” says Baker, who did not give her age but said she was older than a millennial.

The biggest impediment to the market’s growth, however, is the lack of what Baker calls “ubiquity,” which simply means “being available everywhere, all the time.” Cash and checks are widely accepted mediums of exchange, while most P2P services run on proprietary networks. “All of them are lacking in interoperability, so if we want to exchange money and I am using Venmo and you are using Square, we can’t,” Baker says. Baker points out that this is not unlike how things worked when email was becoming popular in the early days of the internet, where you could only exchange emails with people who shared the same service provider. Of course, a common protocol eventually emerged for emails and Baker expects the same evolution to eventually occur in the P2P space.

Why should banks care about a free service like P2P payments? Baker says that based on her conversations, many smaller institutions “don’t seem to understand that P2P helps drive consumer engagement. I think that P2P services keep them right at the center of a consumer’s life and keeps driving engagement with the banking brand.”

FinXTech Advisory Group Weighs in on Partnerships Inside and Outside Your Bank


partnership.png

Tasked with providing the most relevant information affecting the financial industry, the FinXTech Advisory Group is comprised of a select number of technology startup founders, established technology providers, innovation leaders in banking, investors and government, and non-government policy leaders. As financial institutions work to find the best technology solutions, we asked them to weigh in on how banks can evaluate their internal resources to maximize opportunity for innovation. When they cannot address these challenges in-house, our advisors also share how fintechs can best approach a bank to make their case guided by a careful understanding of the existing system that is in place.

How can banks create an organizational culture that prioritizes technology initiatives?

  1. Focus on Challenges: The entire organization needs to be in sync with the challenges it is looking to address.
  2. Reward Innovative Thinking: BNY Mellon hosts —innovation jams’ while U.S. Bank holds —Pitch Factory’ competitions to promote innovative thinking. Rewarding innovation will ensure organizations are open to using new technology.
  3. Continue Reinventing: The key to promoting technology initiatives is to ensure there is no dependence on one particular system or technology. Be open to adopt new and better ways of doing things.

Ensure that executive and senior leadership teams have participants that are invested in understanding the potential of applied technology to address the operating and growth needs of the institution. Additionally, the institution should have the appropriate access to customer and market information, along with the analytical capabilities on staff to assess and understand what that data shows. The institution should make appropriate investments to secure its own technical future, not just outsourced to a vendor or processor.


Preaching A but rewarding B has been the modus operandi of too many financial institutions. If a bank truly wants to prioritize technology initiatives, it can reward those that embrace such initiatives 100 percent, regardless of whether or not those initiatives yield near-term results. A bank should also look to make sure that its board includes professionals with a technology background. A board that only includes technology “spectators” and not practitioners will have difficulty in promoting a tech-driven culture.

How can fintech companies begin to work with banks?

I believe it’s highly dependent on the work that is being contemplated. The legacy factors inside banks are what have given rise to fintech companies in many cases. The legacy environment in banks is something that fintech companies have to appreciate and work with, due to the structure, regulatory requirements and other parameters that exist in highly regulated environments.


I get 10-20 calls or emails from vendors daily trying to get a meeting. I would not try to work through the IT departments at community banks. I believe you need to find the “business” or “product” owners. They have an interest in learning more about the potential benefits of the solutions. I am much more open to meeting vendors at conferences or through their FinXTech relationships than through cold calls. If FinXTech or one of the reputable trade groups refers one of the vendors, I would take the call or meeting to try to help them network or provide advice.


Fintech companies need to look at the big picture and the individual needs at the same time. It is important for them to be self-aware: no matter how cool the fintech proposition, you will be one of the few hundred vendors with a small “v”—so deal with that reality dispassionately! Spend time with people at all levels in the organization. Understand the big and small pain points. Give it enough time. Most importantly, especially for small banks, don’t expect them to spend additional resources on integration with other third parties: try to provide a complete solution. Finally, put things in perspective: You may be the best, but you may not win.

Why New FinTech Banks Think They Will Win Out


fintech.png

There’s an old joke about the guy who’s lost driving in the countryside and stops to ask a pedestrian how to get to the city.The pedestrian replies: “Oh, if you want to get there, I wouldn’t start from here.”

This is exactly how many traditional banks feel today.They want to get to the nirvana of new technologies, but are stuck in a spaghetti of old systems.Some call them legacy systems, others call them handcuffs, but either way they are an impediment to innovation.Old legacy technologies stop the bank from moving forward into the nimble and agile future on offer today, and this is exactly what fintech start-up banks believe they can exploit as it is clearly a weakness for the large banks.

Not all fintech companies compete with banks. In fact, most of them are actually working with banks to help them adopt new capabilities built upon the latest internet-enabled technologies. These include easy-to-use apps for customers, simple-to-add code for merchants and open systems to allow other fintech companies to work with them.It is almost like banking in an app store:Hundreds of companies offering thousands of services for sending and receiving money that are simple and easy to use.One such company is Stripe, a six-year-old start-up that is the preferred code for building online checkout services.Stripe is really easy to work with and has developed the chosen system for many other innovative companies including Kickstarter and Apple Pay, and was valued at almost $10 billion by the end of 2016. The reason why Stripe has gained such a high valuation is that it has taken something the banks make difficult—setting up online payment services—and made it incredibly easy.

There are companies that do similar things in lending, savings, investments and other specific areas of financial services based upon internet technologies.These companies have names like Zopa, SmartyPig, Nutmeg and eToro. They all have fun branding and cool offices, and they all share many of the same attributes in terms of being young, aspirational, visionary and capable.This is why collectively they have seen investments from venture capital and other funds averaging $25 billion for the last four years, according to data published by Ernst & Young.

However, there is a possible impasse here, as the most successful fintech firms are not replacing banks, but serving markets that are under-served. Fintech firms with the highest valuations and greatest success are those that focus on making it easier to invest, provide better access to funding, support small businesses or turn the mobile phone into a point-of-sale device.However, none of them have replaced a bank.They are succeeding by addressing areas that banks find difficult to serve due to cost or risk.

This is why it is interesting today that of the almost 50 new banks that have been launched recently in the U.K., many of them are fintech banks.Atom, Starling, Monzo and others have banking licenses and considerable funding.However, they are up against the country’s biggest banks that have millions of customers, deep funding pockets and centuries of history.For new players, fighting the large banks is going to be a challenge and they will need a lot of funding to succeed.

This does not mean they won’t succeed, but they will need real differentiation and exceptional digital services to win out.Even then, will customers switch?It will be interesting to find out, but the one advantage the new players do have from the start is fresh technology and unconstrained thinking.Equally, they have no cost overheads and therefore can compete more effectively on interest rates.Until they begin to seriously rationalize all of that high cost physical infrastructure, the big banks clearly cannot compete with these new digital start-ups, even with their millions of customers.

Therefore, the fight for the future of banking is going to be an interesting one between a host of new digital players and a few large banks that find it hard to change.Interesting times indeed.

SizeUp: Friend or Foe


size-up.png

Making smart decisions at every stage of growth is a critical—and often difficult—process for many small businesses. While larger companies have the money and resources to utilize big data and analytics tools to gain insight into their performance, customers and competition, small businesses are often left guessing and must rely on incomplete information (or gut instinct) to make key decisions like whether to expand into a new location or introduce new products.

That’s where fintech business intelligence startup SizeUp is stepping in. SizeUp partners with traditional banks to offer big data and business intelligence tools to small business customers to engage (and retain) them over the long run. Business owners who want to know such things as the most under-served areas of their markets when they are considering where to expand can use SizeUp to make the best possible decisions.

SizeUp already partners with big banks like Wells Fargo & Co., but long term will it be a friend or foe to legacy institutions? Let’s dive in and find out.

THE GOOD
SizeUp was initially chosen as one of 30 finalists in the TechCrunch Disrupt startup pitch competition in 2016, out of more than 12,000 applicants. TechCrunch Disrupt is Silicon Valley’s leading startup and technology conference, and the Disrupt startup pitch contest is widely considered to be the most competitive in the tech world. One of the important benefits that banks derive from working with SizeUp is that it increases the breadth of services they can offer their small business clients. Wells Fargo’s Competitive Intelligence Tool (powered by SizeUp), for example, helps businesses manage and grow their companies by analyzing performance against competitors, mapping out customer opportunities and finding the best places to advertise in the future. Providing this level of intelligence about local markets, along with a competitive scorecard analysis, can also be used to decide the best areas for potential expansion.

And as successful small businesses scale, SizeUp’s platform is designed to enable banks to anticipate which financial products their clients are likely to need in the next stage of growth.

“SizeUp enables banks to introduce their products and services at each key decision making moment in a business’ life,” says SizeUp CEO Anatalio Ubalde. “So for example, a small business loan during launch, and a line of credit as they grow.”

Big banks quickly realized the value that SizeUp’s platform brings to the table, with institutions like Deutsche Bank and Credit Suisse investing early on in SizeUp’s development through programs like the Plug and Play Fintech Accelerator. Headquartered in France, Plug and Play is a large international fintech venture capital firm and accelerator, and a partner with BNP Paribas, France’s second largest bank. SizeUp has even partnered with the U.S. Small Business Administration to help entrepreneurs and business owners assess how they stack up with the competition and map out potential vendors and suppliers.

THE BAD
It’s hard to find a whole lot of negatives with SizeUp’s platform and partnership model. If there’s one drawback, it’s the sheer volume of data points and information that is available on the platform. SizeUp draws from hundreds of public and private data sources, so the platform might be slightly overwhelming for small business owners who are not particularly tech savvy. That being said, banks are in a good position to aid their small business clients onboard to the platform and accelerate the learning curve.

OUR VERDICT: FRIEND
At the end of the day, SizeUp is a friend to banks and legacy financial institutions of all sizes. Bringing this level of sophisticated big data and business intelligence to their small business clients is only serving to help them grow and succeed, which should ultimately result in increased small business account retention. And as these companies grow, banks can be ready to upsell and cross-sell additional products and services that focus on specific stages of development along the way. SizeUp also provides an engaging product and interface that business owners can use for a variety of purposes, from plotting out an advertising campaign to gaining an in-depth understanding of how they stack up against the competition at any given time.

Big data and sophisticated business intelligence is something that most small business thought was only for companies with large technology budgets, but SizeUp is in the process of changing all that. And in addition to helping small businesses make better decisions during each phase of their growth, the firm is helping banks engage (and retain) those customers over the long haul.

Balancing Innovation and Risk Through Disciplined Disruption


balance.png

The digital disruption reshaping financial services mirrors the disruption brought about by Netflix, Uber, Lyft and Amazon in other sectors of the economy. What distinguishes financial technology companies is the financial and personal information their consumers entrust them with. The savviest fintech companies are those that employ discipline and structure to manage risk.

Many fintech companies adopt a fast-failure approach: move quickly and accept mistakes as necessary for innovation. Coordinating innovation with risk management might seem cumbersome. But if innovation is not integrated with effective risk management, companies risk running afoul of regulatory or compliance responsibilities.

One challenge fintech companies face is the sheer number of regulators that have rulemaking or supervisory authority over them due to unique business models and state level licensing and regulators. In the absence of a uniform regulatory scheme, there is widespread confusion about rules, expectations, oversight and regulatory risk. Many fintech companies and their banking partners remain uncertain about which laws and regulations apply or, most importantly, how they will be supervised against those rules.

A potential solution to this problem was the announcement in December 2016 by the Office of the Comptroller of the Currency (OCC) that it intended to create a special purpose national bank charter for fintech companies. The OCC aims to promote safety and soundness in the banking system while still encouraging innovation. A special purpose national bank charter would create a straightforward supervisory structure, coordinated by one primary regulator. This has turned out to be a controversial proposal, since the Conference of State Bank Supervisors has sued the OCC in federal court claiming that creation of a fintech charter would be a violation of the agency’s chartering authority.

Common Weaknesses
Executing an effective risk management plan in an innovative culture is challenging. Companies should be alert to the following common areas of weakness that can create vulnerability.

Compliance culture: Fintech companies often have more in common with technology startups than with financial services companies, which becomes particularly notable when maintaining a compliance management system (CMS). Compared with banking peers, many fintech firms generally have less mature compliance cultures that can struggle under increased regulatory scrutiny. The lack of a comprehensive CMS exposes companies to considerable risk, particularly as regulators apply bank-like expectations to fintech companies.

Risk assessments: Many companies fail to move beyond the assessment of inherent risk to the next logical steps: identifying and closing gaps in the control structure. Assessing the control environment and continually aligning an organization’s resources, infrastructure and technology to pockets of unmitigated risk is critical.

Monitoring and testing: Fintech companies can fail to distinguish between monitoring and testing, or understand why both are important. When executed properly, the two processes provide assurance of sound and compliant risk strategy.

Complaint management: Many organizations become mired in addressing individual complaints instead of the deeper issues the complaints reveal. Root cause analysis can help companies understand what is driving the complaints and, if possible, how to mitigate similar complaints through systemic change.

Corrective action: Finally, because of their fast-fail approach, fintech companies do not always follow up to remediate problems. Companies need feedback loops and appropriate accountability structures that allow them to track, monitor and test any issues after corrective action has taken place.

Strategies Across the Organization
Fintech companies should define clear and sustainable governance and risk management practices and integrate them into decision-making and operational activities across the organization. There are a number of actions that can help companies establish or evaluate their risk management strategies.

Assess risks: Because the fast-failure approach can ignite risk issues across the board, companies should evaluate their structure and sustainability of controls, the environment in which they operate, and their leadership team’s discipline level to measure the coordination of risk management and operational progress.

Identify gaps: Often, these gaps (for example non-compliance with certain laws and regulations, ineffective controls or a poor risk culture) represent the gulf between risks and the risk tolerance of the organization. A company’s risk appetite should drive the design of its risk management strategy and execution plan.

Design a road map: Whether a certain risk should be managed through prevention or mitigation will be driven by the potential impact of the risk and the available resources. Defining a plan within these constraints is important in explaining the risk management journey to key stakeholders.

Execute the plan: Finally, companies should deploy the resources necessary to execute the plan. Appropriate governance, including clear lines of accountability, is paramount to disciplined execution.

Successful companies align their core business strategies with effective risk management and efficient compliance. This alignment is especially important in the constantly changing fintech environment. Risk management and innovation can and should coexist. When they do, success is just around the corner.

John Epperson, principal with Crowe Horwath LLP, is theco-author of this piece.

The Innovator’s Imperative


I’ve seen enough to believe there are no barriers to innovation in banking. Certainly, there are speed bumps, gate crossings and rumble strips that banks will encounter on the road to innovation, but nothing that flat out prevents you from getting there. Indeed, there are a growing number of banks, including community banks, that have made important achievements that serve as good examples of innovation. (For a great list, see the Best of FinXTech Award Winners announced at Nasdaq this week.) Some innovation projects have been quite ambitious, others more modest, but they all spring from the same source—a recognition that banks need to begin simplifying and speeding up various aspects of their businesses to keep pace with (or at least, not fall too far behind) where the customer is heading.

Where is the pressure to innovate coming from? The popular boogeymen are fintech companies that compete with banks in payments, lending and personal financial management. But companies in that space are simply reacting to a much deeper trend, which is the profound way that technology is changing our lives. Banks must do the same, and a growing number of you seem to realize it.

On April 26, Bank Director hosted the FinXTech Annual Summit at the Nasdaq MarketSite in New York. The event brought together 200-plus bank executives, directors and fintech executives to explore how technology is changing the industry. Underlying themes were innovation, the opportunities for partnership between banks and fintech companies, and how banks can move forward.

I believe that most bankers understand the imperative to innovate around key aspects of their business, whether it’s payments, mobile in all its many permutations, lending, new account onboarding or data. What many of you lack is a roadmap for how to innovate. Actually, a “roadmap” is probably the wrong metaphor to describe what you need because innovation is really a process rather than a destination—something you do rather than a place that you go. So maybe you need something like a yoga chant (Om!) to help focus your energy as you practice innovation.

There are several issues that need to be dealt with, starting with a vision of what projects to undertake. You can’t change everything at once, so where do you start? What are the greatest friction points within your most important businesses? Where are you seeing the greatest competition, and how would digitalization tilt the competitive balance more in your favor? What has the greatest potential to positively impact your profitability?

Innovation costs money, so you will have to budget for it. Based on my conversations with bankers that have begun to automate key parts of their operations, expect your innovation projects to cost more and take longer than their original estimate. Innovation can be messy, so perseverance and patience are important. You also have to make sure that your bank’s culture will embrace change. When I say “culture,” I really mean people. You must ensure that your employees are open to new ways of doing things, because innovation will change job descriptions, processes and work habits, and many of your staff will feel threatened by this. It’s not enough that your executive management team and board commit to a large project like a new automated underwriting platform for small business lending and allocate the necessary resources to make that happen. You will also have to sell this change to people in your organization whose buy-in is critical.

For most banks—and particularly community banks with a finite amount of money to spend—innovation isn’t something they can do by themselves, so you will have to work in partnership with a fintech company that can help you achieve your objective. This is more complicated than it sounds, because banks and fintech companies have very different perspectives when it comes to how they do business. Banking is a highly regulated industry, so you need a partner who knows how to work within a prescriptive environment that has lots of rules. Fintech companies that have experience working with banks understand this and have learned how to manage change in an ecosystem that tends to discourage it.

The innovation imperative is real, and banks must act upon it. Your world is changing faster than you think, and the longer you wait to embrace that change, the further behind you will fall.

Can Small Banks Play the Innovation Game?


innovation-4-27-17.pngWhen it comes to innovation, community banks generally don’t have the resources—either financial or people—to compete with the country’s largest banks—where the technical staff focused just on innovation alone is probably several times larger than a smaller institution’s entire workforce.

Of course, no one expects smaller banks to compete with a megabank like Wells Fargo & Co., but there are smaller institutions that are playing the innovation game very well.

One of those is Radius Bank, a Boston-based bank that has approximately $1 billion in assets and four years ago made the radical decision to close all of its branches except for one, and convert its local brick-and-mortar retail operation to a digital platform that operates nationally. President and CEO Michael Butler, who appeared on a panel of like minded bankers at Bank Director’s FinXTech Annual Summit in New York on April 26, said that one of the more challenging aspects of that decision was changing Radius’ culture to support its new business strategy. Not all of the bank’s employees were happy about the change in strategy, and Butler said there has been approximately a 50 percent turnover in the bank’s workforce over the last four years. Many of the older employees who resisted the change have been replaced by younger, more tech savvy employees who normally would choose to work at a tech company rather than a bank. Butler said the company has spent a lot of time trying to create the kind of “vibe” that will attract those kind of individuals. “It’s a lot about the people you bring into your organization,” said Butler. At 57, Butler has the background of a traditional banker even though he has led the charge towards digitalization. “My job as the grey hair is to not let them kill themselves,” he joked about some of the bank’s younger staff members.

Another panel member—Jay Tuli, senior vice president for retail banking and residential lending at Leader Bank, a $1 billion bank located in Arlington, Massachusetts—was instrumental in creating ZRent, an online portal that the bank launched in January 2015. It enables landlords to automatically collect rent payments via ACH transactions. ZRent has been a successful customer acquisition tool for Leader Bank, and it is now licensing the software to other banks that want to use it.

Radius and Leader Bank are both located in the Boston area (Arlington is just six miles northwest of the city), so they have the advantage of taping a deep talent pool in one of the country’s most attractive locations, with a number of highly regarded universities in their backyard. Like Radius, Leader Bank has seen a big turnover in its staff over the last eight years. Tuli said that the average age of its 300 or so employees is 31. “There’s a lot of young talent in Boston, and we’ve benefited from that,” he said.

So, if being located in a large urban market is a key element in the innovation game, how to account for the success of Somerset Trust Co., a $1 billion bank headquartered in Somerset, Pennsylvania, a small community situated about 80 miles southeast of Pittsburgh? Somerset had just 6,277 residents according to the 2010 census. A third panelist, Chief Operating Officer John C. Gill, said the bank has always placed a very high premium on having excellent technology, and sees this as a critical component of its organic growth strategy. Only about 19 percent of its consumer banking transactions occur in the branch today. It sees innovation as an imperative despite its rural location.

Somerset has learned to play the innovation game by partnering up with fintech companies. A couple of years ago, Somerset teamed up with Malauzai Software in Austin, Texas, to develop a mobile banking solution that allows Somerset’s retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location or device. There are banks much larger in size that are still working on delivering these capabilities to their retail customers. Working with another fintech company, Bethlehem, Pennsylvania-based BOLTS Technologies, Somerset has also launched a new mobile account opening platform that has greatly reduced the time it takes to open a new account, and is expected to save the bank approximately $200,000 a year. Somerset and BOLTS were finalists in the 2017 Best of FinXTech Awards, which were announced at the event.

Gill said that Somerset is very comfortable partnering with fintech companies to develop product capabilities that it would not be able to develop on its own. “Banks have the customers and low cost funding,” he said. “Fintech companies bring innovation.”

Banks Face the Imperative to Innovate


FXT-6.png

I’ve seen enough to believe there are no barriers to innovation in banking. Certainly, there are speed bumps, gate crossings and rumble strips that banks will encounter on the road to innovation, but nothing that flat out prevents them from getting there. Indeed, there are a growing number of banks, including community banks, that have made important achievements that serve as good examples of innovation. (For a great list, see the Best of FinXTech Award Winners announced at Nasdaq this week.) Some innovation projects have been quite ambitious, others more modest, but they all spring from the same source—a recognition that banks need to begin simplifying and speeding up various aspects of their businesses to keep pace with (or at least, not fall too far behind) where the customer is heading.

Where is the pressure to innovate coming from? The popular boogeymen are fintech companies that compete with banks in payments, lending and personal financial management. But companies in that space are simply reacting to a much deeper trend, which is the profound way that technology is changing our lives. Banks must do the same, and a growing number of them seem to realize it.

On April 26, Bank Director hosted the FinXTech Annual Summit at the Nasdaq MarketSite in New York. The event brought together 200-plus bank executives, directors and fintech executives to explore how technology is changing the industry. Underlying themes were innovation, the opportunities for partnership between banks and fintech companies, and how banks can move forward.

I believe that most bankers understand the imperative to innovate around key aspects of their business, whether it’s payments, mobile in all its many permutations, lending, new account onboarding or data. What many of them lack is a roadmap for how to innovate. Actually, a “roadmap” is probably the wrong metaphor to describe what they need because innovation is really a process rather than a destination—something you do rather than a place that you go. So maybe bankers need something like a yoga chant (Om!) to help focus their energy as they stretch to innovate.

There are several issues that need to be dealt with, starting with a vision of what projects to undertake. They can’t change everything at once, so where should they start? Here are a couple of questions they should ask. What are the greatest friction points within their most important businesses? Where are they seeing the greatest competition, and how would digitalization tilt the competitive balance more in their favor? What has the greatest potential to positively impact their profitability?

Innovation costs money, so they will have to budget for it. Based on my conversations with bankers that have begun to automate key parts of their operations, they should expect their innovation projects to cost more and take longer than originally estimated. Innovation can be messy, so perseverance and patience are important. They also have to make sure that their bank’s culture will embrace change. When I say “culture,” I really mean people. Banks must ensure that their employees are open to new ways of doing things, because innovation will change job descriptions, processes and work habits, and many of their staff will feel threatened by this. It’s not enough that executive management teams and boards commit to a large project like a new automated underwriting platform for small business lending and allocate the necessary resources to make that happen. They will also have to sell this change to people in their organization whose buy-in is critical.

For most banks—and particularly community banks with a finite amount of money to spend—innovation isn’t something they can do by themselves, so banks will have to work in partnership with fintech companies that can help achieve their objectives. This is more complicated than it sounds, because banks and fintech companies have very different perspectives when it comes to how they do business. Banking is a highly regulated industry, so they need a partner who knows how to work within a prescriptive environment that has lots of rules. Fintech companies that have experience working with banks understand this and have learned how to manage change in an ecosystem that tends to discourage it.

The innovation imperative is real, and banks must act upon it. Their world is changing faster than they realize, and the longer they wait to embrace that change, the further behind they will fall.