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

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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?

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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

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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

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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

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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

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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.

Payments Processed on the Legacy Core: Not Smart Business

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payments-8-16-17.pngBanks are discovering that the stronghold they once held on payment processing, a thriving revenue-generating machine for their industry, is beginning to slip away. Corporations are finding fintech companies, a community of organizations built upon entrepreneurial business models, disruptive technologies and agile methodologies, can serve their payment needs better. Unlike organizations in any other industry, financial service organizations are enduring exploding information technology costs at a time when major leaps in technology seem to occur daily. This increasing pressure on banks comes at a time when client expectations and behaviors continually shift to the latest modernized convenient options with no expected cost to them, all while regulators pile on new rules. Banking organizations are under considerable stress, and lack the strategic bandwidth to modernize their core payments infrastructure.

Banking’s legacy infrastructure is built on check-dependent data structures that achieve scale by volume. They are managed by outdated operating models and designed on the physical movement of payments. However, payment volume is no longer the basis for achieving economies of scale. Fintechs build smart technologies deployed in nimble fashion to right size applications, architected to streamline information capture and transform simple data into actionable intelligence.

The legacy core platform has seen its share of changes in technology, products and regulations. Generations of bankers have tried to reinvent their legacy core platforms for decades. Yet the systems survived each generation, unrecognizable from their original state and containing endless numbers of integrations pinned to it. Like a massive spider with hundreds of legs, the core has spun a web so complex that even the brightest banking IT professionals have been tangled up by its beautiful complexity. As the payments industry evolved, it began to do so in singular fashion, feature by feature, product by product. What remains is a core littered with integrations that at the time were modern, but today just difficult to support and expensive to manage.

Increases in regional, national and sector-specific regulatory scrutiny and oversight create major obstacles due to the lack of available insight of legacy core technology. Much of the allocated working capital at financial institutions is dedicated to compliance-related initiatives rather than put to use on modernizing or transforming payment-related infrastructures and platforms. The legacy payment silos of the past provide little to no data insight capabilities resulting in constant reactive work efforts to acclimate products to the fluid nature of consumer and corporate payment behaviors.

Many banks are on defense in the payments arena, late to market, missing premium-pricing periods, and struggling to gain market share. The community of companies in the financial technology space has been quick to step in, developing new products in old arenas, introducing easier to manage data exchange protocols and adding robust business intelligence; stripping some of the market from traditional bank participants. The arduous task of replacing or repairing the core payment platform is beyond reach for most banks. Many banks are looking to the fintech community, once thought of as augmented service providers, to become strategic partners charged with overhauling and replacing the legacy core. This is not a retreat from payment processing but rather the recognition that financial technology companies are better positioned to respond quickly to change. Even better for the banking system, fintechs are no longer at odds with banks and today’s fintechs are collaborating at every opportunity with banks.

Bankers can no longer turn their heads and wish the problem away. The core platform is holding the organization back. Replacing or repairing it are no longer viable options in today’s dynamic payments industry. Replacing the core with an elusive payments hub is not only impractical but also nearly impossible, unless the bank has a lot of money to spend and access to a lot of talent. However, all is not lost. The answer is an overhaul of your payments strategy. That strategy should be realistic in that payment processing has become an ancillary service for most banks and the bank would be better positioned focusing on its core competencies. As payment behaviors continue to shift, those that look to strategically source their payment services may fare the best. Demands from regulators, costly compliance operations and stricter evolving information security protocols are only going to continue and ultimately render the payment infrastructure obsolete. Not processing payments on your core platform is smart business.

Coming Out of the Shadows: Why Big Banks Are Partnering With Fintech Firms

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fintech-8-4-17.pngEver since the introduction of the ATM machine in the 1960s, which several inventors have claimed credit for, banking’s technology has often come from outside the industry. Community and some regional banks across the country almost exclusively rely on vendors for everything from check processing to their core banking systems, and they have done so for decades.

Some banks don’t even count their own money. Counting machines developed by vendors do that, as well.

But banks in general have preferred to keep vendors hidden in the background so customers didn’t know they were there, and big banks have sought to develop much of their own technology in-house. Last year, when I interviewed Fifth Third Bancorp CEO Greg Carmichael for the third quarter 2016 issue of Bank Director magazine, the bank was proud to have developed and spun-off payment processor Vantiv and was planning to hire 120 technology staffers so it would have roughly 1,000 people working in information technology at the end of that year. Bigger banks have even larger crews.

Some of the biggest banks continue to invest in innovation laboratories and pump out new technologies with little to no help from outside vendors, and do an excellent job with it. But there is evidence that even some of the largest banks are warming to the idea that great technology really is coming from startup fintech firms, and that partnerships will speed up the process of innovation and give banks access to sizeable talent outside the banking sector.

“The market is changing way too fast for banks to do all the things in-house they’ve done in the past,’’ says Michael Diamond, general manager of payments for mobile banking and identification vendor Mitek, which sells its products to several of the biggest banks. “They know that.”

Aite Group researcher Christine Barry describes it this way. Historically, most large banks have promoted the technologies they have built themselves and kept the names of any technology partners undisclosed. “They did not view such partnerships as a strength and rarely allowed technology partners to reveal their names,’’ she and David Albertazzi wrote in a recent research report, “Large Banks and Technology Buying: An Evolving Mindset.” “That mindset has begun to change, given the increased attention many fintech companies are now enjoying in the marketplace.”

Nowadays, fintech partnerships are viewed as a leg up for a financial institution, and even the biggest banking players are proudly announcing their affiliations with a multitude of small firms.

USAA, long an innovator in its own right, partnered in 2015 with Nuance to offer virtual assistants to customers, and later, a savings app. TD Bank last year partnered with Moven to offer a money management app for consumers. This year, Capital One Financial Corp. joined other big banks in offering Bill.com to small- and medium-sized businesses, a platform for managing invoices and bill payment on a mobile device.

About 92 percent of banks plan to collaborate with fintech companies, according to a 2017 survey by information technology consulting firm Capgemini Global Financial Services.

In the past, technology might have helped improve back-office efficiency or reduced wait times in the branch. Nowadays, it’s at the forefront of strategic planning and the way banks plan to offer a competitive edge, Barry says.

It’s not just attitude that’s changed. The technology itself is developing rapidly. New ways of interacting with customers using artificial intelligence or virtual reality will be harder to banks to develop themselves, and easier to obtain through partnerships. Amazon’s Alexa, the voice service that powers the Echo, already is transforming consumers’ expectations for shopping, because they can now talk with a robot and order what they want online through voice commands. (For more on what banks are doing about AI, see Bank Director digital magazine’s Fintech issue.)

APIs, or application programming interfaces, will make it easier for banks to offer their customers a variety of technology solutions, by opening up their systems to technology vendors, as described in a recent issue of Bank Director digital magazine.

One of their biggest obstacles for banks is to monitor every vendor for compliance with regulations and security concerns. Smaller banks just prefer to do business with established vendors they trust. But already, they have begun to tap into the benefits of a wave of new fintech technologies, too, by asking core processors such as FIS and Fiserv to connect them with best of breed products, Diamond says. “They need the outsourcers to outsource themselves,’’ he says.

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

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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

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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.