FinTech Day Recap: The Times They Are A-Changin


Over the next few years, the financial services industry will continue to undergo a major transformation, due in part to the speed of the technology movement. With continuous pressures to innovate, how can banks leverage these new technologies to stay relevant and competitive over the next five years?

Filmed during Bank Director’s annual FinTech Day in New York City at the Nasdaq MarketSite, Al Dominick, president and CEO of Bank Director, shares his thoughts on how banks who are looking for partnerships and opportunities to develop new technologies, may find fintech companies eager to collaborate.

How Regulators Could Foster the Fintech Sector


fintech-innovation-3-30-16.pngRegulators can’t afford to wait any longer in developing a framework for their oversight of the fast-rising fintech sector. The number of fintech companies, and the amount of investment in them, is growing too rapidly for regulators to hope that they can supervise the sector by applying existing regulations for banks to fintech companies on an ad-hoc basis. That will only create gaps in regulators’ monitoring of the sector, and confusion among fintech companies trying to grasp the complexities of financial regulation in the U.S. Such gaps and confusion are already evident: Many fintech companies are failing to implement best practices in securing customer data, and many of them are also unaware of how existing regulations apply to them.

I addressed the security issue in a previous article, but regulators should be just as concerned with clearing up the confusion in the market. That’s because the government has a legitimate interest in encouraging fintech growth, which would be boosted by a clear regulatory framework. Some fintech companies serve customers that have been ignored by banks in recent years, bringing them into the financial system. For instance, companies like OnDeck Capital, Kabbage, Lendio, Square, and others are filling the credit needs of small businesses that banks have been hesitant to lend to ever since the Great Recession. Regulators should be careful about imposing standards that gash this new source of credit for underserved small businesses. Also, some new technologies that fintech startups are working on, like the blockchain, can improve regulation and compliance throughout the financial services industry.

Build Relationships Early
How can regulators help foster innovation without sacrificing security and integrity in the financial system? For one, they should start their interactions with fintech companies as early as possible to encourage innovation while also safeguarding customers. This means providing guidance to companies while they are still developing and experimenting with their solutions, so companies can incorporate compliance into their products early on. If regulators wait to offer guidance until after products have already been developed or released on to the market, then regulators will become an unnecessary obstacle to innovation.

U.K. regulators are taking steps to develop relationships with fintech startups early on to offer guidance on their solutions. At the end of 2014, the U.K.’s Financial Conduct Authority (FCA) announced it would launch a regulatory “sandbox” where fintech companies could test new solutions. When companies use the sandbox, the authority waives some of the compliance requirements normally applied to pilot tests for new products. Banks can also use the sandbox, and the authority guarantees that it won’t take enforcement action at a later date regarding any tests that the banks run. The sandbox experiment will go live later this year, and U.S. regulators should watch it carefully and explore similar initiatives.

Eliminating Confusion
Regulators also need to give fintech companies a hand in navigating the complexity of the U.S. financial regulatory system. There are so many different regulations and so many different agencies enforcing them, it creates a landscape that can easily overwhelm a small startup. Banks can sympathize with this issue; but fintech companies don’t have the compliance budget, knowledge and experience that banks do.

One way to eliminate all of this confusion would be to create a separate regulatory agency for fintech companies, but there are such a wide variety of fintech companies now offering solutions in almost every category of financial services, one agency couldn’t deliver effective oversight with such a broad scope of coverage.

Instead, existing regulators need to be more proactive in their outreach with fintech companies. Engaging with new startups as early in their development as possible will help with this. Regulators could further eliminate some of the confusion in the market by creating a central registry for newly formed fintech companies before they launch their products. The registry would collect some information about the company and its work. That information could then be used to determine which regulatory agencies it should report to, and provide some guidance on which requirements it must be mindful of.

Some fintech companies will certainly be averse to more regulatory oversight. However, a more refined regulatory framework that ensures security and eliminates confusion will be a blessing for the fintech sector. Right now fintech regulation is a big question mark, and a critical risk for fintech investors. Removing that risk will improve investors’ confidence in the fintech sector, helping fintech companies gain the venture capital they need to get off the ground.

How Regulators Could Foster the Fintech Sector


Fintech-innovation.png

Regulators can’t afford to wait any longer in developing a framework for their oversight of the fast-rising fintech sector. The number of fintech companies, and the amount of investment in them, is growing too rapidly for regulators to hope that they can supervise the sector by applying existing regulations for banks to fintech companies on an ad-hoc basis. That will only create gaps in regulators’ monitoring of the sector, and confusion among fintech companies trying to grasp the complexities of financial regulation in the U.S. Such gaps and confusion are already evident: Many fintech companies are failing to implement best practices in securing customer data, and many of them are also unaware of how existing regulations apply to them.

I addressed the security issue in a previous article, but regulators should be just as concerned with clearing up the confusion in the market. That’s because the government has a legitimate interest in encouraging fintech growth, which would be boosted by a clear regulatory framework. Some fintech companies serve customers that have been ignored by banks in recent years, bringing them into the financial system. For instance, companies like OnDeck Capital, Kabbage, Lendio, Square, and others are filling the credit needs of small businesses that banks have been hesitant to lend to ever since the Great Recession. Regulators should be careful about imposing standards that gash this new source of credit for underserved small businesses. Also, some new technologies that fintech startups are working on, like the blockchain, can improve regulation and compliance throughout the financial services industry.

Build Relationships Early
How can regulators help foster innovation without sacrificing security and integrity in the financial system? For one, they should start their interactions with fintech companies as early as possible to encourage innovation while also safeguarding customers. This means providing guidance to companies while they are still developing and experimenting with their solutions, so companies can incorporate compliance into their products early on. If regulators wait to offer guidance until after products have already been developed or released on to the market, then regulators will become an unnecessary obstacle to innovation.

U.K. regulators are taking steps to develop relationships with fintech startups early on to offer guidance on their solutions. At the end of 2014, the U.K.’s Financial Conduct Authority (FCA) announced it would launch a regulatory “sandbox” where fintech companies could test new solutions. When companies use the sandbox, the authority waives some of the compliance requirements normally applied to pilot tests for new products. Banks can also use the sandbox, and the authority guarantees that it won’t take enforcement action at a later date regarding any tests that the banks run. The sandbox experiment will go live later this year, and U.S. regulators should watch it carefully and explore similar initiatives.

Eliminating Confusion
Regulators also need to give fintech companies a hand in navigating the complexity of the U.S. financial regulatory system. There are so many different regulations and so many different agencies enforcing them, it creates a landscape that can easily overwhelm a small startup. Banks can sympathize with this issue; but fintech companies don’t have the compliance budget, knowledge and experience that banks do.

One way to eliminate all of this confusion would be to create a separate regulatory agency for fintech companies, but there are such a wide variety of fintech companies now offering solutions in almost every category of financial services, one agency couldn’t deliver effective oversight with such a broad scope of coverage.

Instead, existing regulators need to be more proactive in their outreach with fintech companies. Engaging with new startups as early in their development as possible will help with this. Regulators could further eliminate some of the confusion in the market by creating a central registry for newly formed fintech companies before they launch their products. The registry would collect some information about the company and its work. That information could then be used to determine which regulatory agencies it should report to, and provide some guidance on which requirements it must be mindful of.

Some fintech companies will certainly be averse to more regulatory oversight. However, a more refined regulatory framework that ensures security and eliminates confusion will be a blessing for the fintech sector. Right now fintech regulation is a big question mark, and a critical risk for fintech investors. Removing that risk will improve investors’ confidence in the fintech sector, helping fintech companies gain the venture capital they need to get off the ground.

Regulators Should Force Fintechs to Protect Consumers


fintech-3-16-16.pngWhen looking at the new competition arising from fintech companies, many bankers understandably feel that they are at an unfair disadvantage. Banks must deal with a constricting regulatory environment, but regulators don’t always apply the same standards to fintech companies. So bankers have lobbied regulators to take a more aggressive stance towards their new competitors.  [Editor’s note: The Consumer Financial Protection Bureau recently fined payment startup Dwolla $100,000 for “deceiving” customers about its security practices.]

Bankers are right to push regulators on this issue. Regulators must take a closer look at the growing fintech sector, create new standards and coordinate their efforts across multiple enforcement agencies.

The purpose of these oversight efforts should not be leveling the playing field between banks and new entrants. Instead, the purpose should be protecting customer data and keeping customers informed about how their information is used. Regulation that properly incentivizes innovation and benefits consumers needs to focus on security, privacy and transparency.

The Clearing House, which processes payments for banks, correctly pointed this out last year in a white paper that detailed some of the security lapses by alternative payments providers. For example, reports surfaced last spring that Venmo allows changes to important account information without notifying the user. This is a basic security blunder, and banks can be left on the hook for fraudulent transactions when new providers make such mistakes.

Setting Standards Based on Size, Access to Customer Information
To help fix this situation, regulators need to implement security standards for fintech companies based on their size and the type of customer information they touch. That means some fintech companies should be held to the same standards as banks—particularly those that offer account products—but others should not, depending on the sensitivity of the customer data they handle.

It also means that early stage startups shouldn’t be held to the same standards as larger, more mature fintech companies. An early stage startup with a minimum staff is not likely to have a security professional or the funds to hire one. So holding small startups to the same security standards as a large mobile wallet provider that processes billions of transactions per year will only strangle innovation.

Banks can play a key part in helping these early stage startups while also improving their own offerings. Many of these startups hope to partner with or be acquired by banks. As millennials grow up, those banks will increasingly compete with their peers based on their digital offerings. The ability to effectively partner with small, agile startups while ensuring security and compliance will be a competitive advantage for these institutions.

A bank that wants to partner with a promising startup can share some of its knowledge, staff and resources in security and compliance with the startup. Banks are usually cautious in launching new products in conjunction with startups anyway, typically starting with a small trial with a limited number of users before a full launch. That approach helps banks ensure security and compliance with the product and partner before a full launch with customers.

Effective Security Standards
While giving early-stage startups leeway on security makes sense, fintech companies with a threshold of customers using their products should face appropriate scrutiny and regular security audits because of their increased value and attack surface for hackers.

That means regulators will need to be more specific about their security guidance than they’ve been in the past. Regulators often shy away from mandating specific security measures, instead favoring general guidelines and benchmarking against industry peers. As the cyber threat grows bigger, regulators will need to require measures like tokenization and encryption for fintech companies handling sensitive customer information. Those fintech companies that offer account products or a direct connection to users’ existing bank accounts should be required to monitor and analyze user activity to prevent unauthorized logins and transactions.

These measures are likely to become industry standards in time anyway, but regulators shouldn’t hesitate to take a hand in speeding up that process. Regulators might prefer to wait and let the fintech market determine industry standards. Security is already a competitive advantage for fintech companies. Apple set the bar when it introduced Apple Pay and emphasized the security built into it. The fintech companies that don’t meet industry expectations for security won’t succeed in the long run. But regulators shouldn’t wait for fintech winners and losers to shake out to take action that could help protect customers’ information now.

Three Questions to Ask About Your Bank’s DNA


Today, numerous financial technology (fintech) companies are developing new strategies, practices and products that will dramatically influence the future of banking. Within this period of transformation, where considerable market share is up for grabs, ambitious banks can leapfrog both traditional and new rivals. Personally, I find the narrative that relates to banks and fintech companies has changed from the confrontational talk that existed just a year or two ago. As we found at this year’s FinTech Day in New York City on Tuesday, far more fintech players are expressing their enthusiasm to partner and collaborate with banking institutions who count their strengths and advantages as strong adherence to regulations, brand visibility, size, scale, trust and security.

With more than 125 attendees at Nasdaq’s MarketSite on Times Square, we explored the fundamental role financial technology firms will play in changing the dynamics of banking. While we heard about interesting upstarts, here are three questions that underpinned the event that I feel a bank’s CEO needs to sit down with his/her team and discuss right now:

1. Are We Exceeding Our Customer’s Digital Experience Expectations?
Chances are, you’re not. But you can re-set the bar to make clear to your team that while customer expectations have shifted in pronounced ways, this is an area that a bank of any size can compete, especially with the help and support of a fintech company. If you are looking for inspiration, take a look at these examples of successful partnerships that we highlighted at FinTech Day:

  • City National Bank in Los Angeles and MineralTree in Cambridge, Massachusetts, developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. (In June 2015, City National was acquired by Royal Bank of Canada.)
  • USAA in San Antonio, Texas, and Daon in Reston, Virginia, collaborated to roll out a facial, voice and fingerprint recognition platform for mobile biometric authentication that enhances security while enhancing customer satisfaction.
  • Metro Bank teamed up with Zopa, both in the United Kingdom, on a deal which allows Metro Bank to lend money through the peer-to-peer platform the fintech company developed.

Any good experience starts with great data. Many presenters remarked that fintech companies’ appetite to leverage analytics (which in turn, allows a business to tailor its customer experience) will continue to expand. However, humans, not machines, still play critical roles in relationship management. Having someone on your team that is well versed in using data analytics to uncover what consumer needs are will become a prized part of any team.

2. How Do We Know If We’re Staying Relevant?
How can new players show us whether the end is near? That is, what part of our business could be considered a profit center today but is seriously threatened in the future? As you contemplate where growth isn’t, here are three companies that came up in discussions at FinTech Day that could potentially help grow one’s business:

  • Nymbus, a Miami, Florida-based company which provides a cloud-based core processing system, web site design, marketing and other services to help community banks compete with bigger players.
  • Ripple, a venture-backed startup, whose distributed financial technology allows for banks around the world to directly transact with each other without the need for a central counterparty or correspondent.
  • nCino, based in Wilmington, North Carolina, which developed a cloud-based, end-to-end small business loan origination system that enables banks to compete with alternative lenders with quick processing and approval of loans.

3. Do We Have a “Department of No” Mindset?
Kudos to Michael Tang, a partner at Deloitte Consulting LLP, for surfacing this idea. As he shared at FinTech Day, banks need structure, and when one introduces change or innovation, it creates departments of “no.”

For instance, what would have happened if Amazon’s print book business was able to jettison the idea of selling electronic books? If you refuse to change with your customers, they will find someone else who does. Operationally, banks struggle to make change, but several speakers opined that forward-thinking banks need to hire to a new level to think differently and change.

Throughout FinTech Day, it struck me as important to distinguish between improvements to the status quo and where financial institutions actually try to reimagine their core business. Starting at the customer layer, there appears massive opportunities for collaboration and partnerships between established and emerging companies. The banks that joined us are investing more heavily in innovation; meanwhile, fintechs need to navigate complex regulations, which isn’t easy for anyone. The end result is an equation for fruitful conversations and mutually beneficial relationships.

Innovation Takes Center Stage


Technology has always been integral to banking, bringing both speed and efficiency to a transaction-intensive business. But in recent years, technology has stepped onto center stage as a prime component in every bank’s growth and distribution strategy. Technology has, in effect, gone from being a way to save money (a crucial function that it still fulfills) to a way to make money. Much of this activity is being driven by the continued growth of mobile and online banking.

In an effort to highlight the importance of technology and the evolving partnership between banks and their financial technology providers, Bank Director held its second annual FinTech Day today at the Nasdaq MarketSite in New York. The event brought together senior executives from banks, technology companies and investment firms to create a dialogue between these important groups, encourage cross-fertilization and build a foundation for collaboration.

This year’s event also featured Bank Director’s inaugural Best of FinXTech Awards, which recognizes examples of innovation and collaboration between banks and their financial technology providers. The awards have been given to five banks and their technology partners, chosen by Bank Director from among 10 finalists.

The five winners are:

  • Univest Bank and Trust Co. in Souderton, Pennsylvania, and nCino in Wilmington, North Carolina. The project: Developed a cloud-based, end-to-end small business loan origination system that enabled Univest to meet the challenge of aggressive alternative lenders that are pushing into that important lending market.
  • CNLBank in Orlando, Florida, and CheckAlt in Los Angeles, California. The project: Jointly developed a new solution for remittance processing that greatly reduced the volume of payment exceptions, resulting in reduced costs and improved commercial client retention. In December 2015, CNLBank was acquired by Wayne, New Jersey-based Valley National Bancorp.
  • Somerset Trust Co. in Somerset, Pennsylvania, and Malauzai Software, Inc. in Austin, Texas. The project: Developed a mobile banking solution that allows Somerset retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location of device.
  • Metro Bank in Harrisburg, Pennsylvania, and BizEquity in Wayne, Pennsylvania. The project: Developed a private label version of BizEquity’s online business valuation service, available through Metro’s website, that is used as a tool to bring prospective business customers into the bank’s branches. In August 2015, Metro was acquired by Pittsburgh-based F.N.B. Corp.
  • City National Bank in Los Angeles, California, and MineralTree in Cambridge, Massachusetts. The project: Developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. In June 2015, City National was acquired by Royal Bank of Canada.

The five winners were honored today at FinTech Day in New York. The other five finalists were USAA and Daon Inc., Seattle Metropolitan Credit Union and D+H, First Financial Bank and StrategyCorps, Central Bancompany and Ignite Sales, and Metro Bank and Zopa, both located in the United Kingdom.

The Seven Facets of a Digital Bank


If one were to start a new digital bank today, what would the defining characteristics be? Although there are some similarities to traditional bank counterparts, digital-only banks are in many respects very different. Here are the seven facets of a digital bank that will help drive its success.

Adjacent to each facet are organizations, including digital-only and traditional banks, as well financial technology companies, that Bank Director believes embody each characteristic.

Innovation Takes Center Stage


fintech-day-closing-bell.png

Technology has always been integral to banking, bringing both speed and efficiency to a transaction-intensive business. But in recent years, technology has stepped onto center stage as a prime component in every bank’s growth and distribution strategy. Technology has, in effect, gone from being a way to save money (a crucial function that it still fulfills) to a way to make money. Much of this activity is being driven by the continued growth of mobile and online banking.

In an effort to highlight the importance of technology and the evolving partnership between banks and their financial technology providers, Bank Director held its second annual FinTech Day today at the Nasdaq MarketSite in New York. The event brought together senior executives from banks, technology companies and investment firms to create a dialogue between these important groups, encourage cross-fertilization and build a foundation for collaboration.

This year’s event also featured Bank Director’s inaugural Best of FinXTech Awards, which recognizes examples of innovation and collaboration between banks and their financial technology providers. The awards have been given to five banks and their technology partners, chosen by Bank Director from among 10 finalists.

The five winners are:

  • Univest Bank and Trust Co. in Souderton, Pennsylvania, and nCino in Wilmington, North Carolina. The project: Developed a cloud-based, end-to-end small business loan origination system that enabled Univest to meet the challenge of aggressive alternative lenders that are pushing into that important lending market.
  • CNLBank in Orlando, Florida, and CheckAlt in Los Angeles, California. The project: Jointly developed a new solution for remittance processing that greatly reduced the volume of payment exceptions, resulting in reduced costs and improved commercial client retention. In December 2015, CNLBank was acquired by Wayne, New Jersey-based Valley National Bancorp.
  • Somerset Trust Co. in Somerset, Pennsylvania, and Malauzai Software, Inc. in Austin, Texas. The project: Developed a mobile banking solution that allows Somerset retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location of device.
  • Metro Bank in Harrisburg, Pennsylvania, and BizEquity in Wayne, Pennsylvania. The project: Developed a private label version of BizEquity’s online business valuation service, available through Metro’s website, that is used as a tool to bring prospective business customers into the bank’s branches. In August 2015, Metro was acquired by Pittsburgh-based F.N.B. Corp.
  • City National Bank in Los Angeles, California, and MineralTree in Cambridge, Massachusetts. The project: Developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. In June 2015, City National was acquired by Royal Bank of Canada.

The five winners were honored today at FinTech Day in New York. The other five finalists were USAA and Daon Inc., Seattle Metropolitan Credit Union and D+H, First Financial Bank and StrategyCorps, Central Bancompany and Ignite Sales, and Metro Bank and Zopa, both located in the United Kingdom.

Should Banks Use Facebook to Offer Credit?


data-source-2-26-16.pngIs it time for banks to start using Facebook profiles to offer a loan? Or a person’s Gmail account to verify an identity? A growing number of fintech start-up companies say so.

Banks have traditionally relied on credit bureaus to supply information not only about a person’s FICO score, but also to verify identity with data such as addresses. But sometimes, these data sources come up short. Tommy Nicholas, one of the founders of New York-based startup Alloy, says he has a few banks trying out his company’s platform, which basically allows a la carte access to a variety of traditional and nontraditional data sources to verify a customer’s identity, including credit bureaus as well as services that scan social media profiles or email accounts.

The idea is to make it easier for a bank to verify someone’s identity when traditional sources fall short, for instance, the person moved recently and the new address isn’t showing up on the credit report. “You end up asking half your customers to go find a phone bill and send it to you, not to mention you have all this manual work to do,’’ Nicholas says. “It adds a lot of friction.”

Alloy is trying to get traditional commercial banks interested in the technology for verification purposes, although its use to approve loans may be a ways off. Nonbank lenders already are using a host of online and offline data to make credit decisions, especially micro-finance lenders in developing countries that lack functioning credit bureaus. Some lenders are going so far as to analyze behavioral data to make credit decisions. Smartphone data, for example, can tell a lender that you regularly use a gambling app, which could be a black mark on your alternative credit score. Customers have to agree to provide lenders with the smartphone and social media data before they can be approved for credit. Facebook recently applied for a patent to use data on its users for loan underwriting—if your friends’ average credit score met a minimum, that could be a sign that you were a good credit as well, because you associate with people who have good credit.

Lenddo, which typically works with banks in emerging markets but recently began offering its service to U.S. financial institutions, has an algorithm that assigns a non-traditional credit score based on a variety of data to predict your willingness to pay back your loan. It also verifies identity using non-traditional data, such as Facebook profiles and email accounts. Socure uses what it calls social biometrics, where it pulls data from sources such as email, phone and social media accounts to create a risk score for fraud detection. Customers have to opt in to share their data. Other companies, such as Puddle, allow people to build a trust network online to give small dollar loans to each other. Everyone contributes something to the pool, and the more people you add to your trust network, the more you are able to borrow. Paying back your loan on time increases your trustworthiness.

Advocates of the use of alternative data, like Daniel Castro, the director of the Center for Data Innovation in Washington, D.C., say the plethora of online and offline data on each person is actually making it easier to detect fraud because it’s very difficult to sustain a fake identity online that will pass scrutiny. For example, if you worked somewhere for years, you probably have LinkedIn contacts who worked at that same employer. According to Castro, it’s extremely hard to fake your connections to multiple legitimate people. “More data can be useful,’’ he says. “Long term, every bank will be integrating more data sources. It will just be malpractice on their part not to, because it will reduce risk. It will just take awhile before they figure out the best way to do that.”

John ReVeal, an attorney at Bryan Cave, says the new technologies raise questions about complying with existing banking laws. For example, the Fair Credit Reporting Act applies both to credit and deposit accounts, and consumers have a right to know why they were rejected for either type of account. That could turn some of the new data providers into de-facto credit reporting agencies, he says. Additionally, banks may have to answer questions from their regulators about how they use alternative data to make credit decisions, and ensure such decision-making doesn’t violate anti-discrimination laws.

Will the new technologies provide a better way to analyze credit and approve accounts? That remains to be seen. For now, banks and alternative providers are experimenting with the possibility of augmenting traditional sources, rather than replacing them.

Key Trends & Topics in 2016


Small and midsized banks should continue to outperform the market, but “challenger banks” are positioned to take on even more market share. Tom Michaud, president and CEO of Keefe, Bruyette & Woods, identifies these “challenger banks,” which include innovators such as Silicon Valley Bank and Opus Bank, growing due to a focus on technology and niche expertise, and strong performers such as Bank of the Ozarks and Pinnacle Financial Partners, more traditional models with strong cultures that attract talent. Speaking to the audience at Bank Director’s 2016 Acquire or Be Acquired Conference, Michaud outlines expectations for the industry in 2016, including exposure to commercial real estate, a receptive IPO market and whether we’ll see more partnerships between banks and fintech companies.

Highlights from this video:

  • Current State of the Banking Industry
  • 2016 Banking Outlook & Emerging Trends
  • The Rise of Challenger Banks
  • The IPO Market for U.S. Banks
  • Fintech Partnerships
  • Consolidation Trends