How Financial Institutions Can Meet the Marketplace Lending Challenge


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What makes a bank a bank? When it comes to the commercial lending space, in a world of seemingly commoditized products and services, the true differentiation is defined by how a bank decides who they will lend to and who they won’t. It’s each individual bank’s unique credit policy that, however subtly, makes one bank different from another. All banks use many of the same metrics and scoring data to determine credit quality, and there is generally no secret sauce that one bank has and the rest don’t. Instead, it is often the nuances within those metrics and the interpretation and prioritization of the data that makes one bank different from another—and potentially, enables a business owner to get capital from one bank and not from the other.

Banks have spent a long time fine tuning their credit policies to match their risk appetite and even the history and culture of the bank. Their risk profile is integral to who they are. It is integrated into their brand, their mission statements and their core values. The bank’s credit policy is exclusive to that bank and helps define it as a lender.

Enter the fintech revolution, which has spawned a long list of marketplace lenders that have disrupted the business lending universe by essentially disregarding credit policies that took banks and credit unions decades to develop. Marketplace lenders like Lending Club, OnDeck and Kabbage are telling the business borrowing universe that they have a better solution than financial institutions when it comes to measuring a borrower’s credit worthiness.

Banks and credit unions are being driven to offer an online business lending solution by the need to improve the customer experience, increase customer acquisition and raise their profitability, while at the same time decreasing costs, streamlining workflow and reducing end-to-end time. As marketplace lenders aggressively court the business borrower, financial institutions need to do something in the online space just to remain competitive!

To replicate the technology that the disruptors have created would cost banks millions of dollars and years of development time and energy. The great news is, with innovation and evolution there is always the exploitation of every niche and iteration of a solution or model resulting in alternative means to attain the same outcomes.

There is a technological revolution within the fintech phenomenon that is being created by businesses that have the vision and mission to work with banks—not against them. Companies are hitting the marketplace with technology-only solutions that help banks help their business customers succeed. These “disruptors of the disruptors” are essentially selling financial institutions the technology needed to deliver loans easier, faster and more profitably, without forcing them to give up their credit policies, risk profile, relationships or control over the customer experience.

Banks and credit unions need to find these partners, and find them quickly, because they represent a way for those institutions to accelerate their entry into the online business lending space. Choose a partner that best meets your needs. Are you looking for an online application only, or an application and decisioning technology? Or, are you looking for an end-to-end solution that provides an omni-channel experience from application, through underwriting, docs and due diligence and even closing and funding? The type of partner you select depends on what’s driving your financial institution, whether that be increasing profitability, new customer acquisition, streamlining workflow, reducing end to end time or simply creating an enhanced customer experience for the businesses you serve. Explore all your options!

How Mobile’s Popularity is Disrupting the Regulators


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The world is going mobile and dragging banking along with it kicking and screaming. I am something of an anachronism as I still go into the branch once in a while and still worry about using my phone to deposit a check. My adult children, on the other hand, use their phone for everything, including all of their banking. They bounce from store to store paying for everything from Starbucks to bar tabs using their phones without a second thought. Banks that want to capture and hold their business will have to be very good at mobile banking and mobile payments.

One of the biggest hurdles bankers face is that as unprepared as they were, the regulators were equally unprepared and are now playing catch up with regards to mobile payments. The regulatory picture today is fairly muddled with a mishmash of state and federal agencies offering guidance and opinions to mobile payment providers and consumers. There are gaps in the current laws where no regulations apply to parts of the process—and other situations where two or more rules apply to the same part of the process. As mobile banking and payments continue to grow, the regulators will be looking to create a more coherent regulatory structure and coordinate their inter-agency efforts to protect consumers at every stage of the process.

At a forum held by the Office of the Comptroller of the Currency in late June, Jo Ann Barefoot, a senior fellow at Harvard University, outlined the current regulatory situation. She told the packed room at the meeting that “Agencies are going to have to develop ways to work together, to be faster, to be flexible, to be collaborative with the industry. The disruption of the financial industry is going to disrupt the regulators, too. This is the most pervasively regulated industry to face tech-driven disruption. The regulators are going to be forced to change because of it.”

In a white paper released at the forum, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” the OCC noted that “Supervision of the financial services industry involves regulatory authorities at the state, federal, and international levels. Exchanging ideas and discussing innovation with other regulators are important to promote a common understanding and consistent application of laws, regulations, and guidance. Such collaborative supervision can support responsible innovation in the financial services industry.”

While the OCC has noted the massive potential benefits that mobile payments and other fintech innovations can offer to consumers, particularly those who were unbanked prior to the widespread development of mobile banking and payment programs, Comptroller Thomas Curry has cautioned against what he called “unnecessary risk for dubious benefit,” and called for responsible innovation that does not increase risks for customers or the banking system itself. Mobile payments programs that target the unbanked are particularly ripe for abuse and unnecessary risk.

The Consumer Financial Protection Bureau is also heavily involved in overseeing and regulating the mobile payments industry. The bureau noted that 87 to 90 percent of the adult population in the United States has a mobile phone and approximately 62 to 64 percent of consumers own smartphones. In 2014, 52 percent of consumers with a mobile phone used it to conduct banking or payment services. The number of users is continuing to grow at a rapid rate and the CFPB is concerned about the security of user data as well as the growing potential for discrimination and fraud.

CFPB Director Richard Cordray addressed these concerns recently when announcing fines and regulatory action against mobile payment provider Dwolla. “Consumers entrust digital payment companies with significant amounts of sensitive personal information,” Cordray said. “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”

The regulators, like the banks themselves, are latecomers to the mobile payments game. I fully expect them to catch up very quickly. The biggest challenge is going to be coordinating the various agencies that oversee elements of the regulatory process, and it looks as though the OCC is auditioning for that role following the June forum on mobile payments. Cyber security systems to keep customers data and personal information safe and secure is going to be a major focus of the regulatory process in the early stages of the coordinated regulatory efforts.

I also expect the CFPB to focus heavily on those mobile payment providers that were formerly unbanked. These tend to be lower income, less financially aware consumers that are more susceptible to fraud and abuse than those already in the banking system, and the bureau will aggressively monitor the marketing and sales practices of mobile payment providers marketing to these individuals.

The regulatory agencies are starting to catch up with the new world of banking and the mobile payment process will be more tightly controlled going forward.

What Banks Need to Do to Address Technological Change


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In the past few years the fintech industry has grown exponentially. According to a recent Forbes article, the existing number of fintech start-ups globally are between 5,000 and 6,000, all seeking to take a slice of the financial services marketplace. The fintech industry broadly includes any new technology that touches the financial world, and in many ways, this industry redefines forever the notion of traditional banking. More specifically, fintech includes new payment systems and currencies such as bitcoin, service aggregators such as robo advisors, as well as mobile applications, data analytics and online lending platforms. The fintech industry can also be divided into collaborators and disruptors, those businesses that provide services to banks and those that are competitors for services and looking to displace banks. As new technologies and approaches to delivering financial services are adopted, community banks will be challenged to meet the future expectations of their customers as well as to assess the additional risks, costs, resources and supervisory concerns associated with providing new financial services and products in a highly regulated environment.

The largest commercial banks have recognized the future competitive impact on their business as fintech companies create new and efficient ways to deliver services to their customers. Bank of America, for example, recently announced a fintech initiative and plans to target the start-up market for potential acquisitions. The large banks have the advantage of scale, deep pockets and the luxury of making bets on new technologies. If not by acquisition, other banks are partnering with new players that have unique capabilities to offer products outside of traditional banking. While community banks are not new to the benefits of fintech, the advancement and number of new technologies and potential competitors have been difficult to keep up with and integrate into a traditional bank’s business model. On top of that, the fintech industry remains largely unregulated at the federal level, at least for now.

Competition, compliance and cost are the three critical factors that bank management and board members must assess in adopting new technologies or fending them off by trying to stick with traditional banking values. Good, old-fashioned service based on long-term banking relationships may become a thing of the past as the millennial generation grows older. Contactless banking by the end of this decade or sooner could rule the financial services industry. While in some small community banking markets, the traditional relationship model may survive, it is far from certain as the number of brick-and-mortar bank branches in the United States continues to decline.

Also falling under the fintech umbrella is the rapidly escalating online marketplace lending industry. While most banks may rationalize that these new alternative lending sources do not meet prudent credit standards in a regulated environment, the industry provides sources of consumer, business and real estate credit serving a diverse market in the billions. While the grass roots banking lobby has been around forever, longtime banks should take note that the fintech industry is also gaining support on Capitol Hill, as a group of Republicans are now preparing legislation coined the “Innovation Initiative” to facilitate the advancement and growth of fintech within the financial services industry.

Fortunately, the banking regulators are also supportive of innovation and the adoption of new technologies. The Comptroller of the Currency in March released a statement on its perspective on responsible innovation. As Comptroller Thomas Curry noted, “At the OCC, we are making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.” In an April speech, he confirmed the OCC’s commitment to innovation and acceptance of new technologies adopted by banks, provided safety and soundness standards are adhered to. The operative words here are responsible and supervision.

Innovation will come with a price, particularly for small and midsize community banks. Compliance costs as banks adopt new technologies will increase, with greater risk management responsibilities, effective corporate governance and advanced internal controls being required. Banks may find it necessary to hire dedicated in-house staff with Silicon Valley-type expertise, hire chief technology officers and perhaps even change the board’s composition to include members that have strong technology backgrounds. In the end, banks need to step up their technology learning curve, find ways to be competitive and choose new technologies that serve the banking needs and expectations of their customers as banking and fintech continues to converge.

This article was originally featured on BankDirector.com.

How Fintech Is Co-opting the Banking Industry’s Directors and What to Do About It


directors-7-8-16.pngOver the last several years, companies which can be broadly grouped under the umbrella of “fintech,” or financial technology, have been making notable additions to their boards of directors by acquiring talent from traditional financial institutions and regulatory agencies. These additions include Sheila Bair, former chair of the Federal Deposit Insurance Corporation joining the board of directors of Avant, which specializes in digital lending to subprime customers, and Anshu Jain, former co-CEO of Deutsche Bank, joining online lender SOFI. This effort is certainly not unprecedented.

Many industries undergoing transformation often reach out to individuals in the industry they are attempting to disrupt to create an air of legitimacy to their efforts and facilitate communication and transparency with the primary regulatory organizations. In the case of financial services, banks should take this opportunity to turn the model around and cast their nets in the opposite direction. By reaching out to technology-based companies and sophisticated technology professionals, banks can enhance their ability to meet the challenges associated with delivery of financial services and be better equipped to assess the risks associated with an increasingly technological environment.

Directors are broadly responsible for the management of business and affairs of a corporation and the proverbial “buck” ultimately stops with the board. Directors must fulfill their fiduciary duties with due care and always be properly informed about the critical matters facing their respective institutions. This means that directors need to be able to understand the challenges posed by technological innovation and how technology can successfully be incorporated into a bank’s existing platform. Most directors, however, do not come to a bank board with the technological expertise or sophistication to truly understand how technology works and the risks posed through the use of that technology.

By the same token, at their nascent stage, fintech companies typically do not have boards of directors comprised of individuals who are well-versed in the panoply of regulations which affect the financial services industry or anti-money laundering compliance. Realistically, most fintech companies, even at a more mature level, are often populated with smart technologists, founders and the venture capital representatives who have funded them. But as they grow and move closer to significant liquidity events, whether they be initial public offerings, mergers or acquisitions, fintech companies are leveraging the expertise of establishment bankers and regulators who understand the risks and rewards posed by various business models. Traditional banks should do the same.

How should traditional banks approach this challenge? Of course, by thinking outside of the box. The characteristics that make for a director who understands net interest margin and the ins and outs of loan origination and credit risk are not necessarily the same ones that make for a cutting-edge technology expert who grew up with a computer in hand and who appreciates the cybersecurity and data privacy risks posed when financial information travels from point A to point B. That means that boards must expand their search profile and look for individuals who may not have horizontal breadth of understanding in a wide array of bank operations, but rather, have deep technology experience and can learn the other areas of bank operations while educating their board colleagues on the risks inherent in a technological world.

In addition, banks should inform retained search firms and internal cross-reference sources that the characteristics of leadership they are looking for are probably not sitting on existing bank boards, but instead, may be overseeing the operations of code-laden start-ups located in Silicon Valley. To that end, banks must rethink the manner in which they envision leadership. They must recognize that leadership does not always involve a horizontal breadth of knowledge across a wide spectrum of subjects, but rather, leadership can be articulated through a more narrow, vertical expertise which fills a critical niche in enabling financial service businesses to meet the challenges of today….and tomorrow.

A Fear of Missing Out


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Recently, I had the opportunity to spend time with some of Deloitte’s most senior team in both New York City and at the White House Fintech Summit in Washington, D.C. Together, we explored issues on the minds of many bank executives today; namely, how banks should approach corporate innovation and work with fintech companies. Certainly, collaboration between technology companies and traditional financial institutions has increased — think proofs of concept, partnerships and strategic investments — but much still needs to be done.

From my perspective, the evolution of the banking world is first and foremost a business issue. Historically, banks organize themselves along a line of products. There are banks such as Umpqua Bank, BankMobile (a division of Customers Bank) and Live Oak Bank that have oriented their operations around customer needs and expectations. However, these are more exceptions then the rule.

Consequently, as new technology players emerge and traditional participants begin to transform their business models, there is growing sentiment that successful institutions need to enable financial services for life’s needs through collaboration and partnerships with the very fintech companies that once threatened to displace them.

As Joe Guastella, global and U.S. managing director for financial services at Deloitte Consulting, shared, “incumbents can indeed thrive in a disrupted world. They can learn from history and be proactive in managing the change instead of being passive participants. But first they need to understand how fintech affects them before taking advantage of all the potential benefits fintech offers.”

Accordingly, here are three questions that I posed to Guastella and his colleagues that anyone responsible with growing and changing a bank needs to address.

Q: What do banks need to do so as not to be left behind?

Michael Tang, a partner and head of global digital transformation and innovation at Deloitte, believes institutions must “experiment with intent and purpose… avoid the Fear Of Missing Out (#FOMO) syndrome and investing and dabbling for the sake of it.” He is of the opinion that banks need to “take greater interest in the customer needs analysis from ethnographic research and behavioral economics.”

Thomas Jankovich, a principal in Deloitte and the innovation leader for the U.S. Financial Services Practice, echoed this. He opines that banks should work towards becoming platform based, data rich and capital light — with an infinite ability to scale. He challenges those senior-most bankers to re-think how their executives are educated, immersed and motivated to make bold decisions and take hold of the concept of “Platform as a Service.”

Q: How are some of the more successful financial institutions developing corporate and/or business-unit strategies to take advantage of digital opportunities?

Tang and Jankovich shared that the more progressive and successful banks are taking advantage of emerging opportunities in nuanced ways. For instance, they are:

  • Using a combination of supportive leadership providing the mindset, right incentives and performance metrics to truly support a digital business model;
  • Curating the right talent_ while leveraging the “buy, build, partner” model for capability; and
  • Retaining customers by providing an experience that includes usability, data analytics and competitor awareness.

Q: Should banks become more like tech companies?

Cathy Bessant, the chief operations and technology officer of Bank of America, recently opined that banks shouldn’t see themselves as fintech companies. She reasons that a bank’s customers have such high expectations in terms of reliability and security, that the “fail fast” mindset of many technology firms doesn’t jive with customer expectations. As she made clear, “the potential cost of failure at scale is something to be avoided.”

So with most everything technology-oriented coming back to continuity, security and third parties, one must balance the need for exceptional service with the push for change. According to Michael Tang, one needs “a portfolio approach and clear expectations on the purpose and roles between run and change.” By extension, in terms of corporate innovation, Thomas Jankovich believes that banks need to move beyond the concept of “Run the Bank / Change the Bank” to actually “innovating the bank” in order to disrupt itself.

Yes, banks will be challenged to meet the future expectations of their customers as well as to assess the additional risks, costs, resources and supervisory concerns associated with providing new financial services and products in a highly regulated environment.

Size and scale doesn’t have to be a drawback. It can, however, be an advantage in this environment.

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As a starting point for such an internal discussion, take a look at “Disaggregating Fintech: Brighter shades of disruption,” a report that looks at the the impact of fintech in six areas within financial services and across six business dimensions. Questions or comment? Email meat adominick@finxtech.com

A Better Way To Sell To Your Customers


Helping consumers meet the milestones in their lives could generate more revenue and loyalty for your institution. Tom White of iQuantifi explains why goal-based selling is a better way to connect your customer to the right product.

  • Why Goal-Based Selling Is an Effective Approach
  • Advantages for the Bank
  • Meeting the Needs of Millennials
  • Partnering With Fintech Firms

Commercial Customers Want Fintech Innovation Too


fintech-6-3-16.pngOnline banking, electronic bill pay, and mobile deposits are no longer seen as innovative offerings by consumers. They’re simply check boxes—a bare minimum set of tools and services that they expect their bank to offer. Despite the fact that this technology is considered table stakes in the battle to win consumers, business customers at most banks are still waiting their turn to benefit from this technology. And as the workforce skews younger and gets even more tech savvy, they’re going to get frustrated from waiting for comparable services—if they haven’t already.

Just last year, millennials surpassed Gen Xers as the largest generation in the U.S. labor force. This is the first digitally native generation that grew up with computers in their homes and came into adulthood with near ubiquitous access to the Internet, social networking, and mobile phones. As they take over the workforce, they’re going to want—and expect—the same conveniences they’ve become accustomed to in their personal lives. But when it comes to banking technology, they’re not getting it.

The stark difference between bill payment processes of accounting professionals at home and at work is just one example of how a lack of adequate technology is holding them back. A study last year by MineralTree found that 81 percent of respondents use paper checks frequently or exclusively at work, whereas almost half (48 percent) said they rarely use checks in their personal lives and 7 percent said they never use them at all.

If banks don’t start providing business customers with innovative tools to do their jobs more efficiently, they’re going to start looking elsewhere for the technology they want. As JP Morgan Chase & Co. CEO Jamie Dimon now famously noted in his 2015 annual shareholder letter, “Silicon Valley is coming.”

The Path to Business Banking Innovation
It’s not surprising that business customers have found themselves in this position. It makes sense that technology on the consumer side has paved the way for innovation in banking because it’s so much less complex to build and implement.

Take mobile deposits for example. Being able to take a picture of a check with a mobile phone and deposit it via a banking app is a significant advancement in mobile banking. But it’s much more realistic for a personal account holder to use this technology than it is for a business. For a company that might deposit hundreds of checks every day, taking photos of each of them with a mobile phone is simply not practical or efficient. Not to mention adding the complexities of a business’s need for increased security features like role-based permissions for different users, or integration with other enterprise systems.

Bill pay faces similar hurdles. On the consumer side, banks have proven capable of creating directories that include most of the vendors their customers regularly pay—companies like electric, cable TV or mortgage providers. But it would be nearly impossible for a single bank to create such a directory for all business payments because the size and scope of such a network is just too vast. And then there are complexities like supporting approval workflows, role-based permissions, and integrations.

Integration with other core enterprise systems is a major issue for business customers. Being able to seamlessly connect a bank’s bill pay technology with a company’s financial system of record—their accounting/ERP system—is a must have. But again, it’s a complex task that takes a high level of technical knowledge and expertise to achieve.

Innovations in consumer banking technology have made significant strides in moving the industry forward, but now commercial customers want their share of fintech innovation too. We’re at a tipping point where business banking technology needs to catch up, and the burden is on the banks to make it happen. They can either build the technology on their own or partner with companies who can. But if they don’t, they risk being left behind.

Finding New Sources of Growth Takes Leadership


growth-5-25-16.pngThe Office of the Comptroller of the Currency has some very good advice in its publication, The Directors Book: “Sound financial performance means more than simply how much the bank earned last quarter. Equally important is the quality of earnings over the long term.”

This has always been challenging for bank leaders because of the inherent cyclicality of interest rates and the overall economy. Now, additional challenges have emerged from the relatively new phenomenon of fintech startups that provide competitive alternatives for every bank product and service. The average time spent at the top of any industry, whether a bank, or a company in the Fortune 500, is getting shorter and shorter. Yesterday’s top performers are soon long forgotten, and today’s leaders are already watching out for tomorrow’s darlings in their rearview mirror.

How is that some companies seem to defy the gravitational pull of these forces? How do some companies always find new ways to keep the growth engine going? How do they transition their company’s focus from low growth products to high growth products? One of the most important roles of boards and executive management is the effective allocation of resources—financial resources, human resources, managerial attention—and the best leaders allocate resources not to optimize for current returns, but for the long run.

Kodak was not suddenly surprised by the invention of digital photography; they were one of its key pioneers. So why did they end up being a poster child for an industry leader disrupted by new upstarts? In the final analysis, they didn’t adequately shift enough of the company’s resources away from the dying celluloid film business to the nascent digital photography business. When they did, it was too little, too late.

Direct examples like this are harder to find in banking—and the lessons harder to learn—because banks never really die, they just get absorbed by stronger performers. “Lack of innovation” is never listed as a cause of death in banking, but there is an unmistakable commonality among the industry leaders today—they are all investing resources in new products and services, and many of them are technology-driven.

A huge part of Steve Jobs’ lasting legacy is how he focused Apple’s resources away from the less profitable sectors of PCs and peripherals to create new products at the right times to capture market share in the growing categories of digital music, smartphones and tablets. It remains to be seen if Tim Cook can do it again in smartwatches, in-home entertainment, or even the Apple Car, but innovation is a valued and expected act of leadership in the company’s culture.

Bank customers today are increasingly comfortable with the value those technologies provide, and they expect their bank to keep up with their growing expectations. That takes a leadership team that invests in new ideas, but it goes beyond technology.

Whether those new ideas are created from the front lines, in an internal innovation lab, or through partnerships with external entrepreneurs, they only become valuable when they are implemented. That takes a leader willing to dedicate the right resources—and that usually means directing them from something else—in order create new sources of value for the company.

Can Opposites Attract? Fintech Companies Look to Partner Up With Banks


partnership-5-24-16.pngThe charts look dire indeed. Economic growth as measured by gross domestic product has been anemic. Net interest margins, a main profitability figure for banks, have been under increasing pressure, with only a slight uptick in the fourth quarter of 2015 from a median of 3.08 percent to 3.13 percent. Loan yields also are down. Compliance and regulatory expenses are going up, according to Steven Hovde, chairman and chief executive officer at investment bank Hovde Group, and a presenter at Bank Director’s Growing the Bank conference in Dallas yesterday.

“Fintech and banks are going to end up marrying up,” he warned the crowd. “It’s the only way you are both going to survive. If you think you can do it on your own, you are sadly, sadly mistaken.”

Not long after that, the doors to the ballroom opened and about 140 bank executives and board members were invited to snack on breakfast burritos, as well as mingle with each other and nearly 100 executives from technology companies along with various leaders from professional service firms.

The tech companies have something many banks lack: innovative products and simple, customer-friendly digital solutions for a changing world. Meanwhile, the banks have some things many of the tech companies lack: actual customers and a more stable funding base.

In a sign of increasing acceptance of the transformative power of technology for the banking industry, the conference drew a crowd hoping to learn ways to grow their banks. The vendors were selling everything from data analytics to simplified mortgage platforms and a core system that gives a star rating to customers based on their profitability to the bank.

An executive who spoke at the conference—Eric Jones at core processor Fiserv—said his company has a two-way alert system where customers can take action digitally to respond to alerts by moving money between a savings and a checking account when they get a low-balance notice. Another vendor, Blend, automates the mortgage lending process complete with an application you can fill out on a mobile phone.

Even a representative from Lending Club, the marketplace lender, showed up hoping to lure in some business, although he declined to talk about the company’s recent woes, including internal controls troubles and the abrupt departure of founder and Chief Executive Officer Renaud Laplanche. (Lending Club partners with banks by selling loans to them generated through its online platform, or marketing consumer loans to the bank’s own customers, particularly if the bank doesn’t want to bother with consumer lending.)

Tom Ashenbrener, a director at First Federal Savings Bank of Twin Falls, Idaho, a $575 million asset bank, said his bank was a fairly conservative lender, but looking to grow nonetheless. He wouldn’t rule out the idea of his bank working with online lenders to grow loans. “There are partnerships that could allow us to stretch,’’ he said. “One of the ways we’re going to be prepared is by transforming ourselves.”

Joe Bartolotta, an executive vice president at Eastern Bank, spoke at the conference and had a more urgent tone. He mentioned the destructive impact the start-ups Uber and Lyft have had on the taxi business. “If the taxi business was ripe for disruption, where is banking?’’ he asked.

Address Your Commercial Clients’ Technology Needs


mobile-offerings-5-23-16.pngBy now, practically every traditional bank or credit union understands that they have to find ways to either compete with or embrace financial technology to attract and keep customers.

But it’s not just about retail customers, or millennials in particular, who have been raised to expect that technology should put just about every need at their fingertips. Fintech firms also have their eye on business customers, including a plethora of alternative financial services startups backed by investors and venture capitalists, lending money to small businesses that traditional institutions turn down–small businesses who then leave those institutions for good.

A 2015 World Economic Forum report estimates that marketplace lenders granted $12 billion to U.S. small and medium-sized businesses by the end of 2015. By 2020, annual U.S. volume could reach $47 billion, according to Morgan Stanley and Goldman Sachs.

How can a traditional bank or credit union compete? It can compete by providing products and services to make commercial customers’ lives easier, particularly using the mobile channel. This not only means offering mobile merchant services and treasury management solutions, such as remote cash deposit services, Check 21 compliant check images, expedited payments and interconnected vaults at merchant locations, but also an increasing array of cloud-based solutions.

Traditional banks and credit unions can even capitalize on the alternative lending movement. You name it, institutions can leverage any fintech solution that a business customer could possibly need. But how can institutions below the top 30 money center banks and large regionals—institutions with limited resources—offer solutions like that?

Let’s just look at one example at how challenging adopting fintech solutions on a piecemeal basis can be for one of those institutions: offering a mobile app for remote deposit capture. It’s seemingly a relatively simple app to offer, but to get that solution to market, an institution typically has to rely on its core processor to allow a third-party app developer to connect its solution to the core system. However, most core vendors do not want to open up their systems in real time for posting those deposits because they don’t want the third-party accessing the core—that’s a problem.

Then an institution has to figure out how to handle potential security issues that remote deposit capture poses. For example, a fraudster could take a picture of a fake check, or take a picture and deposit a real check remotely, but then immediately try to cash the check at the institution’s branch or at another institution. That’s another challenge. Working with a third-party app provider presents other problems as well. There could be issues importing images, and not getting upgrades delivered. On top of that, an institution has so much already on its plate that it can’t even imagine also handling sales and marketing of these third-party apps.

This example pales in comparison with what a bank or credit union has to do to provide its own solutions to commercial customers. While an institution’s niche may be primarily banking merchants and corporate entities, its focus may be just on commercial lending. However, to increase the stickiness of commercial customers, institutions should strongly consider offering a much fuller array of non-lending products, and those solutions must be cloud-based and easily accessible via mobile.

Therein lies the most daunting challenge of all: Contending with the financial industry’s own version of the Four Horsemen of the Apocalypse— operations, compliance, IT and sales. Banks and credit unions have options how to best overcome these challenges. They could invest in technologies to launch fintech solutions on their own and pay for the required expertise to appropriately manage those Four Horsemen themselves. They could also choose to partner with fintech vendors for each separate solution and try to coordinate management of the various operations, compliance, IT and sales duties that come with each solution. Alternatively, they could work with “concierge” partners that have wider menus of fintech solutions, as well as the expertise to help institutions manage the entire process.

Whichever approach banks and credit unions choose to compete in the new world, one thing is certain: They ignore fintech at their peril, as they risk losing business customers altogether.