Is Your Loan Origination Process Too Slow?


loan-origination-11-3-16.pngOne of the biggest disruptors to the banking industry in the past several years has been the rise of technologically based financial technology, or the fintech industry. Fintech has brought a new wave of competition by finding more efficient ways to offer many of the same services as banks, including—most recently—lending. As the OCC points out in a recent whitepaper, banks and credit unions need to start thinking seriously about incorporating technology into more of their processes if they are to compete and effectively service customers. As fintechs continue to encroach on core banking services, banks will need to begin to find ways to strengthen and quicken loan origination processes.

According to a 2015 study from McKinsey & Company, 9 percent of fintech companies tracked in the study were making headway in the commercial lending space, an area which made up 7.5 to 10 percent of global banking revenues in 2015. For banks to keep pace, bank management has to ensure that their back-office systems and procedures for loan origination are designed for efficient growth and risk mitigation.

Speed
Technology is shortening processing time for loans, and banks and credit unions, in response, need to speed up their loan origination. Fast turnaround time is the currency of the digital age. Perhaps the most striking example of speed in the lending world is Rocket Mortgage, a Quicken Loans app that launched in a splashy 2016 Super Bowl TV ad that boasted minutes-long pre-approval decisions for mortgages.

In order to increase speed in lending, institutions should start by identifying the biggest bottlenecks in their current origination process. For many institutions, it is data collection and entry. Implementing technology like an online client portal for borrowers to upload documents makes it easier to track down all the required paperwork and allows the loan officer to work in digital instead of paper files. Technology can automatically read tax returns and reduce the time loan officers spend on manual data entry.

Of course, getting the data is only half the battle. The loan still needs to be analyzed, risk rated, priced and reviewed by a loan committee, and by using integrated software and standardized templates, the entire process is streamlined, which means getting back to the customer more quickly.

Defensibility
Another competitive disadvantage that banks and credit unions must overcome is the level of regulatory scrutiny placed on loan decisions. When building a competitive loan origination system, banks should focus on implementing processes that accurately identify credit risk and enable defensible, well documented credit decisions. Three key components of a defensible origination solution include:

  • Automated data entry and calculations to avoid manual error
  • Comprehensive documentation at each step
  • Templates for processes and calculations to ensure consistency and objectivity

Scalability
If an institution wants to process 100 more loans each year, they could hire more staff. Yet, a technology-based origination process also equips the institution to grow without increasing overhead costs and by better deploying staff to high-value activities. Platforms are available that realize time savings and better information flow, giving staff the tools needed to scale the institution.

The rise of fintech in recent years is indicative of the great potential efficiencies offered by technological innovations in banking, and progressive institutions are finding ways to lead this charge. To stay competitive with other institutions as well as fintech, banks and credit unions need to re-examine their back-office processes for loan origination to find ways to increase efficiency in loan origination. Banks can automate data entry and calculations, create consistency through templates for credit analysis, risk rating and loan pricing and prepare for audits and exams more easily with thorough documentation at each step. It prepares the institution to grow, remain competitive and better service its customers.

To learn more about technological solutions for your lending process, download the whitepaper “Tapping Growth Opportunities in the Business Loan Portfolio.”

What the Fintech Revolution is Really About


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I often hear about how slow and ineffective banks are to adapt to the technological world of the internet age. It is true that banks are challenged in the virtual space of the internet. Their systems were built for the 20th century, where trade was focused upon buildings and humans in trading rooms and branches. However, the idea that banks are going to let fintech just steamroll their current operations is just an illusion.

Banks have millions of customers, billions of capital and centuries of history. This is their strength. They have poured billions of dollars into technology over the years, and still do. Admittedly, their systems are often cumbersome and out-of-date, but that is their challenge. How do they overhaul their systems so that they reflect the modern new age of distributing financial services as data through a network of software and servers, rather than as paper through a network of branches and humans?

Meanwhile, the fintech sun is rising and most of its beam is focused upon areas left dark by the incumbent financial institutions. Much of fintech is about banking the unbanked through mobile wallets. The peer-to-peer lenders appear to be more focused upon small businesses and higher credit risk borrowers, rather than the mainstream consumers and smaller, Main Street companies. Robo advisors are offering advice to those who previously received none, and payments companies like Stripe and Square are purely adding an overlay of an app and an API to an existing payments process that is not fit for that purpose.

In other words, fintech is either servicing the unserviced or fixing the fixable, rather than disrupting, destroying or disintermediating banks. In Europe, there are new banks rising: Atom, Solaris, N26, Tide, Tandem, Fidor, Starling, Monzo and more. They are called challenger banks, and mainly for the reason that they are meant to challenge the large existing banks. But they will not. Their focus is upon building niches, as all new banks start with no customers, limited capital and zero history.

Therefore, to throw a little dose of harsh reality onto the fintech fairy tale, the new world of finance on technology is all about adding to the existing financial system. It is not replacing it or disrupting it. It is supplementing it. That is why we have so many bank hackathons, incubators, accelerators and venture capital funds. Banks want fintech to rise. Banks, insurers, regulators and investors recognize that the financial system is only servicing some of the markets, not all. That is why the times we live in are so exciting and why I often underscore the real change our world is seeing with technology. That change is the inclusion of everyone in the network and, by everyone, I mean every one.

A decade ago, the seven billion people on this planet had just two billion with fully functional bank accounts. Today, we are seeing all of the people getting some form of financial inclusion through mobile wallets. Seven billion people can access the financial network today. That is everyone. Just a decade ago, only one in three people could access the network. That is the real transformational moment that fintech is delivering, and that is far, far brighter than the conversation about disrupting, disintermediating or destroying banks.

So please take note: fintech is about a whole new world where everyone can trade and transact in real time for almost nothing one-to-one globally. This is the revolution we are living through and it is a fantastic change from servicing just those worth serving through a physical network with buildings and humans. Serving the world through software and servers to allow trade and commerce to flow like water is the fintech revolution and I love it. I hope you do too.

One Bank’s Digital Transformation Journey


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Last week Chris Skinner, a FinXTech advisor and fellow contributor, talked about the difficulties of banks shifting to digital, and shared the following: “It is radically different thinking, and is a cultural outlook, rather than a tech project.”

As the head of Radius Bank’s Virtual Bank, I work with a team that has been through the digital transformation process. And I can attest to the above statement: The shift to digital is far more than a project. It’s a total reconstruction of a bank’s culture, organization and systems. It is no easy task but the upside opportunity is big.

Digital transformation is perhaps the most important challenge facing banks at the moment. The penetration of the financial services industry by financial technology and the proliferation of alternative banking solutions presents the stalwarts with a choice: change, or else. Banks are realizing that the adoption of sophisticated, personalized technologies is no longer a “nice to have,” but rather a “need to have.” Never before has the customer experience been more critical to a bank’s success than it is today. I feel lucky that the Radius Bank team understood this early on, and set on a course aligned with this new way of banking.

When I first joined Radius Bank at the end of 2008, we were a small, commercial-focused community bank with six branches in Boston and New York. Mike Butler, the Bank’s CEO and president (and a member of the FinXTech Advisory Board), asked me to join him to help build the virtual bank. We recognized that the traditional model wouldn’t be able to address changing consumer demands. In light of that, we set out to build a bank focused on the future rather than the past.

Over the past several years, our Virtual Bank has actually become our primary retail banking strategy. While we’ve maintained one flagship financial center in Boston, our focus on customer experience, product development and technology offerings all starts with and focuses on the digital channel. We’ve made significant investments in technology to build a forward-thinking and responsive virtual banking platform that has allowed us to onboard and serve many new customers from across the country without the need to visit a branch.

We also realized a while back the importance of fintech partnerships. Let’s face it: Consumers today have more choices in terms of managing their finances than ever before, and many of them are choosing to put their trust in nonbanks. For us it has been about finding the right fintech firms to work with, and over the last three-plus years we’ve launched strategic partnerships with fintechs in areas such as mobile payments, investment management, student loans and alternative lending.

We’re proud of what we’ve been able to accomplish, but the transformation to a digital bank is a journey that’s never complete. It requires ongoing support from top leadership, including our board of directors and management team, and a creative, nimble team that brings marketing, sales, risk and IT together to build an infrastructure focused on security and scalability.

I’m eager to share some of the knowledge I’ve gained throughout our digital transformation process. I’m also eager to learn from my peers in banking and fintech about what’s next. FinXTech asked me to participate to represent the banking perspective, but as I’ve outlined above we’re not your traditional community bank. We sit at the intersection of financial institutions and technology companies—an increasingly productive cradle of innovation and disruption.

I look forward to engaging in these important conversations with you.

Creating Regulatory ’Sandboxes’ to Protect Innovation


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Fintech regulation has presented a confusing picture here in the United Sates for several years now. Various federal agencies have at least some measure of control over fintech companies, and it can be challenging for innovative new startups to figure out which regulatory authority they are supposed to be talking to at any stage of the game.

Because of this confusion, there is a risk that we could fall behind the rest of the world as nations including Singapore and the United Kingdom have taken steps to provide their fintech companies with the benefits of a looser regulatory environment. Both nations have developed what they are calling fintech “sandboxes” to encourage and accelerate the development of new ideas and products for the financial services industry. Emerging countries like Thailand and Abu Dhabi are also promoting their version of the fintech sandbox to attract new companies and investment dollars into their economy.

There are some signs that the U.S. is also moving to relax regulation and encourage fintech innovation. I talked recently with William Stern, a partner at alaw firm whose practice focuses on both banking and financial technology. Stern says he is seeing some positive movement among U.S. regulators on the fintech front.

Stern referenced the Financial Services Innovation Act of 2016, introduced by Rep. Patrick McHenry, R-N.C., in September of this year. The bill creates a program similar to that used in the U.K. and would allow innovative new companies to apply to one or more of the agencies that currently oversee the financial services industry for a waiver of certain regulations and requirements. It would also prevent other agencies from introducing enforcement actions against the companies while the agreement was in place.

Stern noted that for a smaller company facing the full brunt of all the rules and regulations from a multitude of agencies including the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Office of the Comptroller of the Currency, it can be incredibly discouraging for a young entrepreneurial company, particularly one with limited funding. Entering into a compliance agreement would allow the firm to move forward, test and introduce new products without falling under the full weight of the combined rules and regulations at various levels of government.

Stern believes there is support on both sides of the aisle in Congress for encouraging financial innovation, but he also points out that the banking industry isn’t necessarily a big fan of relaxed regulation for fintech companies. Allowing smaller fintech concerns to operate without complying with the same rules as banks would place the latter at a disadvantage. Concerns about maintaining a high level of consumer protection have also been expressed.

For his part, Rep. McHenry thinks the legislation is needed to keep companies from leaving the U.S. and taking their innovation to countries with a less onerous regulatory environment. “Innovation in financial services has created more convenient and secure ways to meet the demands of American consumers,” McHenry said in a statement when he introduced his bill. “For these to succeed, however, Washington must rethink its own laws and regulations to keep up with the growth and creativity in the private sector. This bill represents a mindset shift in the way we address financial regulation. Rather than the command-and-control structure of the past, my bill establishes an evolved regulatory framework that encourages financial innovation, all while maintaining our regulators’ commitment to the safety of consumers and our financial markets.”

The bill is still in the early stages of the legislative process and is highly unlikely to be passed this year. McHenry has acknowledged this but hopes it will spark discussions that will carry over into the next congressional session, which will begin in January. The bill will likely face substantial opposition from those who favor greater rather than reduced regulation of financial services—a position generally associated with the Democratic Party—so the outcome of the congressional races on Nov. 8 could have a huge impact on the prospects for passage.

Both the OCC and the CFPB have been encouraging innovators to work closer with them so the agencies can help them navigate the compliance waters. Back in March, the OCC released a paper titled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.” When the report was introduced, Comptroller of the Currency Thomas J. Curry said that “At the OCC, we are making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and supervision that supports it.” The paper outlined eight principles the agency thinks should guide financial innovation and was viewed by many as the first step towards making it easier for innovators to deal with regulators.

As other nations around the world develop and embrace the sandbox concept, there is some legitimate concern that the U.S. will see companies and jobs leave for a more relaxed environment elsewhere.

Does Your Bank Have What It Takes to Go Digital?


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I’m often askedwhat’s the best way to make for a bank to go digital. There’s never an easy answer to that question as every bank is different. Some will only make it by launching a whole new bank rather than trying to reinvent their current bank. Some will try and re-engineer their bank and fail. And a few may actually succeed, although true digital transformation is a long and tough road. Most existing banks were built for the management of paper notes and documents in a branch environment. All of the technology that has been laid over that structure has cemented a physical distribution focus into the bank’s core back office systems. Those core systems are often written in archaic code, and it’s all very complex and difficult to change. The most fundamental point here is that it is also proprietary to the bank.

What is happening now is that fintech startups are using open source architecture that relies on the internet for distribution. They have no history and therefore no constraints. They are using all the latest development environments and are incredibly agile. How can a traditional bank compete with that?

The answer is they can’t. However, what a bank can do is use the fintech ecosystem to re-engineer its operations to become faster and more efficient. That’s going to take time and it’s critically important to understand that this bank re-engineering is more than just a tech project. It’s re-thinking the bank’s business model into an open sourced marketplace ecosystem where the bank is just a platform for many players to play. The visionary banks get this and are building such capabilities as I write this post. However, those visionary banks are few and far between and, common to all of them, have a technologist in the driving seat.

When you think about that statement, it’s pretty obvious that this has to be the case. You cannot convert a traditional bank built around physical structures to a digital bank built around digital structures if you are a banker. This is because the bank is trying to transform itself from a financial institution using technology to a technology provider offering finance. It is radically different thinking, and is a cultural outlook, rather than a tech project.

How many banks are led by technologists? I can count them on one hand. The majority of banks have zero technology representation in the C-Suite. A 2015 study of the world’s largest banks found that 40 percent had no technology professionals in the C-Suite, and 33 percent had just one. Seventy-three percent of banks lack technology leadership and yet they are the very same organizations where the current leaders are shouting for change. JPMorgan Chase & Co. CEO Jamie Dimon’s comment at an investors day event in 2014 that “When I go to Silicon Valley they all want to eat our lunch” is right on the money, but what will most bankers do about it? This is where many hem and haw. They make it known within the bank that it intends to go digital—and then assign the task like it’s just another tech project.

Instead, the few banks that are really making the change are building a C-Suite where the majority of those executives have professional technology experience, and along with the CEO live, breathe and talk technology from the Boardroom to the Boardwalk. They don’t just talk the talk, they walk the walk.

This is something I see very rarely in incumbent financial institutions, so when someone asks me what’s the best way to make a bank digital, my answer is always the same: Get a digital leadership team to work the project from the Boardroom to the Boardwalk. Does your bank do that?

Five Predictions About Banking’s Future


techonology-10-7-16.pngWhat does the future hold? As I referenced in an earlier article, I gave a presentation about the future of banking at Bank Director’s third annual Bank Board Training Forum in Chicago Sept. 29-30, and promised that I would share some of my thoughts with you after the conference. I might end up being completely wrong, of course, but here are my predictions and I’m sticking with them.

Technology
Going forward, I think we will begin to see the ascendancy of digital distribution channels in retail banking. Driving this change will be the continued digitalization across the entire economy, combined with the integration of millennials into the world of work, mortgages and parenthood at an accelerating rate. We occasionally refer to millennials as “digital natives” since they grew up on video games, cell phones and the Internet, and banks will have to provide a robust digital option if they want to keep them as customers. The bank branch isn’t dead, but I see it becoming increasingly less important over the next decade.

Disruption
The long-term future of the website lenders is unclear to me since they rely primarily on private equity investors and the capital markets for their funding, which is much less reliable over the course of an entire economic cycle than bank deposits. The question for them is whether they can take an economic punch in a recession. The payments competitors are here to stay because what they really want isn’t a banking relationship with customers so much as access to their data, including their financial data, because it enables them to bombard those customers with highly differentiated and customized offers on merchandise. And much of the technology of web site lenders and payments competitors will eventually be adopted by the banking industry. This is certainly true in the mobile space, but also in areas like commercial loan underwriting, which remains a laborious, people-intensive process. In this sense, the future of traditional banking is fintech.

Economy
This is probably one of the safer predictions that I made: There will be at least one recession between now and 2026. We are now in the seventh year of an economic expansion which, believe it or not, is the fourth longest going back to 1945. Nothing in this world lasts forever, and the current expansion won’t either.

Consolidation
This is probably my boldest (or craziest) prediction: There will be 4,558 banks as of December 30, 2026. Here’s how I got to that number. The annual consolidation rate over the last couple of years has been approximately 3 percent. There are a little over 6,000 banks today, and if you assume the industry will continue to consolidate at that rate for the rest of the decade, you get close to that 4,558 number. However, I factored in one more variable—one year in which a recession resulted in a consolidation rate closer to 5 percent to account for a spike on bank failures, assisted transactions through the Federal Deposit Insurance Corp. and relatively healthy banks hedging their bets by pairing up with a stronger merger partner. I’m sure I will be wrong about the exact number for banks in 2026, but there’s no question that there will be significantly fewer of them.

Demographics
By 2026, the last of the baby boomers will be heading towards retirement, most of the banks will have Gen X CEOs (the oldest of whom will be in their late 50s to very early 60s) and millennials will be moving into senior management positions. Gen X’ers and millennials are much more intuitive when it comes to digitalization issues generally, and I expect that their ascendance will only accelerate the digitalization of banking and personal finance. And of course, millennials will also be the single largest consumer demographic by 2026, so they will be eating their own cooking when it comes to digital banking.

Finally, I anticipate that something no one expects to occur (and therefore won’t predict) will end up having a huge impact on the industry. We had already seen the emergence of smart phones in 2006, but the ubiquitous iPhone wouldn’t be introduced until 2007, and 10 years ago how many people expected the mobile phone to revolutionize banking?

What do you think the next big thing will be?

How Will Fintech Innovation Scale?


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There is a lively debate in the fintech ecosystem about which firms will be able to scale fintech innovation and how they will do that. Will fintechs scale through organic growth and acquisitions or will they partner with more established providers? Three models are currently being discussed when pundits and the companies themselves attempt to predict how this will take place.

The Go It Alone Model
Those who think that fintech companies should go it alone believe that companies themselves will rise and beat incumbents by providing superior digital experiences and highly intuitive products to their customers. Supporters of this model point to three significant supporting facts. Disruption has happened in every other sector. Just as Amazon and Uber have changed the landscape when it comes to books and ground transportation, companies that grow quickly and join PayPal and Intuit will offer financial services beyond those provided by traditional banks.

These go it alone supporters point out that unlike most banks, fintechs are not built on top of clumsy legacy systems and therefore can offer cheaper and faster products. Those who believe that fintechs can grow organically see banks as being too slow to provide the innovation that consumers want and too stubborn to pay the appropriate multiples to buy fintechs that have a proven record of success. Unfortunately, there is a small but growing list of investors that refuse to back fintech startups that plan to distribute through banks. Early forays into distribution through banks have been sufficiently difficult to repel some investors.

Many in the ecosystem think the go it alone supporters are missing key points. They argue that the cost of customer acquisition is very high for these independent fintech companies. Getting to 80,000 users seems doable, but getting to 250,000 will be extremely difficult for most fintechs, in part because the cost of funding is much higher without bank deposits. Most fintechs rely on the capital markets and other institutional sources of money, including private equity investors, for their funding. Go it alone skeptics also believe that regulators will eventually demand expensive and complex compliance from fintechs that will increase their costs while decreasing their nimbleness. They are concerned that many of these companies are growing by subsidizing the cost of their products, and also lack business models that would make them independently profitable.

Financial Service Incumbents as Innovation Partners Model
A significant number of thought leaders believe incumbent financial services players such as banks and insurance companies will build platforms for best-in-class fintech partnerships. They believe this will be necessary because customers, having seen and heard the promise of new innovation, will demand better products. Supporters of this point of view emphasize that banks do not have the high customer acquisition costs of fintechs, are already familiar with regulatory expectations and have a much lower cost of funds. They argue that such competitive advantages will give them time to partner with or acquire any innovations that they will need. There may come a time when financial service incumbents build their own fintech products. However, at least in the near term, the sheer number of potential innovation needs—ranging from from machine learning tools and data analytics to natural language voice interface–will mean they will need to partner in order to keep up.

Skeptics of this model believe banks make bad partners when partnering with fintechs seeking scale. They insist banks are slow and generally do not do a good job of selling their customers on products they do not own or control. There are also concerns about the cost of partnering with banks. Some fintechs see integration with legacy solutions as a long and clumsy process and believe that meeting vendor risk management standards and other bank regulatory mandates as unnecessarily expensive and time consuming.

The Other Incumbents Model
Another relatively new view is that fintech innovation will scale through other incumbents. This approach often arises as an alternative in conversations concerning the flaws inherent in the other two models. Three types of incumbents are mentioned:

  • Retail: Proponents suggest that retailers or wholesalers will enter the financial services arena by partnering with fintechs and using a bank as a utility. These outlets have existing customer bases and some already offer various forms of financing. For specific niches it is easy to see the connection. If Home Depot offered financial tools to manage a contractor’s business, it would help their core business.
  • Employers and Payroll Providers: One of the most successful savings programs of all time is employer sponsored 401(k) plans. Recent talk of rolling in student debt payoff plans and financial health programs through employers have some fintechs wondering if they can scale through employers. Earned wage management tools are advancing earned money to employees outside of a normal pay cycle to help employees avoid payday lenders. Saving tools for goals other than retirement could be offered by employers.
  • Telecoms: Telecom providers are functioning as financial service providers in developing countries where there is limited financial infrastructure. Supporters argue that many fintechs are mobile-first technologies and data suggests that mobile is the preferred banking channel for a significant–and growing–percentage of consumers.

Most of the other incumbent models recognize that there has to be a bank involved but relegates its role to one of a utility. This position tends to spark another round of debate. Will banks become utilities if they don’t learn to be better partners?

Common to all of these conversations is the growing expectation that innovation will alter how we interact with financial service providers. Whether the provider is a bank, fintech or employer, all agree that consumers and businesses expect innovative solutions and that the best solutions will scale or be widely imitated. No matter how these innovations scale, there is little doubt that significant change is coming and much of the innovation will be driven by technology.

Joining the FinXTech.com Advisory Team


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Greetings from the United Kingdom. I’m part of the FinXTech Advisory Group and will be writing brief updates here from time to time. You may not know me and so you can find out what I get up to over here and on my blog. In case you don’t want to do that, one of the advisors to President Obama called me “the most authoritative voice” in fintech anywhere, which is why I guess the guys at FinXTech asked me to come on board.

Conversely, why have I joined the FinXTech Advisory Board?Mainly because its membership is comprised of many of the fintech leaders that I respect in the United States from the largest financial institutions, leading investment firms, technology companies, service providers and government entities. FinXTech is not just another media company—it’s a platform for connection via the FinXTech.com website, conferences for networking and interactive brainstorming sessions for real world application.

FinXTech’s mission is simple: to connect those who are truly shaping the future of financial services. The fintech ecosystem consists of five distinct groups:

  • The leaders of fintech companies who are producing, researching and creating new technological solutions.
  • Financial institutions that are embracing, adopting and/or seeking to implement cutting edge advancements.
  • Service providers, consultants, advisors and lawyers who are guiding the regulatory, compliance and implementation processes.
  • The investor and venture capital communities that determine who and what might be the next best thing for financial services.
  • And the government voices, be it from the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau or even the White House.

By establishing a group of advisors, FinXTech is able to set the course and agendas for their platform, based on the thoughts and feedback from some of the best and brightest in the industry—and me. So naturally, I joined, too—to be on the inside cutting edge, in addition to adding to it.

You probably already know a lot about fintech, although you may not know who is leading it. Is it Silicon Valley? Is it Wall Street? Is it London? Or maybe Singapore? In fact, financial technology is everywhere. During my travels—and I travel so much that when people ask me where I live, I usually say the British Airways executive lounge—I see every country with a financial focus creating a fintech focus. Oslo, Berlin, Zurich, Amsterdam, Tel Aviv, Dubai, Bangkok, Sydney, Shanghai, Hong Kong, Mexico City, S??o Paulo—fintech is happening in all of these places.

Why are so many billions of dollars being poured into these new technologies for finance?

The answer is that we are revolutionizing financial services through the Internet. For the past 50 years, bank technology has mostly been deployed for internal efficiencies and usage. Today, technology is creating external efficiencies, particularly through peer-to-peer networking. Apps, APIs, analytics, artificial intelligence, big data, blockchain, cloud, distributed ledgers, machine learning and the Internet of Things are changing everything. Everything is now networked and open sourced through marketplaces and connected platforms. This technological revolution has been bubbling for years, starting with the Amazons and Alibabas of the world, moving along to the Facebooks and Baidus, Tencents and Googles. Now we have the Ubers and Airbnbs, and everyone wants to know who will be the next PayPal or AliPay.

This is why fintech is so exciting, as we have major new players like Stripe and Square appearing almost overnight and gaining multi-billion valuations. There is no doubt that we’ve got it going on, and in my next few pieces here I’ll outline the key trends, players and developments.

For now, I wish you a big hearty British welcome to FinXTech. Glad you could make it and it’s good to be here.

Fraud: An Uneven Playing Field for Banks and Fintech Companies


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The role of banks and other financial institutions (FIs) as repositories for large amounts of money has made them prime targets for fraudulent activity over the years. As a result of this, a wide range of laws and regulations have been created governing the activities of FIs with the objective of helping to protect consumers from fraud—whether it’s from the inside or outside. In recent years the question of fraud involving banks and other FIs has arisen again in a new context. Innovations in financial technology have raised questions as to whether banks or the fintech firms developing and operating such technology are responsible when its use exposes banks and their consumers to fraud.

Fintech has changed the way financial firms do business in a variety of areas including investment management, loan sourcing and data aggregation. Along with the ability to more proactively manage customer financial affairs and data through the use of technology has come an increased threat of cyberattacks. These types of attacks give malicious outsiders access to sensitive consumer data. A recent example involved two fintech lenders that were defrauded by a man who misrepresented his financial situation to cheat them out of more than $100,000 in total. He was convicted in Tennessee on six counts of fraud stemming from his actions.

The newness of the fintech revolution means that current laws and regulations, for the most part, do not clearly specify who is responsible for fraudulent activity that occurs in conjunction with processes involving both banks and fintech firms. This is likely to change over time as the courts more clearly apportion responsibility between banks and fintech firms in specific instances of fraud. However, when it comes to the regulatory treatment of the two types of institutions, the situation is much clearer; banks face stringent anti-fraud regulatory requirements governing their activities, whether using traditional banking methods or innovative financial technology, while fintech firms are not subject to the same requirements.

This disparity has not gone unnoticed, with leading financial institutions commenting on the danger posed to them by potentially risky fintech practices such as scraping bank websites to collect consumer financial data. At the same time, industry participants and regulators around the world have noted that they are aware of the regulatory discrepancy and that actions may need to be taken to help level the playing field.

Peter Misek, a partner at the Business Development Bank of Canada’s Venture IT Fund, recently opined that Canada’s emergence as a top five global fintech hub poses major risks due to an inadequate legal framework for dealing with fintech-related issues such as identity theft and fraud. He states that, in this regard, “Canada’s structures, rules and laws are antiquated and, in many cases, actually harmful.” Misek would like to see “innovative solutions to this problem” from tech companies, and wrote that his fund is willing “to put real dollars behind the effort.”

Addressing similar issues, the director and general counsel of Malaysia’s Securities Commission (SC), Foo Lei Mei, warned that digitalization in the financial services industry brings with it increased risk of fraud. In an article in Digital News Asia, Mei said that the SC planned to issue regulatory guidance regarding engaging with industry firms about the issue. “Discussions and focused group meetings have provided invaluable feedback to the SC in designing the regulatory framework for P2P lending in the capital market,” she was quoted as saying.

In the United States, the Federal Reserve Board has weighed in on the risks facing banks when outsourcing risk, such as using third party firms to provide data aggregation or digital wealth advisory services. The Fed’s letter on the matter includes commentary on various issues associated with working with fintech companies. In an article by Robert Canova, senior S&R financial/policy analyst at the Federal Reserve Bank of Atlanta, Canova states that, with the increase in data breaches, website attacks and wire transfer fraud schemes, “Banks will need to become more sensitive to safeguarding any systems containing customer data that their digital vendors have access to, given the fact that hackers are getting increasingly sophisticated at breaking those systems down.”

Canova writes that as competition between fintech firms and banks increases, the former are likely to become subject to increased scrutiny. He cites a consultative paper by the Bank for International Settlement’s Committee on Payments and Market Infrastructures which calls for greater regulation of fintech companies as evidence of this, along with a whitepaper by the Clearing House (a trade association consisting of the 24 largest banks) that discusses “the absence of a level regulatory playing field.”

With fintech innovations becoming increasingly embedded in the fabric of banking operations, the potential for fraudulent use of banking infrastructure involving such technology grows accordingly. With banks and other FIs currently subject to strict anti-fraud regulations, they are unlikely to outpace less regulated fintech companies when it comes to technological innovation in the sector. As banks and fintechs become increasingly intertwined due to mergers, partnerships or head-to-head competition, it becomes more and more likely that regulators will take steps to address this dichotomy going forward.

Banks and Fintechs Adjust Strategies as Sector Matures


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After a period of rapid growth, the fintech sector has reached, if not full maturity, at least the end of its adolescence. With customer acquisition growth rates slowing among digital wealth management services, otherwise known as robo-advisors, a number of industry participants have adjusted their strategies in response. One development reflecting this process is the increasing tendency among large banks and other financial institutions (FIs) to enter the sector by purchasing some of the earliest and most successful innovators in the field.

This marks a change from the approach more commonly seen early in the fintech revolution, when large FIs were more likely to take positions as minority shareholders in promising fintechs than to buy them out. Fintech buyouts hit an all-time high in 2015 as banks rushed to stake their claim in this disruptive market, with KPMG and CB Insights showing fintech investments growing from $3 billion in 2011 to $19 billion in 2015. A CNBC.com report on the sector sees no signs of this trend abating in 2016, with big banks expected to continue to favor outright purchases of technology innovators in the sector over investing in startups.

Other banks and FIs have chosen to pursue different strategies, either forming partnerships with leading fintech firms or, in the case of some of the largest FIs such as Fidelity and Schwab, electing to build their own digital wealth management platforms. Fintech firms, in the meantime, continue to rely on product innovation to attempt to set themselves apart from their competitors. As sector growth moderates and truly disruptive innovations become more difficult (and expensive) to develop, these startups must make difficult decisions about whether to attempt to go it alone or to merge or partner with existing financial industry players.

Outside of a few companies willing to devote the tremendous resources necessary to build their own platforms, the majority of FIs entering the fintech space have done so via purchases or partnerships. While partnerships can be a viable method for entering the sector, some banks and other FIs prefer to own the technology their customers use to access their financial information. For these firms, purchasing an existing fintech company offers the advantage of speeding time to market and gaining the expertise of the tech-savvy founders or operators of the acquisition, in addition to controlling the use and development of the acquired technology.

In an interview for this article, Charlie Haims, vice president of marketing at cloud-based portfolio management service MyVest, expanded on this idea: “The larger FIs historically choose to build a new innovation in-house to tightly integrate it with the rest of the company. But now we are seeing an increase in acquisitions, like BBVA with Holvi, Groupe BPCE with Fidor, Silicon Valley Bank with Standard Treasury and many in wealth management like BlackRock with FutureAdvisor, Invesco with JemStep, and Northwestern Mutual with LearnVest.” Haims attributes this trend to sizable VC investment in fintech startups a few years back, leading to the recent buyouts of VC-backed startups whose success in the field attracted suitors.

While owning your own fintech platform may seem attractive to banks and other FIs looking to enter the space, the truth is that the cost of this approach, whether via purchasing an existing startup or building your own platform, is by no means trivial. A price tag upwards of $100 million to build a comprehensive digital wealth management platform is not unknown. For many banks interested in entering the field, finding a technology partner is perhaps a more practical way of gaining access to the industry. Haims agrees: “For smaller FIs, the best approach is often partnering with leading service providers or startups to quickly adopt the best-of-breed for a given fintech innovation, and this still seems to be the case today.”

MyVest offers its enterprise wealth management software platform to FIs such as banks, broker-dealers, RIAs and service providers. Haims cites banks as being particularly well-suited to use the company’s service to “help them bridge silos across their trust, brokerage and RIA divisions, so they can run a smoother operation and provide a holistic customer experience on a single, unified platform.” The company also has channel partnerships with Genpact Open Wealth and Thomson Reuters Wealth Management “to offer a combination of wealth management technology and services to FIs.”

In addition to digital wealth management, banks have formed partnerships across a variety of other fintech platforms, including startups in the crowdfunding and direct-to-consumer loan sectors. In the former category, BNP Paribas has inked a partnership deal with SmartAngels, which provides a platform for investing in crowdfunding deals; in the latter category is JPMorgan Chase’s partnership with On Deck Capital, which provides online small business loans.

As the industry matures, the competition among fintech sector participants has become increasingly fierce. In the digital wealth management field, independent robo-advisors now face the challenge of competing with large FIs such as Vanguard and Schwab, which have attracted the bulk of new robo-advisor assets since entering the space.

One prominent robo-advisor, Personal Capital, has engaged a private equity firm to help it consider its financial options, leading some to speculate that the firm is seeking a buyer. Other digital wealth management platforms, such as Wealthfront and Betterment, have stressed their dedication to innovation as a major factor in helping them stay competitive. Industry expert Craig Iskowitz has outlined the challenges facing such firms as their growth slows in an article on his Wealth Management Today blog. In the article he suggests that, rather than going head-to-head with industry behemoths for assets, a hybrid model of “selling to consumers as well as advisors, along with the B2B model, will soon be seen as the best way to succeed in this market.”

Among digital wealth management advisory services continuing to pursue the direct-to-consumer model, Iskowitz cites the Acorns robo-advisor platform as notable for experiencing robust growth by pursuing a millennial-friendly strategy. The company’s mobile app allows users to link their bank or credit card accounts to the firm’s platform and automatically invest the spare change gained from rounding up transactions to the nearest dollar in an electronically traded fund, or ETF, which is a diversified portfolio of securities that can be valued and traded at any time during the trading day instead of after market close like a mutual fund.