What sets today’s lending environment apart is the potential for banks to collaborate with technology platforms to manage their risk more effectively and efficiently, explains Garrett Smith, the CEO of Community Capital Technology. In this video, he outlines how banks of varying sizes are diversifying their loan portfolios, and he shares his advice for banks seeking to buy or sell loans on the secondary market.
There’s one thing in today’s banking industry that is critical to remaining competitive, being innovative, and maintaining compliance and risk levels: data.
This is no longer a surprise for most banks. It’s an issue that comes up often among bank boards and management, but there are still a number of challenges that banks must overcome to be successful in all of those areas.
It has a connection to many of the major decisions boards make, from what third-party partners to join forces with to how it integrates the next landmark technology.
Five Steps to a Data-Driven Competitive Strategy Maintaining a competitive advantage for banks today lies in one of its most precious assets: data. Banks have the gold standard of consumer data, and leveraging that information can be the trump card in achieving growth goals.
Getting there, though, requires good governance of data and technology, and then using those elements to craft strategic objectives.
Fintechs Can Fend Off Compliance Issues With Data Fintechs are known to be nimbler than banks for a few reasons, including a limited regulatory framework compared to their bank partners and a smaller set of products or services. But with that relative freedom comes added risk if they don’t comply with broader regulatory requirements. One compliance problem can put a fintech out of business.
But those companies can use data to reduce compliance risk. Here’s how.
Risk Management at the Forefront in Fintech Partnerships Bank regulators have generally kept their distance from interfering in bank-fintech partnerships. Agencies have deferred to the bank’s third-party risk management process, but some regulators have indicated the intent to keep a closer eye on third-party fintech firms.
Here is an overview of what banks should keep in mind when considering and managing the risk associated with these third-party partnerships.
Four Ways To Innovate And Manage Risk, Compliance There is a careful balance that banks must strike in today’s industry. To remain competitive, they have to innovate, but they also have to remain compliant with regulations, many of which have stood for years, and manage risks that can ebb and flow with economic and technological pressure.
Finding a similar balance between thinking strategically for the future while also remembering what has worked and not worked can also be challenging for financial institutions. Building a checklist around these four ideas can help achieve that balance.
How to Pick The Right Data Partner Banks are grappling with trying to gain the greatest efficiency through a variety of innovative and technological tools, but often are hampered by the quality of the data they maintain. To make correct and sound decisions, accurate and reliable data is essential.
Partnering with third-party data service providers can help with that effort, but even that requires due diligence. To help with that due diligence, banks should have a checklist of capabilities for those partners.
Leadership is a central aspect of banking. Not only do bank executives lead their institutions, but directors who sit on bank boards tend to be leading members of their communities.
Indeed, it’s no coincidence that the biggest and tallest buildings in many cities and towns across the country are named after banks.
That’s why leadership was one underlying theme of this year’s Bank Director’s Acquire or Be Acquired Conference held at the JW Marriott in Phoenix, Arizona.
It was the 25th anniversary of the conference, one of the marquee events in the banking industry each year.
The conference opened with a video tracing the major events in banking since 1994—a period of deregulation, consolidation and innovation.
In that time, the population of banks has been cut in half, Great Depression-era regulations have rolled back and the internet and iPhone have made it possible for three-quarters of deposit transactions at some banks to be completed from the comforts of bank customers’ own homes.
It was only fitting then to bookend the conference with some of the greatest leaders in the banking industry throughout this tumultuous time.
The first day concluded with the annual L. William Seidman CEO Panel, featuring Michael “Mick” Blodnick, the chief executive officer of Glacier Bancorp from 1998-2016, and Joe Turner, the CEO of Great Southern Bancorp since 2000.
The banks run by Blodnick and Turner have created more value than nearly all other publicly traded banks in the United States. Glacier ranks first in all-time total shareholder return—dividends plus share price appreciation—while Great Southern ranks fifth on the list.
As Blodnick and Turner explained on stage, there is no one right way to grow. Blodnick did so at Glacier through a series of 30 mergers and acquisitions, building one of the leading branch networks throughout the Rocky Mountain region.
Turner took a different approach at Great Southern. He and his father, who had run the bank from 1974 to 2000, focused instead on organic growth. They built a leading footprint in the Southwest corner of Missouri, and then, in the financial crisis, completed five FDIC-assisted transactions to spread their footprint into cities up the Missouri and Mississippi rivers.
One consequence of this approach was it enabled Great Southern to consistently decrease its outstanding share count by upwards of 40 percent since originally going public, as it never had to issue shares to buy other banks.
Asked what one thing he wanted to share with the audience, Turner talked about the importance of ignoring shortsighted stock analysts. Despite Great Southern’s extraordinary returns through the years, it has rarely if ever been “buy” rated by the analyst community.
Why not? When the economy is great and other banks are growing at a rapid clip, Great Southern tempers its growth to avoid making imprudent loans. Then when times are tough, and a pall is cast over all stocks, Great Southern surges ahead. Blodnick’s advice focused on M&A. For sellers, the goal should never be to get the last nickel, he explained. Rather, the goal should be to establish a partnership that will maximize value over time.
The conference also had a parallel track of sessions, FinXTech, focused on technology.
These sessions were often standing-room only. It was an obvious indication about what the future leaders of banking are focused on now.
Don MacDonald, the chief marketing officer of MX Technologies, took a particularly broad approach to the subject. Although his session ostensibly focused on harnessing data to increase growth and returns, he put the topic into historical perspective.
The question MacDonald was trying to answer was: How do we know if the banking industry has reached a genuine inflection point, after which the rules of the game, so to speak, have changed?
The answer to this question, MacDonald said, can be found in developing a framework for assessing change. That framework should include multiple forces in an industry, such as regulations, customer expectations and technology.
It’s only when multiple major forces experience change at or around the same time that a true strategic inflection point has been reached, explained MacDonald.
Has banking reached such a point?
MacDonald didn’t answer that question, but given the environment banks operate in right now with the growth of digital distribution channels and the ever-evolving regulatory regime, one would be excused for coming to that conclusion.
Given these two tracks—the general sessions focusing on banking and the FinXTech sessions focusing on technology—it was fitting that the final day of the conference was opened by John B. McCoy, the former CEO of Bank One, from 1984-99. McCoy hails from the notoriously innovative McCoy banking dynasty, preceded by his father and grandfather. Bank One was one of the earliest adopters of credit cards, drive-through windows and ATMs, among other things.
Furthermore, it was McCoy’s approach to acquisitions at Bank One, where he completed more than 100 deals, that helped to inform Blodnick’s approach at Glacier. Known as the “uncommon partnership,” the approach focused on buying banks, but allowing them to retain their autonomy.
The decentralized aspect of the uncommon partnership left decision-making at the local level—within the acquired banks. It allowed Bank One and Glacier to have their cake and eat it too—growing through M&A, but leaving the leadership of the individual institutions where it belongs: In their local communities. This resulted in lower customer attrition, the scourge of most deals.
One overarching lesson from Acquire or Be Acquired is that banking is about facilitating the growth of communities, and the best people to spearhead this are the ones with the most on the line—the leaders of those communities.
Most people assume that fintech companies are out to take business away from banks, but what if the opposite is true?
What if, instead of being a threat, fintech companies actually open up new opportunities for banks?
That’s what a handful of banks are exploring right now. They’re doing so by essentially white-labeling deposit insurance, regulatory expertise and access to credit platforms.
You can think of it as a partnership that leverages a fintech company’s strengths on the front end of the customer experience, with attractive and refined digital interfaces, as well as a bank’s strength on the backend, by providing access to safe and secure financial products.
It’s a classic win-win situation.
One bank pursuing this course is TAB Bank, an online bank based in Ogden, Utah, with $711 million in assets.
“We came to the conclusion that we would build our strategy around how we think the market will look in two to five years, not how it behaves today,” says Curt Queyrouze, president of TAB. “What we determined was that once consumers try a digital interaction, they stay in that lane.”
Queyrouze has been cultivating this model for years.
The 20-year-old online bank has “sponsored” non-banks before who wanted access to the Visa and MasterCard credit platforms, says Queyrouze. Then TAB began working with marketplace lenders and offering traditional transaction accounts—in other words, white-labeling banking services to its partners.
“To the extent we can be the infrastructure for that cash account that attaches to whatever payment systems are out there, yeah, there’s a lot of benefit to that,” says Queyrouze. “As traditional banks we can hold that money, we can insure it and then we can take that money and turn around as the traditional banking model has always been and lend out that money, (or) use it in other ways to create profitable margin.”
The Bancorp Bank is pursuing a similar course. The $4.4 billion online bank headquartered in Delaware makes it clear what their model is all about: enabling non-bank companies to offer bank-like products.
“Take a close look behind some of the world’s most successful companies: that’s where you’ll find The Bancorp,” the company boasts.
The Bancorp backs Varo Money, for example, a mobile app offering users insured deposits, fee-free ATM withdrawals, interest-bearing savings accounts and personal loans in 21 states. (Varo Money was among the first fintechs to apply for the new national charter offered by the Office of the Comptroller of the Currency last year.)
Yet another bank pursuing a similar strategy is Cross River Bank, a New Jersey-based bank with $1.2 billion in assets.
Getting back to TAB, another epiphany came to Queyrouze in late 2018 at one of the biggest financial services conferences of the year.
Queyrouze thought about all the money being spent to lure new customers by both banks and non-banks.
As Queyrouze saw it, this gave TAB two potential paths to follow.
One would require a massive marketing budget to compete against bigger banks and fintech companies in the competition to acquire customers. The other was to stick to what it knew on the backend—namely, banking—while leveraging the strength of fintech companies on the frontend.
“While we do have the option to market against this tide, we also have the opportunity to build a banking infrastructure to align with the fintech world and provide banking services to support their client base,” says Queyrouze.
In short, small banks like TAB don’t have the resources to compete in the digital realm against larger peers. Nor can they pump money into a national marketing blitz to grow their customer base.
But they can stick to what they do just as well as any bank regardless of size—banking—and let fintech partners handle the rest.
There are three ways to consider expanding into new lines of business, improving operational capabilities, or tapping new markets. Should you build, buy, or partner?
Technology is disruptive, and established companies struggle with the best way to adapt to the changing trends.
Fortunately, there are options. Fintech partners, big and small, offer a variety of financial products and services utilizing the latest technology that can be white-labeled or simply acquired.
In addition, the talent pool of technologists is expanding, giving financial institutions access to the necessary skills should they choose to build internally. When determining whether to build, buy, or partner, these institutions must consider their core competencies and competitive advantages, as well as their culture, structure, and access to capital.
While there is no one-size-fits-all approach for financial institutions, partnering with fintechs can be most beneficial and provide needed flexibility for the long term.
Consider the choice to build. First, an institution must recruit and fill a team of product managers, engineers, and other highly skilled positions that demand significant compensation. An up-front investment must be made to support software development, testing, security and maintenance. The speed to market is typically slower if an institution chooses to build, elevating the risk the product or service will be out-positioned by the time of launch.
While true that some of the largest financial institutions have managed to develop popular new digital products and applications internally, they are the exception. Those banks also typically had the surplus capital to put to work.
The “buy” option presents challenges as well. Few credit unions and community banks have the financial clout to acquire a fintech company. Those that do will face numerous hurdles integrating the acquisition into their existing operations, technology stack and company culture.
There are certainly examples of successful fintech acquisitions by financial institutions, but unless the acquirer is prepared for a lengthy and resource-consuming process, this may not be the most viable option.
Partnering can often be the most cost-effective and efficient alternative. There is no shortage of turnkey solutions that allow community banks to automate products and services, enabling them to provide the kind of digital experience consumers have come to expect.
Partnering with a fintech also provides the financial institutions with an option to test before investing in a build or buy strategy later. For institutions seeking a stopgap solution, partnering can meet current needs and buy time to consider long term alternatives.
It’s not hyperbole to suggest the technological challenges and threats facing banks are existential. Those that do not adapt quickly face the risk of becoming irrelevant. Fortunately, whether it is build, buy, or partner, there are myriad solutions that allow institutions to provide an attractive digital experience without relinquishing their core competencies and competitive advantages.
As a microcosm of the banking sector and the broader economy, North Carolina provides an interesting glimpse at some of the trends and issues impacting banks nationwide.
“North Carolina’s banks are strong and benefiting from a robust economy,” says Ray Grace, who has served as the North Carolina Commissioner of Banks since 2013. “A sign of the good times for banking here is the interest we’ve seen in this cycle from out-of-state banks buying their way into North Carolina markets.”
Out-of-state banks making recent acquisitions in North Carolina include Columbia, South Carolina-based South State Corp., Pittsburgh, Pennsylvania-based F.N.B. Corp., and two Tennessee banks: Pinnacle Financial Partners, in Nashville, and First Horizon National Corp., in Memphis.
As the state’s banks consolidate, there is interest in opening new banks—the first since the financial crisis.
North Carolina also boasts a burgeoning technology sector, including the bank operating system nCino, based in Wilmington, and payment solutions provider AvidXchange, digital banking provider Zenmonics and IT consulting firm Levvel—all based in Charlotte.
In this interview, which has been edited for length and clarity, Grace explains why he’s seeing more interest in opening de novo banks in the state, shares his advice for banks exploring fintech partnerships and weighs in on prospective challenges for the industry.
BD: North Carolina just chartered its first de novo bank in a decade, with American Bank & Trust in Monroe, North Carolina. The Charlotte Observer reported you believe there’s more interest in opening new banks in your state. What’s driving that interest, and do you expect more activity to result from that interest?
RG: During the so-called Great Recession, the traditional economic drivers for bank formations disappeared. The economic downturn increased credit risks from borrowers, monetary policy wrung the margins out of lending, and the predictable tightening of the regulatory screws increased both the cost and the complexity of banking. Normally, we would have seen a faster return of de novo activity, but this was of course no normal recession, and fittingly, it was no normal recovery. Rather than the “V-shaped” recovery we had seen following previous downturns, this was the dreaded “L-shaped” variety, prolonging the drought.
On the heels of an epic consolidation trend, many North Carolina markets, including some that had been historically very supportive of community banks, lost those banks. As with previous consolidation episodes, this has left voids in these markets, particularly in rural areas. At the same time, we have seen a strong, decisive uptick in the economy through much of the state, a gradual return to normalizing interest rates, and, mirabile dictu, the beginnings of a swing of the regulatory pendulum toward a somewhat less restrictive environment. All these factors have contributed to the return of industry profitability and made the banking model attractive once again.
BD: Banks have been increasingly working with fintech firms to better expand and improve their own products and services, but properly vetting younger tech companies can be tricky. Do you have any advice for banks exploring fintech partnerships?
RG: Banks will need to embrace new technologies if they are to remain viable. That said, they need to focus on being cutting edge, but not bleeding edge. There is a dizzying array of gee-whiz products being introduced now, and it’s important to be careful in what you choose to implement.
Like a lot of advice, mine is more easily given than followed, but start with the fundamentals. What [or] who are your markets? What are you offering those markets and customers in the way of products and services, and why? What is trending, and in what directions? How does all this fit in with your business plan? Does your business plan still make sense? If not, change it.
In light of the foregoing, is your management team and board adequate to your bank’s current and future needs? For example, do you have a chief technology officer? A tech-savvy director or two?
Know what is available, [and] study and carefully assess the alternatives that fit the needs of your business plan. Discard applications or products that do not enhance customer value and the quality of their experience—while not breaking the bank.
What existing bank systems must be accessed by the new application? What firewalls or other protections are provided for access, data and systems security?
What is the financial strength of the company you are contracting with? What is their capacity to support the application? Do they have a track record with other banks? What would be the consequences to your operations in the event of failure of the vendor? Who owns the code in that event, and who could take over support?
Not long ago, there were any number of fintech startups with interesting offerings but limited resources and infrastructure, which made them risky to engage with. The good news is that’s changing, and clearly it is better to deal with companies that have some legs, financially and organizationally.
BD: Is there anything else you think is important that boards be aware of heading into 2019?
RG: Change, or the failure to meet its challenges, is the single greatest existential risk to banking as we know it. However, boards cannot afford to lose focus on more traditional risks. There is an old banking axiom that the worst of loans are made in the best of times. These are some pretty good times, and we are beginning to see some troubling signs that memories are short. Among those I would cite are the rising prevalence of “covenant light” loans and other structural concessions on the commercial side, and 100 percent financing in both the commercial and mortgage lending spaces. Some in Washington are again talking about the need to increase access to affordable housing. Déjà vu all over again?
Interest rates are likely to continue to rise, albeit at a modest rate. I think this is a good thing for the industry and the economy, but it will require an increased emphasis on sound funds management policies and practices on both sides of the balance sheet.
Our banking industry has always faced challenges: the Great Depression, disintermediation and the thrift crisis of the 80s, the repeal of Regulation Q, the Great Recession and resultant Dodd Frank Act, and a host of others. Yet, the industry has survived and reinvented itself time and again. Unfortunately, banks have also been the target of damaging criticism from Washington, sometimes for good reason but too often for political motivation. Restoring the public trust tarnished by this criticism will play a critical role in ensuring the industry’s future. We need to be reminded that banks are special. That they are the only industry that “creates” money. And that they are the place where people have traditionally gone when they wanted to buy a home or a car, or start a business. In a very real sense, banks are where people go to make their dreams come true. That’s a powerful story. It’s up to banks to tell it and to make it so.
For many consumers, their relationships with financial institutions can be highly personal. They often choose a bank because that’s where their family has done business, or because they’ve done their own due diligence and made a personal choice.
That gives people have a certain level of loyalty to their chosen organizations.
Due to the highly sensitive nature of financial relationships, trust is essential to maintaining them. But with the rise of technology, and the demand for financial organizations to adopt and adapt, many are faced with the risk of their own attention diverting from their core strength — building and maintaining customer relationships.
This is understandable for a few reasons. In order for banks to acquire new clients and retain their existing ones, they need to meet customers where they are, whether that means offering mobile apps or digital services beyond the core of a typical banking relationship.
A great example of this is the demand for digital wealth management. Consumers are increasingly looking for services that enable them to manage their wealth online, and the proof is in the numbers.
Assets on digital platforms stand at approximately $397 billion and are expected to more than triple, eclipsing $1.4 trillion by 2022, according to the data service Statista.
For financial institutions looking to capture a piece of this growth, speed to market is a vital differentiator. While many might consider designing and launching their own digital advisory platform in-house, the risks are significant both internally and externally. For consumers, in the time it might take for a financial institution to build its offering from start to finish, many might seek out a provider that can meet their needs immediately.
For institutions, asking staff to focus on work outside of their specialty might cause them to leave for more nimble firms that can leverage technology to empower and not distract their workforce.
The solution to both challenges? Outsource non-core technology capabilities, such as digital advisory services, to proven, enterprise-ready third parties that understand the banking space. This approach helps retain talent while simultaneously enabling banks to support a higher volume of higher value customers.
Done right, outsourcing to sophisticated digital advisory providers allows banks to retain existing customers while also focusing its efforts on attracting new ones. It opens new opportunities to deepen engagement and further monetize existing relationships through upselling. It also opens the possibility for growth into new market segments — the much talked about notion of increasing wallet share.
Offering digital advisory shouldn’t cost much to support. Sophisticated third-party solutions offer easy access to wealth management for digitally savvy customers, enabling them to self-serve with minimal assistance. These solutions, in turn, allow banks to service these types of clients with less overhead.
Choosing the right approach for offering a digital wealth platform comes down to institutional preparedness. Designing and developing a solution in-house takes time and money. Partnering with a third party that supports white-labeled technology allows for quick and easy implementation, allowing you to harness the provider’s talent as your own.
One thing to keep in mind when hiring a vendor is whether or not they have deep experience in both the wealth management and the banking spaces. This means finding trusted providers that have taken the time to integrate with multiple banking cores and custodians, as well as diverse payment systems and best-in-breed portfolio managers.
Having the right pipes in place ensures implementation flows seamlessly, without any clogs in the process.
Additionally, banking institutions entrenched with legacy systems can feel comfortable partnering with a third-party provider that is pre-vetted and has established relationships with core providers, the only way that new technologies can be deployed at the speed of customer demand.
More banks are exploring relationships with technology companies, but there are distinct differences between a vendor and a true partner. Steve Brennan, the senior vice president of lending technology at Validis, explains what banks should seek in a partner and in turn, shares how banks can be good partners.
Ultimately, partners should work toward being successful together. This video outlines how a bank can ensure a good outcome results from these relationships.
Should you acquire or be acquired? Some community banks are electing to do neither, and instead are attempting to forge a different path – pursuing niche business models. Each of these business models comes with its own execution and business risks. All of them, however, come with the same regulatory risk – whether the bank’s regulators will challenge or be supportive of the changes in the business model.
Some community banks are developing partnerships with non-bank financial services, orfintech, companies – companies that may have created an innovative financial product or delivery method but need a bank partner to avoid spending millions of dollars and years of time to comply with state licensing requirements. These partnerships not only drive revenue for the bank, but can also – if properly structured – drive customers as well. WebBank is a prime example of the change this model can bring. As of the close of 2007, WebBank had only $23 million in assets and $1 million in annual net income. Ten years later, WebBank had grown to $628 million in assets and $27.5 million in annual net income, a 39 percent annualized growth in both metrics.
Following the recession, bank regulators have generally been supportive of community banks developing new business models, either on their own or through the use of third party technology. As the OCC notes, technological changes and rapidly evolving consumer preferences are reshaping the financial services industry at an unprecedented rate, creating new opportunities to provide customers with more access to new product options and services. The OCC has outlined the principles to prudently manage risks associated with offering new products and services, noting that banks are motivated to implement operational efficiencies and pursue innovations to grow income.
Even though the new business model may not involve an acquisition, the opening of a new branch, a change in control, or another action that requires formal regulatory approval, a bank should never forge ahead without consulting with its regulators well before launching, or even announcing, its plan. The last thing your board will want is a lawsuit from unhappy investors if regulators shut down or curb the projected growth contemplated by a new business model.
Before introducing new activities, management and the board need to understand the risks and costs and should establish policies, procedures and controls for mitigating these risks. They should address matters such as adequate protection of customer data and compliance with consumer protection, Bank Secrecy Act, and anti-money laundering laws. Unique risks exist when a bank engages in new activities through third-party relationships, and these risks may be elevated when using turnkey and white-label products or services designed for minimal involvement by the bank in administering the new activities.
The bank should implement “speed bumps” – early warning indicators to alert the board to issues before they become problems. These speed bumps – whether voluntary by the bank or involuntary at the prompting of regulators – may slow the bank’s growth. If the new business model requires additional capital, the bank should pay close attention to whether the projected growth necessary to attract the new investors can still be achieved with these speed bumps.
Bank management should never tell their examiners that they don’t understand the bank’s new business model. Regardless of how innovative the new business model may be, the FDIC and other bank regulators will still review the bank’s performance under their standard examination methods and metrics. The FDIC has noted that modifying these standards to account for a bank’s “unique” business plan would undermine supervisory consistency, concluding that if a bank effectively manages the strategic risks, the FDIC’s standard examination methods and metrics will properly reflect that result.
Banks also need to be particularly wary of using third-party products or services that have the effect of helping the bank to generate deposits. Even if the deposits are stable and low-cost, and even if the bank does not pay fees tied to the generation of the deposits, the FDIC may say they are brokered deposits. Although the FDIC plans to review its brokered deposit regulations, it interprets the current regulations very broadly. Under the current regulations, even minor actions taken by a third party that help connect customers to a bank which offers a product the customer wants can cause any deposits generated through that product to be deemed brokered deposits.
Community banks definitely can be successful without acquiring or being acquired. However, before choosing an innovative path a bank should know how its regulators will react, and the board should recognize that although regulators may generally be supportive, they do not like to be surprised.
Strategic planning is one of the most important roles of a financial institution’s board of directors. Since the 2008 financial crisis, financial institution boards have dealt with the emergence of fintechs as a primary consideration in developing their strategic plans. A few large financial institutions have opted to build fintech capabilities, but the majority of financial institutions have determined that the best strategy is either to invest in or partner with a fintech firm through an outsourcing process.
On July 31, 2018, the Office of the Comptroller of the Currency announced it would begin accepting applications filed by fintech firms for “special purpose” federal bank charters. While not unexpected given the conversations around this topic in recent years, the announcement garnered immediate and passionate responses from the interested constituents. Whichever strategy has been adopted and implemented in their firm, financial institution boards should consider the impact a “special purpose national bank charter” may have on their relationship with a fintech firm, or how newly chartered fintechs may change their strategic plan.
First: Re-evaluate Your Strategy Financial institution boards should first consider if their strategy should change based on an assumption that fintech firms would become chartered special purpose banks. Applying the standard SWOT (strengths, weaknesses, opportunities, threats) approach to their strategic planning, the board might determine that what once was a strength for a financial institution (direct access to customers, ability to accept deposits) could become a threat as chartered fintechs obtain bank powers, while weaknesses (stricter regulatory oversight and related infrastructure expense) become strengths or opportunities. This shift in the playing field for fintech and financial firms should become a basis for deciding if the build, invest or partner strategy is still the best fit for the financial institution.
Second: Evaluate Your Options Whether the board determines that their current strategy is appropriate or needs to be reconsidered, their decision will be influenced by the ability to and cost of change. The board should review the existing relationships that are in place and determine the feasibility of changing strategy. While building may be the best answer, the cost of building fintech expertise may not be a valid strategic option, given the expertise required and the size of investment. Likewise, finding a new vendor or outsourcing partner may be relatively easy, but exiting a current contract may be difficult or costly if there isn’t a valid contractual reason for termination.
Third: Focus on Execution In their review of options the board should have been exposed to any shortcomings or important factors in executing the adopted strategy. Once the strategic approach has been decided, the basis of that decision must be taken into account in the execution. The possibility of a fintech firm obtaining a bank charter should be the cornerstone of execution. Directors should ask themselves whether getting a bank charter should be a basis for terminating a financial institution’s relationship with a fintech firm. If so, the terms should be clearly stated including financial outcomes and operational details. For example, any fintech investments or contracts should make it clear the financial institution will maintain the customer relationships and the related data. In addition, the arrangement should have appropriate non-solicitation and non-competition clauses to protect the financial institution in the event the fintech becomes a competitor. If the fintech firm can terminate the relationship, the financial institution should ensure there is an adequate conversion process that will allow it to pursue a different strategy or to migrate to a new strategic partner with minimal interruption to its customers.
It is not expected that fintech firms will rush to obtain charters or that charters will be granted to fintech firms in the near future. Significant barriers still remain for fintech firms to obtain charters. The application, review and examination process for obtaining a new (or de novo) charter is arduous and time consuming. In addition, newly chartered special purpose banks would need to build extensive regulatory infrastructure and would be subject to additional oversight and supervision during their early existence. Nevertheless, the OCC’s announcement will provide fintech firms with additional strategic options and a foothold for bringing further disruption to the financial services industry. Financial institution boards should be prepared to strategically respond to that challenge.