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.

How One Bank Invests for Innovation


“You don’t invest to stay where you are. You invest to go where you want to be in the future,” says Chris Nichols, chief strategy officer of CenterState Banks Inc., a $4.9 billion asset bank headquartered in Davenport, Fl. The term is everywhere–innovation. But what does it mean relative to banks? In an industry burdened with compliance and regulatory pressures, it is rare for bank leadership to have the bandwidth to also think creatively. And when it comes to financial technology, many bankers feel that they don’t really understand this new world they are trying to enter. Nichols was the keynote speaker at a recent conference put on by the law firm Bryan Cave–Crossroads: Banking and Fintech Conference. The following is an edited conversation between Nichols and FinXTech Head of Innovation Kelsey Weaver.

When it comes to innovation, who at the bank is or should be responsible?
Nichols: Everyone should be responsible for innovation. Anyone can lead the charge. Every banker needs to understand the basics of how a bank works–credit, deposit gathering, compliance, finance—and the same is true for innovation. Everyone within the bank should be on the lookout for how to improve a process and how to incorporate new technology. The mistake that many banks make is leaving innovation to their IT group. Technology and process improvement is democratized at CenterState so any business leader can spearhead an effort with the support of IT, compliance, management and other line staff.

What area of fintech do you think has had the most profound impact for your bank?
Nichols: Figuring out how to add value to our customer’s lives and figuring out how to become more efficient in delivering our services are two areas that all banks need to have a relentless focus on. As a metric, we want to become part of our customer’s lives once per day and want to cut our efficiency below 40 percent over time. Neither effort will be easy, but it is getting easier over time with new processes and technology.

What advice would you give to other bankers when it comes to innovation?
Nichols: Be intentional. Proactively develop a culture of innovation so experimentation is the norm and failure is just part of the process. Next, commit to improving a process. Start with creating a vision, incorporate that into an action plan, approve a budget and hold someone accountable for execution. Improving your loan process is an excellent place to start in order to deliver credit faster and cheaper. Next to cutting branch delivery costs, loan processing is the second largest functional cost for a bank. Operational leverage in these two areas is easy to obtain and can make a huge difference on the bottom line in addition to the lives of a bank’s customers.

What advice would you give to fintech companies looking to work with banks?
Nichols: It is no wonder banks have a hard time working with fintech companies. There is a disconnect on both counts. Banks need to understand the urgency and mindset of the entrepreneur while fintech need to understand the compliance and reputational risk that the bank has to be responsible for.

I can’t tell you how many times a fintech company just wants to connect to our core system or have us send over “sample customer information” as if these are simple tasks. Fintech companies need to understand that these types of requests are huge undertakings and don’t happen lightly. Vendor compliance for a start-up alone is daunting let alone entering into a beta test. At Centerstate Bank, like most banks, our customer is our most valuable asset and we are fiercely protective of both their data and their experience.

Further, we run into many fintech companies that just have not thought through their business model. We get pitched many models that just cannot work from a pricing or customer care standpoint. We will never let another fintech company aggregate our customer base or our brand value.

What other banks in your opinion are doing things right when it comes to innovation?
Nichols: We stand in awe of many banks that excel in different areas. USAA, C1 Bank, Commercial Bank of California, Citizens of Edmonds, Triumph Bank, Live Oak, Texas Bank & Trust, Austin Capital are just some of the many banks that make equal or greater progress around being innovative. We follow and learn from a great many banks.

Community Banks Collaborate on C&I Lending

lending-12-23-15.pngThe traditional community banking model, while still viable, is being challenged because of economic, competitive, technological and regulatory forces—many of which are beyond the control of any individual community bank. The largest banks have used their massive size, product set, and more recently, technology, to make dramatic gains in market share at the expense of community banks. I believe that progressive community banks should be considering new ways of doing business, especially in regards to their lending strategies.

Community banks do many things far better than their larger competitors, while enjoying a degree of trust and resiliency that the megabanks may never achieve. But those big banks boast something the community banks, standing alone, cannot match: the scale to operate the lending platforms which are now necessary in most lines of business—including commercial & industrial (C&I) lending. Many American businesses now require loan amounts of $50 million or more, a loan size that typically defines the low end of the “middle market.” Those loans required by middle market borrowers, companies providing goods and services serving a wide range of industries, far exceed the individual lending capacity of the typical community bank. The teams required to source, screen, underwrite and manage these larger loans are typically out of reach for a community bank.

To date, those megabank advantages have clearly outweighed the strengths of community banking in C&I lending. Without the ability to deliver many of the commercial loans that middle market businesses require, community banks are stuck in a quandary in which they often have to turn away customers with successful, growing businesses. The numbers are clear: In 1990, community banks with under $10 billion in assets accounted for over one-third of C&I loans held on the balance sheets of banks. By the end of 2014, community banks’ share of the C&I market has dropped to just over 15 percent of the market. The continuation of this trend will likely limit the profitability and growth of community banks as well as their ability to positively affect their communities in other lines of business. Equally important, it also subjects those banks to less diversified loan portfolios and the risk associated with loan concentrations, particularly in commercial real estate.

While each community bank may individually struggle to match the scale of the mega-banks, it is important to keep in mind that the biggest banks are saddled with their own challenges such as bureaucracy, legacy systems, resistance to change, customer fatigue and burdensome regulatory oversight.

Community banks, but for their individual lack of scale, ought to be well positioned to capitalize on these opportunities and to outcompete the megabanks. The innovation required for community banks to break this logjam—to free them to focus on their strengths—is here, and its essence is this: community banks no longer need to stand alone.

They can prosper by working together, particularly in gaining access to middle market lending. Community banks do have the scale enjoyed by the biggest banks, they just don’t have it on their own. Together, community banks hold $2.3 trillion in assets—13 percent of the assets held by US banks, and just shy of the assets of JPMorgan Chase & Co., the largest US bank. The question is how to leverage that scale while preserving the individuality, proximity to the customer and legendary service that contribute to their unique value.

Community banks should consider joining together in alliances or cooperatives in order to gain access to C&I loans, including diversified sectors such as manufacturing, healthcare, technology, and business services. In addition to using such partnerships to successfully source these loans on a national basis, other benefits such as diversification (size, geography, and industry type), access to larger customers, and combined expertise in underwriting and loan management can be achieved. One such cooperative, BancAlliance, consists of over 200 community bank members and has sourced over $2 billion in such loans.

Through partnerships such as these, community banks can succeed in delivering loans to job-creating middle market businesses throughout our country at a reasonable cost to each community bank, while adding to their net interest margin and diversifying their balance sheet.