How Bank Compliance Teams Can Champion Micro-Innovation

Despite the compliance group’s reputation as a dream-crushing, idea-stomping wielder of power, they actually do want to help the rest of the bank succeed in delighting customers and clients.

It’s time to approach digital transformation as the new normal for banks. The best way to do that is to get compliance teams on board early — and the best way to accomplish that is by practicing micro-innovation. Micro-innovations are incremental changes that run parallel to proven processes, allowing nimble, modern organizations to try new approaches or strategies without sapping time and attention from what’s known to work.

Jeffery Kendall, the CEO of Nymbus and my colleague, says it best: “Modern organizations know that incremental innovation at a quick pace usually wins, compared to spending years developing a single product.”

The key for banks is to start talking with compliance when the bright idea is forming — not when the work is done. When teams are on the same page from the start, compliance can be an invaluable partner that can help balance risk throughout your micro-innovation strategy.

Align Teams From the Start
Start by including front-line staff and, yes, even compliance, when it’s time to set micro-innovations in motion. Long-tenured employees can be change generators. A recent study showed that the average American customer stays with the institution connected to their primary checking account for 14 years. Chances are, some of them have a relationship with tellers and lobby staff who understand their frustrations better than anyone and can bring these insights to the planning table.

Involving compliance from the outset can uncover what’s possible, rather than just reinforcing what can’t be done. By including compliance early, you can enliven achievable possibilities through micro-innovations. Start with monthly level-setting conversations and a deep dive into what projects and initiatives are on the horizon. Include teams in product development, sales, marketing and compliance so the bank is aligned on opportunities and goals from the start.

Find the Compliance Sweet Spot
Banks face a challenging operating environment; for compliance and risk, it’s also an opportunity to innovate. To support innovation in this landscape, compliance officers can ask themselves “How can we get where we want to go?” and “Where are the boundaries?”

In reality, most of a bank’s biggest processes, procedures and inefficiencies route through the risk compliance organizations at some point. This makes compliance staff natural advocates for change. Because they own the processes, empowered compliance officers are well positioned to understand nuance and identify opportunities for improvement and change.

Siya Vansia, chief brand and innovation officer at ConnectOne Bancorp in Englewood Cliffs, New Jersey, notes that when she stepped into her role, she “stopped hiring for innovation” and “started building internal advocates.” By working with compliance and others throughout the organization, Vansia creates a culture of innovation that looks for opportunities instead of tallying roadblocks.

With 70% of banks saying the Great Resignation has challenged their ability to carry out compliance requirements, some are considering unconventional hiring to fill jobs. As your institution prepares for 2023, prioritize retention and employee satisfaction to retain the talent you have on hand.

Digitize Progress, Not Inefficiencies
It can be tempting for banks to build an app and migrate longstanding inefficiencies onto a new digital platform. That’s a missed opportunity for positive change and customer loyalty.

“The future is about making banking better and connected, not simply having a cool app with a lot of features,” says Corey LeBlanc, cofounder and chief operating and chief technology officer of Fort Lauderdale, Florida-based Locality Bank.

As your institution identifies targets for micro-innovations, examine existing processes to ensure they still fit what your customers need and want. Look for opportunities to remove inefficient and cumbersome practices and simplify the customer experience. Even one or two steps in a process can add up over a customer journey; incremental improvements can have a significant impact on satisfaction. Compliance here can be a tool to identify inefficient processes. Leverage these same techniques to assess your people, resources and strategies. Start now with small changes that can have an innovative impact right away.

Your bank’s compliance office doesn’t have to be a “no” factory. Compliance teams can help banks build delightful experiences that matter to their customers — especially when they’re aligned on solving the problem from the start.

It can be daunting to assemble a 2023 strategic plan that hits the key performance indicators, solves the issues and makes digital a reality — all at once. So don’t. Instead, divide and conquer with micro-innovations that allow your institution to take small and mighty steps toward growth and change without delay.

Maximizing Profitability Potential Via Push Notifications

Implementing digital fintech solutions is critical for banks seeking to grow their customer base and maximize profitability in today’s increasingly competitive industry.

To engage account holders, banks must explore digital-first communication strategies and mobile-friendly fintech products. Push notifications are an often overlooked, yet powerful, tool that enables financial institutions to proactively deliver important messages to account holders that earn higher engagement rates than traditional communication methods.

Push notifications are delivered directly through a banking app and sent to account holders’ mobile devices and can provide timely alerts from a financial provider. While push notifications can act as a marketing tool, they can also convey critical security alerts via a trusted communication channel — as opposed to mediums that are vulnerable to hacks or spoofing, such as email or SMS texts. Push notifications can be used for personalized promotional offers or reminders about other financial services, such as bill pay or remote check deposit, transaction and application status updates, financial education and support messaging, local branch and community updates and more.

Banks can also segment push notifications using geo-location technology, as long as customers get permission, to alert account holders at a time, place and setting that is best suited to their needs. Banks can customize these notifications to ensure account holders receive messages notifying them of services that are most relevant to their financial needs.

When leveraged effectively, push notifications are more than simple mobile alerts; they’re crucial tools that can significantly increase account holder engagement by nearly 90%. Push notifications can be more effective in reaching account holders compared to traditional marketing methods like email or phone calls and receive engagement rates that are seven times higher.

Boosting customer engagement can ultimately have a significant impact on a bank’s profitability. Studies show that fully engaged retail banking customers bring in 37% more annual revenue to their bank than disengaged customers. Enhancing ease of use while offering greater on-demand banking services that consumers want, banks can leverage push notifications to encourage the use of their banking apps. Enabling push notifications can result in a 61% app retention rate, as opposed to a rate of 28% when financial providers do not leverage push notifications.

Bank push notifications come at a time when consumer expectations for streamlined access to digital banking services have greatly accelerated. In a study, mobile and online access to bank accounts was cited by more than 95% of respondents as a prioritized banking feature.

This focus forces financial institutions to explore fintech solutions that will elevate their customers’ digital experience. Traditional institutions that fail to innovate risk a loss of market or wallet share as customers migrate to technologically savvy competitors. U.S. account holders at digital-only neobanks is expected to surge, from a current 29.8 million to 53.7 million by 2025.

Banks should consider adding effective mobile fintech tools to drive brand loyalty and reduce the threat of lost business. Push notifications are a unique opportunity for banks to connect with their audience at the right moments through relevant messaging that meets individual account holder needs.

Real-time and place push notifications can also be a way for banks to strengthen their cross-selling strategies with account holders. They can be personalized in a predictive way for account holders so that they only offer applicable products and services that fit within a specific audience’s needs. This customization strategy can drive revenue while fostering account holder trust.

To gain insight on account holders’ financial habits and goals, institutions can track user-level data and use third-party services to tailor push notifications about available banking services for each account holder. Institutions can maximize the engagement potential of each offer they send by distributing contextually relevant messaging on services or products that are pertinent to account holder’s financial needs and interests.

Push notifications are one way banks are moving toward digital-first communication strategies. Not only do push notifications offer a proactive way to connect with account holders, they also provide financial institutions with a compelling strategic differentiator within the banking market. Forward-looking financial institutions can use mobile alerts to strengthen account holder relationships, effectively compete, grow their customer base and, ultimately, maximize profitability.

FinXTech’s Need to Know: Cash Flow

This article is the second in a series focusing on small business banking financial technology. The first covers accounts payable technology and can be found here.

There are 33.2 million small businesses in the United States. With a looming recession, many may soon be looking for ways to lower their budgets, be it by reducing staff, cutting back on hours or even terminating contracts with other vendors. The median small business holds only 27 days of cash on hand, according to a 2016 study from the JPMorgan Chase Institute — an amount that could be challenged by the changing economic state.

Financial institutions should see cash flow management as an opportunity to provide their small business customers with integrated products and services they used to go elsewhere for.

Business owners decide where, when and how to invest and spend revenue after tallying bills, employee hours and balance sheets. They now have modern tools and ways to leverage third-party softwares to automate their balances.

Banks can provide this software to their small business customers, and they don’t have to start from scratch: They can turn to a fintech partner.

Here are three fintechs that could satiate this software need.

Boston-based Centime launched its Cash Flow Control solution in partnership with $26 billion First National Bank of Omaha in 2019. Centime gathers accounts receivable and accounts payable data to provide accurate, real-time forecasts to business customers. Any bank can integrate the solution as an extension of their online banking or treasury management services.

Banks can profit off of these cash flow products, too. Small business customers have access to a direct credit line through the analytics platform. And in a still rising interest rate environment, expanding the lending portfolio will be crucial to a bank. Banks that offer Cash Flow Control to their business customers can play a strategic role in their clients’ cash flow control cycle, gain visibility into their finances and provide streamlined access to working capital loans and lines of credit.

Centime states that it works best with banks with more than $1 billion in assets.

Cash flow solutions can also provide essential insight into current and projected business performance for a bank’s own purposes. Less than 50% of banks said that not effectively using and/or aggregating their data was one of their top concerns in Bank Director’s 2022 Technology Survey. Data segmented into business verticals could shed light into what businesses need from their banks and when they need it.

Monit from Signal Finance Technologies is another cash flow forecasting and analytics solution available to small businesses. Monit aggregates data from the small business’s accounting software, like QuickBooks, Xero or FreshBooks, along with data inputs from the business owner. The projections are dynamic: Business owners can dive deeper into exact factors that influence anticipated dips in cash flow. They can also model alternative scenarios to find ways to avoid the shortfall.

Using the projections, Monit provides business owners with suggestions for the future success of their business, such as opening a new line of credit or slowing down on hiring.

Accessing business data and the third-party apps that house it is another way to strengthen a bank’s understanding of their business clients, as well as indicate how, where and when to help them. UpSWOT’s data portal could be the right solution for a bank looking to gather better data on their business customers and connect with the third-parties that house it.

UpSWOT uses application programming interfaces, or APIs, to collect data from over 150 business apps and provide key performance indicators, marketing data and actionable insights to both bank and business users. It can even notify a bank about a small business client’s activity such as new hires, capital purchases like real estate or vehicles, payment collection and accounts receivable, financial reporting and tax information.

The upSWOT portal also creates personalized marketing and sales dashboard, which bankers can use to anticipate their business clients’ needs before their balance sheets do.

Essential to every single one of the more than 30 million small businesses in the U.S. is cash. And without the ability to effectively forecast and manage it, these small businesses will fail. Banks can help them flourish with the aid of fintech partners.

Centime, Monit and upSWOT are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.

What to Consider as Regulators Scrutinize Bank-Fintech Partnerships

Fintech partnerships, specifically banking as service arrangements, are changing the risk profile at community banks and require heightened risk management from executives and the board.

Banking as a service has evolved from the niche domain of certain community banks to a business line facilitated by software. The growth of the industry, and its concentration among small banks, has attracted the attention of the Office of the Comptroller of the Currency, and its Acting Comptroller Michael Hsu. Experts say that community banks should respond by increasing their due diligence and strengthening their risk management oversight, practices and processes ahead of potentially more scrutiny from regulators.

“The growth of the fintech industry, of [banking as a service] and of big tech forays into payments and lending is changing banking, and its risk profile, in profound ways,” Hsu said in prepared remarks at a conference hosted by The Clearing House and the Bank Policy Institute in New York City in September. 

Banking as a service leverages an institution’s charter so a nonbank partner can offer banking products or services to customers. It creates a series of layers: A bank services a fintech, who offers products to a business or individual. And increasingly, the connection between the fintech and the bank is facilitated, partially or completely, by software that is in the middle of the fintech and bank relationship, called middleware. 

One company that makes such an operating system is Treasury Prime, where Sheetal Parikh works as associate general counsel and vice president of compliance solutions. 

“We’ve learned how to become more efficient; we have a lot of these banks with antiquated technology systems and cores that can’t necessarily get fintech companies or customers to market as quickly as maybe they could,” says Parikh.  

While software and operating systems can make the onboarding and connections easier between the parties, it doesn’t ease the regulatory burden on banks when it comes to vendor due diligence and customer protections. A bank can delegate different aspects and tasks within risk management and fraud detection and prevention, but it can’t outsource the responsibility.

“The banks that do it [banking as a service] well have constant engagement with their fintechs,” says Meg Tahyar, co-head of Davis Polk’s financial institutions practice and a member of its fintech team. “You need someone at the end to hold the bag – and that’s always the bank. So the bank always needs to have visibility and awareness functions.” 

Even with middleware, running a rigorously managed, risk-based BaaS program in a safe and sound manner is “operationally challenging” and “a gritty process,” says Clayton Mitchell, Crowe LLP’s managing principal of fintech. The challenge for banks adding this business line is having a “disciplined disruption” approach: approaching these partnerships in an incremental, disciplined way while preparing to bolster the bank’s risk management capabilities.

This can be a big ask for community institutions — and Hsu pointed out that banking as a service partnerships are concentrated among small banks; in his speech, he mentioned an internal OCC analysis that found “least 10 OCC-regulated banks that have BaaS partnerships with nearly 50 fintechs.” The found similar stats at banks regulated by the Federal Reserve and FDIC; most of the banks with multiple BaaS partnerships have less than $10 billion in assets, with a fifth having less than $1 billion.

Tahyar says she doesn’t believe Hsu is “anti-banking as a service” and he seems to understand that community banks need these partnerships to innovate and grow. But he has a “sense of concern and urgency” between fintech partnerships today and parallels he sees with the 2007 financial crisis and Great Recession, when increasing complexity and a shadow banking system helped create a crisis.  

“He understands what’s happening in the digital world, but he’s ringing a bell, saying ‘Let’s not walk into this blindly,’” she says. “It’s quite clear that [the OCC] is going to be doing a deep dive in examinations on fintech partnerships.”

To start addressing these vulnerabilities and prepare for heightened regulatory scrutiny, banks interested in BaaS partnerships should make sure the bank’s compliance teams are aligned with its teams pushing for innovation or growth. That means alignment with risk appetite, the approach to risk and compliance and the level of engagement with fintech partners, says Parikh at Treasury Prime. The bank should also think about how it will manage data governance and IT control issues when it comes to information generated from the partnership. And in discussions with prospective partners, bank executives should discuss the roles and responsibilities of the parties, how the partnership will monitor fraud or other potential criminal activity, how the two will handle customer complaints. The two should make contingency plans if the fintech shuts down. Parikh says that the bank doesn’t have to perform the compliance functions itself — especially in customer-facing functions.  But the bank needs strong oversight processes. 

OCC-regulated banks engaged in fintech partnerships should expect more questions from the regulator. Hsu said the agency is beginning to divide and classify different arrangements into cohorts based on their risk profiles and attributes. Fintech partnerships can come in a variety of shapes and forms; grouping them will help examiners have a clearer focus on the risks these arrangements create and the related expectations to manage it.

What is clear is that regulators believe banking as a service, and fintech partnerships more broadly, will have a large impact on the banking industry — both in its transformation and its potential risk. Hsu’s speech and the agency’s adjustments indicate that regulatory expectations are formalizing and increasing. 

“There is still very much a silver lining to this space,” says Parikh. “It’s not going anywhere. Risk isn’t all bad, but you have to understand it and have controls in place.”

How Bank Executives Can Address Signs of Trouble

As 2021’s “roaring” consumer confidence grinds to a halt, banks everywhere are strategizing about how best to deal with the tumultuous days ahead.

Jack Henry’s annual Strategic Priorities Benchmark Study, released in August 2022, surveyed banks and credit unions in the U.S. and found that many financial institutions share the same four concerns and goals:

1. The Economic Outlook
The economic outlook of some big bank executives is shifting. In June 2022, Bernstein Research hosted its 38th Annual Strategic Decisions Conference where some chief executives leading the largest banks in the U.S., including JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley, talked about the current economic situation. Their assessment was not entirely rosy. As reported by The New York Times, JPMorgan Chase Chairman and CEO Jamie Dimon called the looming economic uncertainty a “hurricane.” How devastating that hurricane will be remains a question.

2. Hiring and Retention
The Jack Henry survey also found 60% of financial institution CEOs are concerned about hiring and retention, but there may be some hope. A 2022 national study, conducted by Alkami Technology and The Center for Generational Kinetics, asked over 1,500 US participants about their futures with financial institutions. Forty percent responded they are likely to consider a career at a regional or community bank or credit union, with significant portion of responses within the Generation Z and millennial segments.

3. Waning Customer Loyalty
The imperative behind investing in additional features and services is a concern about waning customer loyalty. For many millennials and Gen Z bank customers, the concept of having a primary financial institution is not in their DNA. The same study from above found that 64% of that cohort is unsure if their current institution will remain their primary institution in the coming year. The main reason is the ease of digital banking at many competing fintechs.

4. Exploding Services and Payment Trends
Disruptors and new competition are entering the financial services space every day. Whether a service, product or other popular trend, a bank’s account holders and wallet share are being threatened. Here are three trends that bank executives should closely monitor.

  • The subscription economy. Recurring monthly subscriptions are great for businesses and convenient for customers: a win-win. Not so much for banks. The issue for banks is: How are your account holders paying for those subscriptions? If it’s with your debit or credit card, that’s an increased source of revenue. But if they’re paying through an ACH or another credit card, that’s a lost opportunity.
  • Cryptocurrency. Your account holders want education and guidance when it comes to digital assets. Initially, banks didn’t have much to do with crypto. Now, 44% of execs at financial institutions nationwide plan to offer cryptocurrency services by the end of 2022; 60% expect their clients to increase their crypto holdings, according to Arizent Research
  • Buy now, pay later (BNPL). Consumers like BNPL because it allows them to pay over time; oftentimes, they don’t have to go through a qualification process. In this economy, consumers may increasingly use it to finance essential purchases, which could signal future financial trouble and risk for the bank.

The Salve for It All: The Application of Data Insights
Banks need a way to attract and retain younger account holders in order to build a future-proof foundation. The key to dealing with these challenges is having a robust data strategy that works around the clock for your institutions. Banks have more data than ever before at their disposal, but data-driven marketing and strategies remains low in banking overall.

That’s a mistake, especially when it comes to data involving how, when and why account holders are turning to other banks, or where banks leave revenue on the table. Using their own first-party data, banks can understand how their account holders are spending their money to drive strategic business decisions that impact share of wallet, loyalty and growth. It’s also a way to identify trouble before it takes hold.

In these uncertain economic times, the proper understanding and application of data is the most powerful tool banks can use to stay ahead of their competition and meet or exceed account holder expectations.

How Legacy Systems, Tech Hold Bank Employees Back

The recent explosion in financial technology firms has allowed banks to make massive strides in improving the customer experience.

The most popular solutions have focused on making processes and services faster and easier for customers. For example, Zelle, a popular digital payments service, has improved the payments process for bank customers by making transfers immediate — eliminating the need to wait while those funds enter their checking account. There are countless examples of tools and resources that improve the bank customer experience, but the same cannot be said for the bank staffers.

Bank employees often use decades-old legacy systems that require weeks or months of training, create additional manual work required to complete tasks and do not communicate with each other. Besides creating headaches for the workers who have to use them, they waste time that could be better spent meaningfully serving customers.

The Great Resignation and tight labor market has made it difficult to find and retain workers with adequate and appropriate experience. On top of that, bankers spend significant amounts of time training new employees on how to use these complicated tools, which only exacerbates problems caused by high turnover. The paradox here is that banks risk ultimately disengaging their employees, who stop using most of the functionality provided by the very tools that their bank has invested in to help them work more efficiently. Instead, they revert to over-relying on doing many things manually.

If bank staff used tools that were as intuitive as those available to the bank’s customers, they would spend less time in training and more time connecting with customers and delivering valuable services. Improvements to their experience accomplishes more than simply making processes easier and faster. As it stands now, bank teams can spend more time than desired contacting customers, requesting documents and moving data around legacy systems. This manual work is time-consuming, robotic and creates very little profit for the bank.

But these manual tasks are still important to the bank’s business. Bankers still need a way to contact customers, retrieve documents and move data across internal systems. However, in the same way that customer-facing solutions automate much of what used to be done manually, banks can utilize solutions that automate internal business processes. Simple, repetitive tasks lend themselves best to automation; doing so frees up staff to spend more of their time on tasks that require mental flexibility or close attention. Automation augments the workers’ capabilities, which makes their work more productive and leads to a better customer experience overall.

There are good reasons to improve the experience of bank employees, but those are not the only reasons. Quality of life enhancements are desirable on their own and create a greater opportunity for employees to serve customers. When deciding which tools to give your staff, consider what it will be like to use them and how effectively they can engage customers with them.

Asking the Right Questions About Your Bank’s Tech Spend

Bank Director’s 2022 Technology Survey, sponsored by CDW, finds 81% of bank executives and board members reporting that their technology budget increased compared to 2021, at a median of 11%. Much of this, the survey indicates, ties to the industry’s continued digitization of products and services. That makes technology an important line item within a bank’s budget — one that enables bank leaders to meet strategic goals to serve customers and generate organizational efficiencies.

“These are some of the biggest expenditures the bank is making outside of human capital,” says John Behringer, risk consulting partner at RSM US LLP. The board “should feel comfortable providing effective challenge to those decisions.” Effective challenge references the board’s responsibility to hold management accountable by being engaged, asking incisive questions and getting the information it needs to provide effective oversight for the organization.  

Banks budgeted a median $1 million for technology in 2022, according to the survey; that number ranged from a median $250,000 for smaller banks below $500 million in assets to $25 million for larger banks above $10 billion. While most believe their institution spends enough on technology, relative to strategy, roughly one-third believe they spend too little. How can boards determine that their bank spends an appropriate amount?

Finding an apples to apples comparison to peers can be difficult, says Behringer. Different banks, even among peer groups, may be in different stages of the journey when it comes to digital transformation, and they may have different objectives. He says benchmarking can be a “starting point,” but boards should delve deeper. How much of the budget has been dedicated to maintaining legacy software and systems, versus implementing new solutions? What was technology’s role in meeting and furthering key strategic goals? 

A lot of the budget will go toward “keeping the lights on,” as Behringer puts it. Bank of America Corp. spends roughly $3 billion annually on new technology initiatives, according to statements from Chairman and CEO Brian Moynihan — so roughly 30% of the bank’s $11 billion total spend.

For banks responding to the survey, new technology enhancements that drive efficiencies focus on areas that keep them safe: For all banks, cybersecurity (89%) and security/fraud (62%) were the top two categories. To improve the customer experience, institutions have prioritized payments capabilities (63%), retail account opening (54%), and consumer or mortgage lending (41%).

Benjamin Wallace says one way board members can better understand technology spend is to break down the overall technology cost into a metric that better illustrates its impact, like cost per account. “For every customer that comes on the board, on average, let’s say $3.50, and that includes the software, that includes the compensation … and that can be a really constructive conversation,” says Wallace, the CEO of Summit Technology Group. “Have a common way to talk about technology spend that you can look at year to year that the board member will understand.”

Trevor Dryer, an entrepreneur and investor who joined the board of Olympia, Washington-based Heritage Financial Corp. in November 2021, thinks boards should keep the customer top of mind when discussing technology and strategy. “What’s the customer’s experience with the technology? [W]hen do they want to talk to somebody, versus when do they want to use technology? When they do use technology, how is this process seamless? How does it align with the way the bank’s positioning itself?” If the bank sees itself as offering high-touch, personal service, for example, that should be reflected in the technology.

And the bank’s goals should drive the information that floats back to the boardroom. Dryer says $7.3 billion Heritage Financial has “great dashboards” that provide important business metrics and risk indicators, but the board is working with Chief Technology Officer Bill Glasby to better understand the impact of the bank’s technology. Dryer wants to know, “How are our customers interacting with our technology, and are they liking it or not? What are the friction points?” 

Some other basic information that Behringer recommends that bank leaders ask about before adopting new technology include whether the platform fits with the current infrastructure, and whether the pricing of the technology is appropriate. 

Community banks don’t have Bank of America’s $11 billion technology budget. As institutions increase their technology spend, bank leaders need to align adoption with the bank’s strategic priorities. It’s easy to chase fads, and be swayed to adopt something with more bells and whistles than the organization really needs. That distracts from strategy, says Dryer. “To me, the question [banks] should be asking is, ‘What is the problem that we’re trying to solve for our customers?’” Leadership teams and boards that can’t answer that, he says, should spend more time understanding their customers’ needs before they go further down a particular path. 

The best companies leverage technology to solve a business problem, but too many management teams let the tail wag the dog, says Wallace. “The board can make sure — before anyone signs a check for a technology product — to press on the why and what’s driving that investment.” 

Forty-five percent of respondents worry that their bank relies too heavily on outdated technology. While the board doesn’t manage the day-to-day, directors can ask questions in line with strategic priorities. 

Ask, “’Are we good at patching, or do we have a lot of systems where things aren’t patched because systems are no longer supported?’” says Behringer. Is the bank monitoring key applications? Have important vendors like the core provider announced sunsets, meaning that a product will no longer be supported? What technology is on premises versus hosted in the cloud? “The more that’s on prem[ises], the more likely you’ve got dated technology,” he says.

And it’s possible that banks could manage some expenses down by examining what they’re using and whether those solutions are redundant, a process Behringer calls “application rationalization.” It’s an undertaking that can be particularly important following an acquisition but can be applied just as easily to organic duplication throughout the organization. 

A lack of boardroom expertise may have members struggling to have a constructive conversation around technology. “Community bank boards may not have what we would consider a subject matter expert, from a technology standpoint,” says Behringer, “so they don’t feel qualified to challenge.” 

Heritage Financial increased the technology expertise in its boardroom with the additions of Dryer and Gail Giacobbe, a Microsoft executive, and formed a board-level technology committee. Dryer led Mirador, a digital lending platform, until its acquisition by CUNA Mutual Group in 2018. He also co-founded Carbon Title, a software solution that helps property owners and real estate developers understand their carbon impact. 

Experiences like Dryer’s can bring a different viewpoint to the boardroom. A board-level tech expert can support or challenge the bank’s chief information officer or other executives about how they’re deploying resources, whether staffing is appropriate or offer ideas on where technology could benefit the organization. They can also flag trends that they see inside and outside of banking, or connect bank leaders to experts in specific areas. 

“Sometimes technology can be an afterthought, [but] I think that it’s a really critical part of delivering banking services today,” says Dryer. “With technology, if you haven’t been in it, you can feel like you’re held captive to whatever you’re being told. There’s not a really great way to independently evaluate or call B.S. on something. And so I think that’s a way I’ve been trying to help provide some value to my fellow directors.”  

Less than half of the survey respondents say their board has a member who they’d consider a tech expert. Of the 53% of respondents who say their board doesn’t have a tech expert, just 39% are seeking that expertise. As a substitution for this knowledge, boards could bring in a strategic advisor to sit in as a technologist during meetings, says Wallace. 

On the whole, boards should empower themselves to challenge management on this important expense by continuing their education on technology. As Wallace points out, many boards play a role in loan approvals, even if most directors aren’t experts on credit. “They’re approving credit exposure … but they would never think to be in the weeds in technology like that,” he says. “Technology probably has equal if not greater risk, sometimes, than approving one $50,000 loan to a small business in the community.”

The ways in which banks leverage technology have been featured recently in Bank Director magazine. “Confronting the Labor Shortage” focuses on how M&T Bank Corp. attracts and trains tech talent. “Community Banks Enter the Venture Jungle” examines bank participation in fintech funds; a follow-up piece asks, “Should You Invest in a Venture Fund?”  Some institutions are evaluating blockchain opportunities: “Unlocking Blockchain’s Power” explores how Signature Bank, Customers Bancorp and others are leveraging blockchain-based payments platforms to serve commercial customers; risk and compliance considerations around blockchain are further discussed in the article, “Opportunities — and Questions — Abound With Blockchain.” 

Technology is an important component of a bank’s overall strategy. For more information on enhancing strategic discussions, consider viewing “Building Operational Resiliency in the Midst of Change” and “Board Strategic Leadership,” both part of Bank Director’s Online Training Series.   

Bank Director’s 2022 Technology Survey, sponsored by CDW, surveyed 138 independent directors, chief executive officers, chief operating officers and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. Bank Services members have exclusive access to the complete results of the survey, which was conducted in June and July 2022. 

7 Key Actions for Banks Partnering With Fintechs

A longer version of this article can be read at RSM US LLP.

Many banks are considering acquiring or partnering with existing fintechs to gain access to cutting-edge technologies and remain competitive in the crowded financial services marketplace.

There are many advantages to working with fintech partners to launch newer services and operations, but failing to properly select and manage partners or new acquisitions can have the opposite effect: additional risks, unforeseen exposures and unnecessary costs. Partnership opportunities may be a focus for leadership teams, given the significant growth and investments in the fintech space over the last decade. Consumer adoption is up: 88% of U.S. consumers used a fintech in 2021, up from 58% in 2020, according to Plaid’s 2021 annual report; conventional banks’ market share continues to drop.

Planning is everything when partnering with or acquiring a fintech company. Here are seven key actions and areas of consideration for banks looking for such partnerships.

1. Understand your customers on a deeper level: The first step before considering a fintech partner or acquisition is to understand what your consumers truly want and how they want those services delivered. Companies can pinpoint these needs via surveys, customer focus groups, call centers or discussions and information-gathering with employees.

Organizations should also explore the needs of individuals and entities outside their existing customer bases. Gathering data that helps them learn about their customers’ needs, lifestyle preferences and behaviors can help banks pinpoint the right technology and delivery channel for their situation.

2. Understand leading-edge technological advancements: While fintech partnerships can give a traditional bank access to new cutting-edge technologies, leaders still need to understand these technologies and the solutions. This might involve helping teams gain fluency in topics such as artificial intelligence that can improve credit decisioning, underwriting processes and fraud detection, automation that speeds up service delivery responses and customer onboarding, data analysis and state-of-the-art customer relationship management tools and more.

3. Prepare for culture shock: Fintechs, particularly those in start-up mode, will be used to operating at a different pace and with a different style than typical banks. Fintechs may behave more entrepreneurially, trying many experiments and failing often and fast. This entrepreneurial mindset has implications for how projects are organized, managed, measured, staffed and led.

4. Take a 360-degree view of risk: Fintechs may not have been subject to the same strict compliance as banks, but as soon as they enter a partnership, they must adhere to the same standards, regulations and controls. Any technology-led, third-party partnership comes with the potential for additional risks in areas such as cybersecurity, data privacy, anti-money laundering and myriad other regulatory compliance risks. Banks need to have a solid understanding of the viability and soundness of the fintech they might partner with, as well as the strength and agility of the leadership team. They should also ensure the new relationship has adequate business continuity and disaster recovery plans.

From vendor selections and background checks to mutual security parameters and decisions around where servers will be located, all potential exposures are important for banks to assess. A new fintech relationship could open new avenues for outside threats, information breaches and reputation damage.

5. Don’t underestimate the management lift needed:Acquiring or partnering with a fintech or third-party vendor involves significant management work to meet customer needs, keep implementation costs in line and merge technologies to ensure compatibility between the two organizations.

Employees at each company will likely have different approaches to innovation, which is one of the major benefits of teaming up with a fintech company; your organization can rapidly gain access to cutting-edge technologies and the overall agility of a startup. But management needs to ensure that this union doesn’t inadvertently create heartburn among employees on both sides.

6. Build ownership through clear accountability and responsibility: A fintech partnership requires management and oversight to be effective. Banks should consider the ownership and internal staffing requirements needed to achieve the full value of their investment with a fintech organization.

Don’t underestimate the time and effort needed to develop and deploy these plans. Based on the automation levels of the solution implemented, these resources may need dedicated time on an ongoing basis for the oversight and operations of the solution as well.

7. Stick to a plan:While in a hurry to launch a service, leadership teams may gloss over the whole steps of the plan and critical items may fall off. To combat this, banks should have a robust project plan that aligns with the overall innovation strategy and clear definitions around who is responsible for what. A vendor management program can help with this, along with strategic change management planning.

Balancing the demands of innovation with a thorough and thoughtful approach that considers customer behaviors, risks, resources and plans for new solutions will make fintech partnerships go as smooth as possible. Institutions would do well to incorporate these seven key areas throughout the process of a potential third-party partnership to ensure the maximum return on investment.

FinXTech’s Need to Know: Construction Lending

Demand for housing hit a high unlike any other during the pandemic. While demand grew, the number of acquisition, development and construction (ADC) loans in bank portfolios grew parallel alongside it. Construction and development loans at community banks increased 21.2% between the first quarter of 2021 and the first quarter of 2022, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.

As a subset of the commercial real estate (CRE) lending space, banks are accustomed to the timely process that construction lending requires. But are banks prepared for the influx of risk that can accompany this growth?

Mitigating construction risk is a bit like attempting to predict the future: Banks not only have to evaluate creditworthiness, but they also have to predict what the project will be worth upon completion. With another interest rate hike expected later this month, being able to accurately price projects is becoming more complicated — and more vital.

Here are three ways financial technology companies can help banks in their attempt to fund more ADC projects.

Software can automate the drawing process. Construction lending features the unique ability for builders to “draw” cash from their loan throughout the project. Spacing out the draw schedule protects banks from losing large amounts of money on projects that go cold, and also allows proper due diligence and inspection to be on rotation.

CoFi — formerly eDraw — specifically focuses on this process. Bank associates access all budgets, invoices, approvals and construction draw records in one web-based system. The bank’s borrowers and builders also can access the software through customer-facing accounts. A builder requests funds by uploading invoices, and CoFi then notifies the bank that their approval is required for the funds to be disbursed.

Once the bank approves the disbursement, the borrower is notified. Banks can also dispatch inspectors to the property using CoFi. After confirming that construction progress is in line with the draw requests, the inspector can upload their report directly into CoFi. With all of the proper approvals in place, the bank can release funds for the payment request. All actions and approvals are tracked in a detailed, electronic audit trail.

CoFi also has a construction loan marketplace banks can plug into.

Multiple parties and industries can collaborate in real time through web-based solutions Nashville-based Built Technologies operates as a construction administration portal, coordinating interactions and transactions between the bank, the borrower, the contractor, third-party inspectors and even title companies in one location. 

Legacy core banking technology wasn’t designed to completely support construction loans, which moved the tracking of these types of loans into spreadsheets. Built’s portal eliminates the need for these one-way spreadsheets. The moment a construction loan is closed, instead of a banker creating a spreadsheet with a specific draw budget, they can design one digitally in Built and reconcile it throughout the duration of the project.

Builders can even request draws from their loan through their phones, using Built’s mobile interface. 

Fintechs can better monitor portfolios, identify errors and alert banks of risk areas, compared to manual review only. ADC loans are fraught with intricate details, including valuations that fluctuate with the market — details that can’t always be caught with human eyes.

Rabbet uses machine learning and optical character recognition (OCR) when reviewing documents or information that is inputted to its platform, the Contextualized Construction Draw format (CCDF). It also continually monitors and flags high-risk situations or details for borrowers, including overdrawn budgets, liens or approvals. Any involved party — developer, builder or bank — can input budget line items into the platform. Rabbet then links relevant supporting documents or important metrics to that item, which is information that is typically difficult for lenders to track and verify.

Storing loan calculations and documents in one place can translate to faster confirmations for borrowers and easier reconciliation, reporting and auditing for the bank.

In July 2022, Built announced the release of its own contractor and project monitoring solution, Project Pro. The technology helps banks keep track of funds, identify risk areas such as missing liens or late payments, and stay on top of compliance requirements.

Banks with a heavy percentage of construction loans on their balance sheet need to keep notice of all elements attached to them, especially in a rapidly changing economic environment. Technology can alleviate some of that burden.

CoFi, Built Technologies and Rabbet are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.