How to Identify the Right Partner — Beyond a Solution

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The decision to outsource a function or task is often a difficult one for banks. Executives need to consider many different factors. And once they decide to outsource, the search for the perfect vendor partner begins. An array of different solution partners often exist for banks to choose, so how can executives select the right partner for their needs?

Bankers should begin by evaluating vendors by inquiring into their implementation process — not solely by reviewing their technology. The key is to ask important questions early. Implementation is often filled with pain points and obstacles that banks and their partners must address; it is easy to forget about the huge implications of implementing new technology and processes. As the bank sheds older processes, how can their new partners help them connect the dots to ensure the end result for employees and customers improves?

Before the Process Begins
Bankers may need to ask themselves some hard questions before they begin the search for a partner. This process will disrupt the current status quo. Is their organization truly ready for changes associated with an implementation?

Usually, the people making partner decisions are not the ones who will have to work with the new technology on a regular basis. Bring the day-to-day employees into the conversation early: they can provide insights about how processes work today and management can give them with a realistic understanding of what the implementation process will look like. These employees have a unique perspective that might trigger additional questions that decision-makers had not thought to ask before.

There are two discussion-driving questions bankers can ask potential vendor partners to help when deciding on which solution is going to work best for their organization.

1. How do I get from Point A to Point B?
The goal is to uncover as many pain points as possible and discuss how the potential partner will work with the bank to solve them. Every implementation is going to have challenges, but many potential vendors do not mention challenges during the sales process without direct questions from the bank. Getting a good idea of what the overall process looks like helps prepare banks for where issues may arise. Executives should ask questions like:

• How does this new process pull data or connect to user information within the core?
• Are all processes automated? Does any human intervention need to occur?
• How does the vendor update the core to keep a single source of truth?

2. How strong is your project management?
Before bankers even have these conversations with a potential partner, they need to make sure they have a good understanding of the technology and workflow changes that will happen. Similarly, bankers need to ensure that their potential partner understands the realistic impact those changes will have on the institution. Shared empathy and understanding will provide both partners with a better implementation process.

Vendors typically have their own project management methodology. It is important to learn what that is and evaluate whether or not it will work for the bank’s team. Bankers should ask questions like:

• Who does the vendor project team consist of?
• Is there a timeline of key deliverables and accountability?
• What are the typical challenges that stall similar projects?
• How does the vendor help the bank overcome these challenges?
• Can they provide a sample testing plan?

Good partners will create and communicate a realistic timeline with drop dead dates to make sure that everything remains on target. Finding a partner that will be open and honest is priceless when it comes to ensuring a smooth implementation.

At the end of the day, the bank is going through a transformation. The ultimate goal is to provide the organization or the end user with better technology or an improved experience — maybe both. Doing due diligence and asking the hard questions early prepares the bank for a better implementation process. Working to understand all the implications that come with integrating new systems and a new partner will set banks up for success and help executives choose the right partner — beyond just a solution.

Core Provider Ranking: FIS Satisfies More Bank Executives

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core-provider-12-30-16.pngBank executives don’t exactly give their core providers a ringing endorsement in Bank Director’s Core Provider Ranking, conducted in September and October 2016, particularly when it comes to these companies’ willingness to integrate with third party applications and their ability to offer innovative solutions.

Eighty-six executives, including chief executive officers, chief information officers and chief technology officers, rated the overall performance of their bank’s current core provider, and within individual categories that explored aspects of the provider’s service to the client bank, on a scale of 1 to 10, with 10 indicating the highest level of satisfaction. An average score was then calculated based on the individual ratings. Participants were not asked to rate other core providers. The executives surveyed represent banks between $100 million and $20 billion in assets. Forty percent of respondents indicate that Fiserv is their bank’s core provider, while 26 percent use FIS and 19 percent Jack Henry. Sixteen percent indicate that they use another provider.

While respondents express some disappointment in what is likely their biggest vendor relationship, one core provider does come out on top.

#1 FIS

Average overall score: 7.18

According to 67 percent of its customers, FIS, headquartered in Jacksonville, Florida, is the only core provider that keeps pace with innovations in the marketplace.

FIS has been the most active acquirer of the big three core providers. David Albertazzi, a senior analyst at Aite Group, says FIS has a great track record of acquiring and integrating innovative companies into the firm’s suite of products. Beginning in 2012, FIS has acquired six firms, according to crunchbase, a data firm that tracks the technology sector. These include two compliance solutions, a payments technology company and a mobile banking solution. Its most recent acquisition was the software firm SunGard, in 2015.

FIS features nine different core systems in the U.S. The company came out on top within all individual categories but one, rating highest for being a cost effective solution, communicating with clients about new products and updates, providing high quality support, offering innovative solutions and for the company’s willingness to integrate with third-party applications.

#2 Jack Henry & Associates

Average overall score: 6.63

Jack Henry, based in Monett, Missouri, came in just behind FIS in many of the individual categories, but rated highest of the three when it comes to being easy to contact and responsive when issues and problems arise. Albertazzi says customer service is a core tenet for the company, and Jack Henry regularly measures how well its IT and support staff are performing. Those efforts are clearly recognized in the industry.

Jack Henry offers a more streamlined product selection compared to FIS and Fiserv— according to Aite, just six core systems. Recent acquisitions include Banno, in 2014, a mobile account platform, and Bayside Business Solutions in 2015, which expanded the provider’s commercial lending suite.

#3 Fiserv

Average overall score: 4.97

Brookfield, Wisconsin-based Fiserv features 18 core systems, according to Aite—the most of the three core providers. That variety, along with its ubiquity in the banking space—Fiserv serves one-third of all U.S. banks and credit unions—may account in part for its low rating.

Client perceptions of their core provider’s performance can be muddied by several factors, including the age of their core system, says Albertazzi. The client bank may be loath to take on a conversion, and instead remain on an old system that the provider is no longer fully supporting. Bank Director did not rank individual systems, but rather the companies’ performance overall. A client running an outdated, basic core would be more apt to criticize a vendor than one using a shiny new system tailored to integrate with the latest-and-greatest fintech solution on the market.

If acquisitions have the potential to jumpstart innovation for legacy core companies, Fiserv could see a boost soon. Fiserv has been a significantly less active acquirer in recent years, compared to Jack Henry and FIS, with just one acquisition in 2013. But Fiserv recently acquired Online Banking Solutions, an Atlanta, Georgia-based provider of business banking technology, which promises to deepen Fiserv’s relationships with commercial banks.

As a group, other providers averaged a score of 6.07, just above the overall average for all providers of 6.02. One-quarter of retail banks could end up opting for startup providers for their online and mobile banking solutions by 2019, predicts Stessa Cohen, research director at Gartner, a research and advisory firm. Currently, 96 percent of banks rely on their core provider for services outside of core banking, according to Bank Director’s 2016 Technology Survey. As banks open up to other technology vendors, it’s possible they’ll lessen their dependency on the legacy core providers, and even open up to newer core solutions.

Should You Do Business With Marketplace Lenders?

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Lenders-12-9-16.pngThe shift away from the traditional banking model—largely due to technological advances and the growing disaggregation of certain bank services—has contributed to the rise of the marketplace lending (MPL) industry. The MPL industry, in particular, offers consumers and small businesses the means by which to gain greater access to credit in a faster way. MPL, despite its increasing growth, has managed to stay under the radar from regulatory oversight until recently. However, in a short span of time, federal and state regulators—the Department of the Treasury, Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC) and California Department of Business Oversight, for example—have begun to weigh the benefits and risks of MPL, with the OCC, for example, going so far as to announce its intention to grant special purpose national bank charters to fintech companies.

Given the evolving nature of the industry and its regulation, in this article, we discuss three key issues for MPL participants to consider. First, we discuss the regulatory focus on the third-party lending model. Second, we consider the potential fair lending risks. Third, we focus on considerations related to state usury requirements. We conclude with a few thoughts on what to expect in this changing landscape.

Third-Party Lending Model
The MPL model traditionally operates with three parties: the platform lender, the originating bank and investors purchasing the loans or securities. Based on the reliance on originating banks in the MPL structure, the FDIC, CFPB and others increasingly have considered the risks to banks from these third-party relationships. In particular, regulators appear to be concerned that banks may take on additional risk in these relationships, which are potentially similar to the lending model rejected by a U.S. District Court judge earlier this year when deciding CashCall was the real lender in dispute, not a tribal lender set up in South Dakota. Thus, the FDIC, for example, in its recent Guidance for Managing Third-Party Risk, asks institutions engaged in such third-party relationships to appropriately manage and oversee these third-party lenders before, during and after developing such a relationship. In addition, certain originating banks have also taken to retaining some of the credit risk to mitigate concerns that the MPL may be considered the true lender.

Fair Lending
Another potential area to consider relates to fair lending risks regarding extensions of credit in certain geographical areas, underwriting criteria and loan purchase standards. For example, the potential for fair lending risk may increase particularly with respect to the data collected on borrowers for underwriting purposes, for example, where the use of certain alternative criteria may inadvertently result in a disparate impact to protected classes. In addition, restrictions on lending areas or the types of loans sold to investors similarly could pose such issues.

State Usury Requirements
The recent Second Circuit decision in Madden v. Midland Funding LLC also highlights potential uncertainty regarding the MPL model. In Madden, the Second Circuit determined that a debt collection firm, which had purchased a plaintiff’s charged-off account from a national bank, was not entitled to the benefit of the state usury preemption provisions under the National Bank Act, despite originally being available to the originating national bank. Madden was appealed to the Supreme Court, which declined to hear the case. Thus, Madden has the potential to limit the ability for MPL firms to rely on their originating banks to avoid complying with state-by-state interest rate caps, as federal preemption would no longer apply to those loans later transferred to or acquired by such nonbank entities. Further, Madden increases the uncertainty regarding the originated loans that MPL firms may later sell to (or issue securities for) investors. While some lenders have chosen to carve out the Second Circuit (New York, Connecticut and Vermont) for lending and loan sale purposes, there is the continued risk that the decision may set a precedent in other circuits.

Conclusion
Even with the increasing scrutiny of the MPL industry, regulators appear to recognize the benefits of access to credit for borrowers. For example, the OCC, CFPB and the Treasury have indicated that any increase in regulation should be balanced with fostering innovation. This may be a potential signal on the part of regulators to adopt a framework by which financial innovation is incorporated into the traditional banking model. Thus, looking forward, we think the regulatory uncertainty in this space provides the opportunity for MPL participants to take a proactive approach in shaping regulatory policy for the industry.