Competitive to Collaborative: How Fintech Works With Banks and Not Against Them


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Over the past two decades alone, the advent of new technologies has undeniably changed the way we communicate, work, travel, invest, shop and more. This has forced traditional financial institutions to adopt more efficient and modern business models. It comes as little surprise, then, that the banking industry—long renowned for its staid, traditionalist approach to business—is ripe for disruption, operates under significant financial pressure and is subject to renewed scrutiny as a result of the liquidity spiral of 2008. Enter fintech.

Fintech has come a long way since Peter Knight, a business editor at the United Kingdom’s Sunday Times, first coined the term back in the 1980s, and since early entrant PayPal first revolutionized electronic payments. In its most current iteration (circa 2007, give or take), fintech emerged as a knight in shining armor: a disruptive force ready to save us all from those —evil’ financial institutions deemed responsible for the Great Recession.

Much has changed since 2007 and it seems that, as many predicted, banks, alternative lenders and fintech companies have come full circle in how they view each other relative to the ecosystem they occupy—from perceived partners, to “frenemies” (companies that cooperate for the mutual benefit despite competing in the same industry niche) and enemies (companies that compete in the same industry niche), then back to perceived partners. An increasing number of these actors have been adopting a more collaborative rather than adversarial approach, recognizing the overlap in business objectives in everyone’s self-interest. This can be seen as an extremely positive thing; partnerships with fintech companies can provide financial institutions with the ability to serve new segments, engage new customers and expand business with efficient technological solutions.

Bottom line, when banks and fintech companies work together, they are able to bring products to market quickly and seamlessly, all while providing a significantly enhanced client experience.

But what is behind this paradigm shift? There are three main factors driving this new wave of collaboration:

The Competitive Landscape
Beholden to prohibitively complex and cumbersome financial regulations, banks have seen significant consolidation and increasing competition over the past 40 years. They responded in large part by rebalancing their business models from a strict asset transformation approach, to blended fee-based models. Now, however, when fintech and banks collaborate, they’re able to not only leverage the resources of banks, but also leverage fintech’s nimbleness in order to effectively and expediently bring products to market. Data has exposed many previously underserved market opportunities, long overlooked due to bloated cost structures riddled with antiquated IT infrastructures and heavily layered processes, impeded further by the highly siloed nature of financial institutions’ operational structures.

Traditional Customer Service Role Has Changed
Traditional banks, be they large too-big-to-fail banks or regional and community banks and credit unions, have a strong position not only from a capital perspective, but also from a customer vantage point—they have records of all of their customers’ information. This is an important distinction between traditional and well-established institutions versus new alternative finance companies—banks would have a much lower cost of customer acquisition when compared to alternative lenders that face massive marketing expenditures.

The traditional role of the bank is to take in and manage deposits, allocate that capital and service a traditional portfolio with traditional loan parameters. Banks lend, borrow and ultimately help keep money in circulation. However, unless there is commitment by senior management at these financial institutions to adapt modern technologies, success is unlikely for traditional financial institutions.

Innovation Overdue
Lastly, driven by the competitive landscape, banks seem to have recognized that they are not viewed as bastions of innovation. Many are responding accordingly by teaming up with fintech companies that are well-positioned to steer them forward into the digital age. Deals between traditional financial institutions and alternative lenders and fintech players (like JP Morgan and OnDeck or Kabbage and Santander) are illustrative of the complementary and mutually beneficial qualities that players in banking and fintech bring to the table.

These factors, in combination, will likely result in an ecosystem of fintech companies assuming 25-30 percent, if not more, of the current banking system’s value chain. Catering to both traditional and alternative financial institutions, fintech companies enable banks to focus on their individual core competencies by offering expanding toolkits of services from origination (customer acquisition and digital onboarding) to underwriting and portfolio management (know your customer, otherwise known as KYC, anti-money laundering compliance, predictive data analytics and loan management).

The financial ecosystem is changing regardless of how market participants feel. Change is the only certainty, after all. Survivors will adapt by leveraging technological innovation through fintech partnerships, creating significant value for customers and the company itself. Those that don’t will quickly be left behind and ultimately perish.

Are You Digitally Native or Just Digitally Naive?


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Your bank’s survival could hinge on how you answer this question.

In recent years, we’ve seen a tremendous increase in use of technology. According to a range of surveys, at least one in every three people in developed markets now carries a smartphone. And in the United States alone, smartphones account for more than half of all mobile subscriptions, meaning that at least a third of all consumers potentially will use their phones to make payments and purchases.

The digital era is here to stay and adopting a digital-first mindset is no longer a matter of preference but rather, a question of necessity. Traditional banks need to recognize the need to expand their own digital services and capabilities, and many have started innovating and investing heavily to do so.

If you’re ready to become a part of the digital revolution, that means your core banking platform needs to be up to the task of helping you establish a strong digital presence. Evolving into a more fully digital organization with the right core in place can help financial institutions deliver quicker and more reliable services, strengthen the relationship with current clients while helping to acquire new ones—all the while delivering a unique, personalized customer experience to all of their customers.

Looking into the future, a 2014 McKinsey & Co. research predicted that within a few years over two-thirds of all banking users will be fully adapted to the online world. However, a 2016 Bain & Co. study also indicates that adding channels to a customer’s experience can increase confusion and frustration. In other words, there are still some bumps in the road to a purely digital experience.

With the increasing adoption of digital channels, despite some snags, it’s easy to see an emerging trend: to succeed, financial institutions must adopt a digital-first view of how to do business (PDF).

The average customer will interact at least twice a day with their bank, checking on payments and balances, paying bills or making purchases. Because of this heightened activity, an increasing number of financial institutions are beginning to grasp the importance of the digital-first view of banking. North American banks have begun to invest heavily in apps that, when working in concert with existing core technologies, will improve the customer experience and cultivate stronger and longer-lasting relationships with their clients. These new apps allow banking clients to perform a range of financial activities while on the go, offering services more sophisticated than mere paperless customer experiences, which have been around for nearly a decade.

There is no doubt that the world is already experiencing a digital transformation. But can the inevitable change be advantageous? It can, if you’re ready with solid core technologies already in place. By some estimates, adopting digital technology could allow banks to decrease their physical footprint by 30 percent, resulting in a significant reduction in costs and corresponding improvement in profitability. Brian Moynihan, CEO of Bank of America Corp., cites the rise of digital usage among his customers as a prime driver behind significant workforce reductions in recent years.

Figures from the last few years demonstrate the success of digital banking. Online-only banks, for instance, saw more than a 30 percent rise in deposits between 2010 and 2013. Mobile banking will grow to more than 2 billion users worldwide by 2020. And according to a recent Accenture study, 20 percent of all bank customers are entirely digital users, meaning that if a bank wants to increase its customer base, catering to the needs of these new tech-savvy clients is a must.

The ability to deliver services the way customers want, including through digital channels, while not neglecting the core services that all clients demand, is increasingly crucial to establishing and maintaining long-term banking relationships. Digital change demands that financial institutions digitize their processes and drastically reset how banking staff reacts to customer needs. The adaptation of lean core banking IT systems and investment in new digital products and services that enhance and personalize customer experience will be key factors going forward.

In short, digital banking can realize astonishing improvements in earnings before interest, taxes, amortization and depreciation, while also enabling you to reach a wider set of customers through an expanded range of services. Experts estimate that a digital transformation of the financial sector and banking institutions can ensure secure transactions and minimize risks, reduce costs, ensure seamless integration with back office applications—and last but not least, streamline the customer experience.

David Mitchell is the president of Nymbus.

Why New FinTech Banks Think They Will Win Out


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There’s an old joke about the guy who’s lost driving in the countryside and stops to ask a pedestrian how to get to the city.The pedestrian replies: “Oh, if you want to get there, I wouldn’t start from here.”

This is exactly how many traditional banks feel today.They want to get to the nirvana of new technologies, but are stuck in a spaghetti of old systems.Some call them legacy systems, others call them handcuffs, but either way they are an impediment to innovation.Old legacy technologies stop the bank from moving forward into the nimble and agile future on offer today, and this is exactly what fintech start-up banks believe they can exploit as it is clearly a weakness for the large banks.

Not all fintech companies compete with banks. In fact, most of them are actually working with banks to help them adopt new capabilities built upon the latest internet-enabled technologies. These include easy-to-use apps for customers, simple-to-add code for merchants and open systems to allow other fintech companies to work with them.It is almost like banking in an app store:Hundreds of companies offering thousands of services for sending and receiving money that are simple and easy to use.One such company is Stripe, a six-year-old start-up that is the preferred code for building online checkout services.Stripe is really easy to work with and has developed the chosen system for many other innovative companies including Kickstarter and Apple Pay, and was valued at almost $10 billion by the end of 2016. The reason why Stripe has gained such a high valuation is that it has taken something the banks make difficult—setting up online payment services—and made it incredibly easy.

There are companies that do similar things in lending, savings, investments and other specific areas of financial services based upon internet technologies.These companies have names like Zopa, SmartyPig, Nutmeg and eToro. They all have fun branding and cool offices, and they all share many of the same attributes in terms of being young, aspirational, visionary and capable.This is why collectively they have seen investments from venture capital and other funds averaging $25 billion for the last four years, according to data published by Ernst & Young.

However, there is a possible impasse here, as the most successful fintech firms are not replacing banks, but serving markets that are under-served. Fintech firms with the highest valuations and greatest success are those that focus on making it easier to invest, provide better access to funding, support small businesses or turn the mobile phone into a point-of-sale device.However, none of them have replaced a bank.They are succeeding by addressing areas that banks find difficult to serve due to cost or risk.

This is why it is interesting today that of the almost 50 new banks that have been launched recently in the U.K., many of them are fintech banks.Atom, Starling, Monzo and others have banking licenses and considerable funding.However, they are up against the country’s biggest banks that have millions of customers, deep funding pockets and centuries of history.For new players, fighting the large banks is going to be a challenge and they will need a lot of funding to succeed.

This does not mean they won’t succeed, but they will need real differentiation and exceptional digital services to win out.Even then, will customers switch?It will be interesting to find out, but the one advantage the new players do have from the start is fresh technology and unconstrained thinking.Equally, they have no cost overheads and therefore can compete more effectively on interest rates.Until they begin to seriously rationalize all of that high cost physical infrastructure, the big banks clearly cannot compete with these new digital start-ups, even with their millions of customers.

Therefore, the fight for the future of banking is going to be an interesting one between a host of new digital players and a few large banks that find it hard to change.Interesting times indeed.

Reflections on Fintech at Bank Director’s Acquire or Be Acquired Conference


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I spent the first part of last week in Phoenix at the Bank Director Acquire or Be Acquired (AOBA) conference and as always I came away feeling like I knew more about industry conditions and expectations than I did when I got on the plane. If you are a bank executive, you should probably be there every year and may want to consider taking your team on a rotating basis every year. If you serve the industry in some way, you must be there as well. If you are, like me, a serious bank stock investor, you need to be there at least once every few years to stay on top of how bankers feel about their industry and how they plan to grow their banks.

The mood this year was much more upbeat than last year. All the concerns about low interest rates, regulatory costs and other potential headwinds have been blown away by a blast of post-election enthusiasm. Bankers were almost giddy in anticipation of higher rates, a stronger economy and possible regulatory relief. Everyone I talked with during my three-day stay was upbeat and enthusiastic about the future of banking.

There has also been a tremendous change in bankers’ view of fintech of late. Fintech companies have often been viewed as the enemy of smaller banks, and I have talked with many community bankers who are legitimately concerned about their ability to keep up with the new high-tech world. One older gentleman told me at Bank Director’s Growing the Bank conference last May in Dallas that if this was where the industry was going, he would just retire as there was no way he could compete with the upstart fintech companies.

Over the course of the last year, however, a different reality has begun to set in. Fintech companies have discovered that the regulators and bankers were not ready to concede their traditional turf and consumers still like to conduct business within the highly regulated, insured-deposit world of traditional banking. Banks have begun to realize that instead of relying on their traditional practices, much of what fintech companies are doing could make them more efficient and enable them to offer services that attract new customers and make those relationships stickier.

It has become apparent to many of the bankers I chatted with that fintech is not a revolution but an extension of changes that has been going on for years. Drive through bank branches and ATMs were also thought to be revolutionary developments when they were introduced, and today they are considered standard must-have items for any bank branch. Mobile banking is just another step along the evolutionary scale. More customers today interact with their mobile devices than through traditional means like branch visits, phone calls and ATM transactions. That’s not going to change, and bankers are adjusting.

Chris Nichols of CenterState Bank spoke in a breakout session about using fintech to improve the bottom line. He pointed out that if you used the traditional banking approach based on in-branch transactions it cost about $390 per customer per year to service your clients. Using the same cash required to build a branch and spending it to improve the bank’s mobile offering could bring the annual cost per customer down to just $20 a year. Processing a customer deposit costs the average bank about $2 if done in a branch and just $0.20 if done via a mobile phone. Nichols also suggested that acquiring a C&I loan customer could be as high as $14,200 when done via traditional banking methods, but the expense drops to just $3,060 if the transaction is done on a mobile platform.

The proper use of fintech, according to Nichols’ presentation, should also allow banks to lower their efficiency ratio and increase their returns on assets and equity. That is the kind of news that gets bank CEOs and boards excited about expanding the use of technology even if they still carry flip phones and use AOL for home internet.

While you can expect to see partnerships between bankers and fintech companies expanding in the future, bankers will use the technology that reduces costs or creates more revenue streams. They will offer the mobile payment and deposit services customers demand today. The litmus test for technology is, “Does it make or save me money or dramatically improve my customer relationship?” If the answer to these questions is no, then banks will pass on even the most exciting and innovative fintech ideas. They are bankers, after all, not tech gurus.

Fintech Lenders Under Fair Lending Scrutiny


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One of the many concerns surrounding fintech lenders is that they are not as tightly regulated as traditional banks and are not bound as firmly by the provisions of the Fair Lending Act. The Federal Trade Commission has expressed concerns about many of the lending practices of fintech companies, saying in a recent statement that “the use of big data analytics to make predictions may exclude certain populations from the benefits society and markets have to offer.” Using big data to cherry pick loan candidates may be seen as discriminatory and could end up increasing regulatory scrutiny of fintech lenders as some see their underwriting practices as not being much different than redlining.

Gerron S. Levi, the director of policy and government affairs for the National Community Reinvestment Coalition, also expressed concerns about the practices of the fintech lenders in recent testimony before the House Subcommittee on Financial Institutions and Consumer Credit, telling legislators “We see echoes of the early days of the subprime mortgage boom, in which rapidly growing nonbank mortgage lenders innovated in the worst possible way by loosening credit standards, layering significant and multiple forms of risk, and causing financial harm to borrowers who could ill afford to repay the loans. If lightly regulated nonbank small business lenders, including fintech firms, are left unchecked, our fear is the impact may be the same: millions of small businesses stuck with exploding loans they can’t afford, and the American taxpayer left on the hook to clean up the mess.”

While the ability of fintech lenders to quickly process and fund loans may be seen as an improvement over the much slower process used by most banks, and is also seen by many as an opportunity to expand credit offerings to a wider percentage of the public, there are drawbacks. The algorithms that are used to find the very best borrowers would stand a good chance of being found to be discriminatory under the requirements of the Fair Lending Act. And some fintech lenders are targeting consumers with low or no FICO scores and charging extremely high-interest rates—which some regulators consider to be a form of predatory lending.

We already see the various regulatory agencies take a deeper look at the fintech lending industry. The Consumer Financial Protection Bureau in July entered into a consent order with Flourish, a fintech lender that the agency said had violated several regulations including the Consumer Financial Protection Act and the Fair Credit Reporting Act. The order required Flourish to deposit $1.93 million in an escrow account to repay customers, and the company was fined an additional $1.8 million.

The biggest problem facing fintech lenders is that most of them have not yet been all the way through a credit cycle, so we have no idea how they will react when an economic event causes liquidity to dry up. They do not have access to depository funding and rely on credit facilities, whole loan sales and securitizations to fund originations. These sources of financing have a tendency to evaporate when markets become volatile, and many fintech lenders could be forced to seek partnerships with other lenders or the banks themselves.

In many ways, that would be the perfect solution for this potential liquidity problem. Community and regional banks are very interested in adding new technology that will allow them to offer more online products and services as well as cut costs and speed up loan processing. Banks are actively looking to accomplish this by partnering with, or in some cases acquiring, fintech lenders. According to a recent survey conducted by the law firm Manatt, Phelps & Phillips, 88 percent of those surveyed think that in a decade the banking world will be one where traditional banks are partnering with fintech companies in a mostly collaborative environment

Fintech lenders choosing to partner with banks will come under closer regulatory scrutiny as their lending practices will have to be in line with the regulations under which banks operate. Regulators have also expressed growing concern about data security, and that will be a large issue that both the banks and fintech companies will have to address.

Regulatory challenges are going to continue to increase for fintech lenders. For many of them, the most practical course of action will be to partner with community and regional banks. For that to happen, however, their strategies and operations will have to be modified so the marketing programs and loan approval algorithms have no hint of discriminatory or predatory lending practices.

Fundbox: Friend or Foe


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For small businesses and freelancers, successfully performing work for customers and clients is only half the battle. Oftentimes, businesses wait up to 90 days to receive payment for their outstanding invoices. This delayed cash flow can create a variety of problems, especially when it comes to covering overhead expenses like rent and payroll.

That’s why Eyal Shinar developed the Fundbox software service, to help small businesses fix their cash flow problems as it relates to outstanding invoices. Fundbox is the leading cash flow optimization platform for small businesses, and who better to start a fintech company focused on this problem than someone who learned it at his mother’s knee? Shinar’s mother was a small business owner, so growing up he saw the pain and frustration that delayed payment of invoices can cause. According to a recent report, 82 percent of small businesses fail due to poor cash management. Where some see problems, others see solutions, and that’s where Fundbox comes in.

The process is straightforward. Business owners simply connect their existing accounting software to Fundbox and submit their outstanding invoices for immediate reimbursement. The business owner incurs a small fee for this service and they are given up to 24 weeks to pay Fundbox back.

For banks looking to offer new or better services to small business clients and freelancers, though, is Fundbox a good partner? Let’s look a little closer.

THE GOOD
Small business accounts are a much coveted group for banks, so providing new tools to improve service and/or relationships with this group should be of interest area to most any financial institution. The fact that Fundbox already has some traction in the small business space should be a good indicator for banks that the service they provide—instant cash flow—is a needed service for this group.

Once a small business owner submits an invoice to the Fundbox platform, they are typically paid within one to two days. Fundbox connects easily with most existing accounting platforms that small businesses are already using, such as QuickBooks, Freshbooks, Xero, Wave and Sage One, so there is very little to do in terms of importing data. Fundbox connects with a few simple clicks and pulls any outstanding invoices that business owners might want to turn into cash. Also, when the user signs up for their account, Fundbox uses big data and algorithms to quickly determine the consumer’s financial health rather than putting them through a lengthy application and approval processes.

The pricing model is simple and transparent. For an invoice of $1,000, the fee is $48 per week over 24 weeks, or $89 per week over 12 weeks. Fees are reduced if the business pays back what it owes prior to the deadline, which is a good incentive to keep Fundbox’s own cash flow looking good, although they have no shortage of funding—another point that might give banks some comfort in partnering with the company.

THE BAD
While the Fundbox fee structure is quite straightforward and transparent, it’s also relatively expensive and can really add up over time, especially for businesses that regularly choose the 24-month financing option. After you do the math, the annual percentage rate for Fundbox repayments can range anywhere from 13 percent to 68 percent. Fundbox also places a $100,000 limit on invoices that it will fund, so it isn’t an option for companies seeking to turn accounts receivable for amounts larger than that into cash.

While Fundbox is compatible with most of the common accounting software mentioned earlier, small businesses that use less common accounting packages or Excel spreadsheets can’t utilize its service. Other drawbacks are that Fundbox doesn’t provide cash for past-due invoices, and the approval process for credit limit increases can take some time. So while the service is helpful in many use cases, it certainly doesn’t match every situation. Finally, Fundbox is rolling out additional credit products as well, which could increase its presence as a possible competitor in the banking space.

OUR VERDICT: FOE
Fundbox offers an important service to small businesses and entrepreneurs, and does so more conveniently than most banks do today. At a time when so much emphasis is being placed on the customer experience, banks should be taking notice of this heavily-funded bank alternative. If an entrepreneur has outstanding invoices and needs cash to keep the lights on, their only option with traditional banks is to apply for a small business loan, or to go to their credit card company, which charges even higher rates than Fundbox. Furthermore, between the application process, credit checks and agreeing upon collateral, it can be weeks or months before businesses see a penny of the cash they need. For this reason, I applaud what Fundbox is doing, and I think it is certainly a —friend’ to many entrepreneurs in their times of need.

As Fundbox encourages more and more small business owners to come to them for cash, though, this obviously chips away from the bank’s importance and its relationship with their small business clients—a relationship they certainly don’t want to lose. And to date, Fundbox cannot boast of any existing bank partnerships or list banks as an area of interest. Of course, if this was to change, we might reconsider our foe designation.

In the meantime, banks would be wise to understand why entrepreneurs are using services like Fundbox, and how they might better address this particular need, whether it’s partnering with fintech companies, investing in new solutions or building them internally. In short, business owners have enough things to worry about, and getting paid on time doesn’t have to be one of them. Who can blame small business owners for looking outside their banking relationship for help?

What Banks Need to Do to Address Technological Change


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In the past few years the fintech industry has grown exponentially. According to a recent Forbes article, the existing number of fintech start-ups globally are between 5,000 and 6,000, all seeking to take a slice of the financial services marketplace. The fintech industry broadly includes any new technology that touches the financial world, and in many ways, this industry redefines forever the notion of traditional banking. More specifically, fintech includes new payment systems and currencies such as bitcoin, service aggregators such as robo advisors, as well as mobile applications, data analytics and online lending platforms. The fintech industry can also be divided into collaborators and disruptors, those businesses that provide services to banks and those that are competitors for services and looking to displace banks. As new technologies and approaches to delivering financial services are adopted, community banks will be challenged to meet the future expectations of their customers as well as to assess the additional risks, costs, resources and supervisory concerns associated with providing new financial services and products in a highly regulated environment.

The largest commercial banks have recognized the future competitive impact on their business as fintech companies create new and efficient ways to deliver services to their customers. Bank of America, for example, recently announced a fintech initiative and plans to target the start-up market for potential acquisitions. The large banks have the advantage of scale, deep pockets and the luxury of making bets on new technologies. If not by acquisition, other banks are partnering with new players that have unique capabilities to offer products outside of traditional banking. While community banks are not new to the benefits of fintech, the advancement and number of new technologies and potential competitors have been difficult to keep up with and integrate into a traditional bank’s business model. On top of that, the fintech industry remains largely unregulated at the federal level, at least for now.

Competition, compliance and cost are the three critical factors that bank management and board members must assess in adopting new technologies or fending them off by trying to stick with traditional banking values. Good, old-fashioned service based on long-term banking relationships may become a thing of the past as the millennial generation grows older. Contactless banking by the end of this decade or sooner could rule the financial services industry. While in some small community banking markets, the traditional relationship model may survive, it is far from certain as the number of brick-and-mortar bank branches in the United States continues to decline.

Also falling under the fintech umbrella is the rapidly escalating online marketplace lending industry. While most banks may rationalize that these new alternative lending sources do not meet prudent credit standards in a regulated environment, the industry provides sources of consumer, business and real estate credit serving a diverse market in the billions. While the grass roots banking lobby has been around forever, longtime banks should take note that the fintech industry is also gaining support on Capitol Hill, as a group of Republicans are now preparing legislation coined the “Innovation Initiative” to facilitate the advancement and growth of fintech within the financial services industry.

Fortunately, the banking regulators are also supportive of innovation and the adoption of new technologies. The Comptroller of the Currency in March released a statement on its perspective on responsible innovation. As Comptroller Thomas Curry noted, “At the OCC, we are making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.” In an April speech, he confirmed the OCC’s commitment to innovation and acceptance of new technologies adopted by banks, provided safety and soundness standards are adhered to. The operative words here are responsible and supervision.

Innovation will come with a price, particularly for small and midsize community banks. Compliance costs as banks adopt new technologies will increase, with greater risk management responsibilities, effective corporate governance and advanced internal controls being required. Banks may find it necessary to hire dedicated in-house staff with Silicon Valley-type expertise, hire chief technology officers and perhaps even change the board’s composition to include members that have strong technology backgrounds. In the end, banks need to step up their technology learning curve, find ways to be competitive and choose new technologies that serve the banking needs and expectations of their customers as banking and fintech continues to converge.

This article was originally featured on BankDirector.com.