Until now, it was generally only the large banks and some specialist regional banks that had the benefit of working with fintech. However, that is changing fast. No longer is it banking versus fintech. The two industries need each other, and customer demand dictates that. The year 2018 will be all about banking AND fintech working together, especially in community banking.
A version of this article first appeared in Western Banker Magazine (Dec 2017)
But first, what is the current state of FinTech?
Despite the doomsday predictions of some journalists and other critics, fintech is not dead. Yes, fintech companies cannot demand the crazy valuations and pricing of before. Nor can they raise capital with unproven ideas. The fintech market has entered the first stage of maturity, like all new markets do. Weaker players are falling out – some through consolidation, some because their model was never going to work anyway. Perhaps they had a solution when there was not really a problem. However, the strong and wise grew up quickly. They are adapting to the financial services market and regulatory realities. The result is that fintech is now more eager to do deals with a range of smaller community banks, rather than with one large bank only, thus spreading their risk and maintaining true independence as entrepreneurs. Working with and partnering with fintech can be a win-win proposition for community banks. Community banks will gain many benefits from working with fintech, and prevent the larger banks from further pulling ahead by monopolizing the best talent and technology. Partner with fintech to improve your digital offering and take market share from the big banks.
There is profitable opportunity for community banks to cooperate with FinTech in various ways.
- White label technology, marketing services and risk models to originate deposits online. This could range from simply licensing their technology to open deposit accounts online, or to a complete outsourced arrangement where the fintech does both the marketing and automated origination – inclusive of ID verification and Know Your Customer. They bring you consumer or business deposits, according to your specifications and appetite. There is a cost to all of this, of course, but when you build your financial model, it will more often than not show an ROI superior to building new branches. Do you need more traffic to your website and more application starts for your new automated account opening system? Sure, there is a fintech (and more) for that. There is no need to suddenly expect your IT person to be a social media expert.
- White label technology, marketing services and risk models to originate loans online. With generally high loan concentrations at community banks, there are opportunities to expand your market or to broaden your lending product range. One option is to participate in one of the online aggregator portals, which will push loan applications that fit your risk criteria to you automatically. Or you could use another fintech’s automated underwriting models to reduce underwriting costs and decision time. These can typically be adjusted to very closely mirror your existing credit policy and rules. Or you could simply automate the origination and application form, without automated decision making. Either way, your customers will be happier with the new, quick, and easy digital experience – and you will save some trees.
- Partner with a fintech that could bring fee income. Who does not need more fee income? One option is to partner with a fintech in wealth management and investment services. With the advent of robo-advisers, it has opened a much broader market at lower income and personal asset levels. Now, with a robo-advisor, most of your customers will qualify for these wealth management services that were previously too cost-prohibitive to offer to your average customer. You could make it an additional option, right within online banking, to increase stickiness. How about SBA fee income? Do you need more SBA loan leads and/or a more efficient process? There is a fintech for that.
- Operational efficiency. Do you still manually input row after row of data from business tax returns and spread them manually? Do you have a largely manual anti-money laundering processes? For almost every aspect of your business, there is likely a fintech to help you make it better.
Partnering with fintechs allows community banks to offer their clients products and services that they want – often quicker, cheaper and better than they could on their own. While opportunities abound, community banks should choose carefully when considering new fintech partners and projects. Working with a knowledgeable and experienced professional in the banking/fintech partnership space could save much time and help avoid costly mistakes.
Banking and fintech can and will co-exist. As explained above, the two industries need each other, and customers demand better integration and transparency. By partnering with a good and reliable fintech, you can grow your balance sheet and reduce operational cost.
Be more profitable. Don’t fall further behind in 2018. You will, if you don’t act soon. Be proactive and incorporate fintech and enhanced digital banking in your 2018 strategic plan, but do it with the following in mind: 1) the integrations will come with a cost, but will usually be much cheaper than traditional means; 2) your customers are demanding a more integrated digital experience than what either you or fintechs can provide on your own; 3) if you want the integrations to happen smoother and avoid costly mistakes, you want to hire a knowledgeable and experience professional in the banking/fintech partnership space.
