Whats New in Fintech- and Why should a Community Bank Care?

Fintech

 

Among the things that community banks must consider in the next decade is how best to navigate the landscape that is being created by Fintech companies.  Financial technology companies (Fintech’s) have been quickly changing the financial services landscape for some time.   The Independent Community Bankers Association recognized these changes and prepared a document entitled the Fintech Strategy Roadmap.  In this document, the ICBA points out:

Fintech is simply the intersection of financial services and technology. The innovation within this intersection is robust, and the positive impact to community banks is wide-reaching. Digital wallets and real-time transactions bring instant results to bank customers. New lending platforms offer streamlined experiences and faster credit decisions. Business intelligence solutions provide new ways for community banks to manage and anticipate customer activity, while transformed cloud infrastructures give banks more secure and efficient opportunities for data security and storage.  [1]

There are a number of developments in Fintech that will directly impact access to customers for community banks.  Initially, Fintech companies were designed and built to replace services that traditional banks, provide.  More recently, the energy in this field has been towards work with banks to enhance products and services.  One example of this change is described here:

Take Teslar, one of the accelerator cohort and the Banker’s Choice winner at this year’s IBCA LIVE national convention.  The company was founded by bankers with a passion for supporting community banking by streamlining systems.  Teslar offers a software solution to bring systems together to interoperate form a single platform-helping banker actively manage their daily tasks for their portfolio.  Everything from exception tracking to loan closing documentation is available through the platform. [2]

The driving force for development and innovation in this field is the desire to meet the ends of a rather large population, unbanked and underbanked families.  These are families that either have no bank accounts (unbanked) or just one transaction account (underbanked).  A large portion of the families that find themselves using minimal banking serves are millennials.  This group of consumers are looking for speedy delivery of products, minimal contacts with branch personnel and technology that matches their lifestyle.

The good news is that community banks are naturally a better fit for Fintech companies and the customers that they seek.   The same small businesses that are served by community banks are also the “sweet spot” for fintech companies.  FinTechs are looking sell a suite of products such payment systems, credit applications and faster delivery of funds.    On the other hand, community banks continue to look for various opportunism to increase income including seeking new clients and the ability to offer products and services that add to the bottom line.   Some of the innovations that can greatly assist community banks  include:

  • Lending: Loan origination platforms, either direct or indirect, offer community banks an opportunity to access borrower data and make credit decisions in a more expeditious manner. These systems provide vast amounts of customer data to guide timely underwriting decisions and help to automate a consistent lending process.
  • Finance, Business Intelligence, and Liability Management: Product pricing tools, profitability modeling, and report automation offer ways to operate more efficiently and improve net interest margins. Customer data acquired from transactional activities also provide community banks access to new behaviors and insights into account movements and patterns that allow for better predictive assessments.
  • Payments: Digital wallets, real-time payments, global remittances, and digital currency movement all stand to enhance the practices customers use to move money from one place to another. The settlement practices have expanded the universe of merchants, customers, and financial institutions taking advantage of the new technologies.
  • Wealth Management and Personal Financial Management: Technological advances and advanced analytics allow for more accurate, automated, and low-cost ways to manage funds and even offer investment advice. This appeal has moved beyond just the millennial base and is now part of the mainstream wealth management arena.
  • Regtech: Technologies can offer banks opportunities to outsource regulatory maintenance, monitoring, data collection, and customer due diligence. Regtech looks to enhance all aspects of a bank’s Compliance Management System including customer account alerts and monitoring, customer risk identification, and the fair application of lending practices.

To Join or Not to Join

So, since these firms can provide software and solutions that are potentially very valuable to a community bank, consideration of a partnership is wise.   Because the fintech firm has spent money and resources on research and development, investing in a partnership comes with a minimum of capital outlay.   The risks associated with these firms generally are operational; the community bank that wants to form a partnership should have conducted a risk assessment to ensure that the Fintech company is really a good fit.

Regulatory Advantage of Community Banks

For all of their technology and state of the art cutting edge software, there are several advantages that community banks have over FinTechs.  First, as part of state and national banking systems, community banks have access to deposit insurance and the liquidity that comes form maintaining insured deposits.  Many fintech firms run on venture capital money which allows time for development but comes with the expectation that the product will be sold, and investors reimbursed.   Overall access to ongoing funding is still limited for these firms.

FinTechs are regarded by most regulators’ as Money Service Businesses (MSB’s), which means that they must get a license as an MSB for every state in which they intend to do business.   A partnership with a community bank can provide a fintech with the ability to continue to conduct business without having to chase licenses in all fifty states.   Finally, community banks have access to the Federal Reserve  and therefore the ability to clear transactions.  There is a great deal of incentive for FinTechs to work directly with community banks.

Partnerships Have to be Pursued Cautiously

There are a great deal of synergies between Fintech companies and community banks.  Despite the exciting opportunities that such a partnership offers, the relationship can only go as far as each partner can take it.  A Bank’s infrastructure, as well as the knowledge and expertise of the staff to use a product must be considered as part of partnership.  A complete risk assessment that considers the ability of the bank to effectively administrate the program is a critical component for a successful partnership.

 

Ultimately, what’s new in fintech should be an important part of strategic considerations for a community bank.

 

 

 

 

James Defrantz the principal at Virtual Compliance Management Services LLC.

** For more information about trends in community banking, please contact us at http://www.VCM4you.com**

[1] Fintech Strategy Roadmap for Community Banks March 2018

[2] How Fintech Changes the Game for Community Banks and Their Customers- Kevin Tweddle, Chief Operating Officer, ICBA services Network

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