What’s New in Fintech – And Why Should a Community Bank Care?

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 Road map.  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 Fin-Tech companies.  Fin Techs 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 fin tech 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 www.VCM4you.com**

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[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

A New Decade for Community Banking

The last decade saw a great deal of regulatory change.  Beginning with the passage of the Dodd Frank Act, a great deal of regulations change the way that Banks are administrated and regulated.  In some respects, community banks and their much larger brethren were separated by the regulatory changes with the really large banks coming under the watchful eye of the CFPB along with the other regulatory bodies.   Over the years, there have many discussions about the possibility of a separate regulatory scheme for community banks.  However, the possibility of this change seems unlikely.  For community banks, regulations and their enforcement will continue to be matter of “one size fits all”.   

Many of the regulatory changes were brought about by a confluence of events including economic crises and the fallout from the damage, the crisis caused.  Towards the end of the decade, regulation has slowed to a crawl, but significant change continues in the banking industry.  

At first blush, overall, banking is in pretty good shape, even for community banks, but a deeper dive will show that there are indeed storm clouds on the horizon.   In a recent public speech, the Vice Chairman for Supervision of the Federal Reserve, describe the current state of community banking;   

The number of community banks has been declining over the last 20 years, but community banks still account for more than 95 percent of banks operating in the United States. The decline has been roughly similar for urban and rural community banks, leaving the share of community banks that operate primarily in rural markets quite stable at just over 50 percent As the share of branches in the average banking market operated by community banks has declined, so, too, has the share of deposits held at community banks. This shift in deposit shares away from community banks, similar to the shift in branch shares, has been substantial in urban markets but only marginal in rural markets. Community banks held almost half of all deposits at urban bank branches in 1997, but just over one-third in 2017. In rural markets, community banks collectively had a deposit market share of 80 percent in 1997, declining moderately to 77 percent in 2017.^[1]

Financial technical companies (“FinTechs”), virtual currencies and the need for financial products that serve a mobile society are creating financial institutions that are non-traditional.   These institutions are designed specifically to meet the needs of some of the nontraditional customers of banks.  These customers include millennials, the unbaked and the underbanked.  The growth of these institutions will impact community banking in the next decade and beyond.

Over the past several years, neobanks like Chime targeted millennials, FinTechs like Kabbage focused on business liquidity and major tech companies such as Apple and Google have infiltrated the financial services landscape. In response to these disruptors, more banks and credit unions will deploy digital brands next year to help attract new customers and members. Digital is now the preferred touchpoint for most consumers, making this approach an effective way to gain deposits and expand an institution’s geographic reach — if done correctly. For digital banks to be successful, institutions must ensure the digital experience is convenient, intuitive and delivers a significant differentiator. [2]  

Banking for millennials, the unbanked and underbanked will become a real priority in this decade.  The pool of people who are looking for financial products and services that are nontraditional continues to grow.    

Small businesses account for 99% of business in the U.S. Despite being a trusted local partner for many small businesses across the U.S., most banks and credit unions fail to offer a solution built specifically for them, forcing small businesses to rely on modified, ill-fitting versions of commercial or retail solutions. Better serving these organizations now can lead to increased revenue opportunities in the future as small businesses grow. [3]

The development of internet business presents both an opportunity and a challenge to community banks.  Opportunities exits for banks who are willing to consider products and services that are aimed at internet ventures in particular.  The challenge will be to fit concepts of traditional safety and soundness into a whole new suite of products and services.   

The gig economy will continue to rise in 2020. Last year, the Bureau of Labor Statistics reported that more than 35% of the U.S. workforce are gig workers, and that number is expected to grow to 43% next year. This segment presents an unprecedented opportunity. Any financial institution that can provide the right tools for these customers to effectively manage their financial health in the gig economy will attract new relationships and expand existing ones. [4]

The opportunity exists to partner with fintech companies that have developed platforms designed to meet the needs of these potential new customers.  

However, institutions must act fast. Small businesses and gig workers will not simply wait around for banks and credit unions to offer the capabilities they desire, especially as FinTechs and nontraditional competitors like Uber Money are aggressively pursuing them. Institutions must quickly deliver digitally optimized, intuitive experience small business owners and gig workers want or they risk losing these relationships and opportunities to grow revenue.[5]

Money service businesses continue to be a missed opportunity for community banks.   The remittance market is a huge opportunity to enhance non-interest income, reach out to nontraditional customers and improve the overall delivery of funds throughout the world.   Remittances are a growing market that continues to grow according to the world bank statistics $138,165,000,000 in remittances was sent from United States to other countries in 2016.  In 2020, the market is expected to grow more than in the previous two years for several reasons.   The average size of an individual remittance remains $200.00.   There are a number of money transfer business that have developed systems that are familiar to the customers and efficient in their delivery.  Despite the huge demand and potential for fee income, many MSB’s are in search of a banking relationship

Many banks are staying away from them due to the stigma associated with Operations Chokepoint. Briefly, Operation Chokepoint was an initiative by regulators and the Justice Department to limit the banking access of firms that the government had deemed highly likely to laundering money or provide terrorist financing.  Unfortunately, during the implementation of this initiative, many Money service businesses were targeted for strict scrutiny by the regulators.  Although Operation Chokepoint has been terminated, the stigma associated with it remains.  Money services businesses have a great deal of difficulty obtaining banking services.

During the next decade, trends suggest that for community banks to survive and thrive, consideration of both remittance market and partnership with fintech companies will be a successful strategy. 

James Defrantz the principal at Virtual Compliance Management Services LLC.

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

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[1] Trends in Urban and Rural Community Banks

Vice Chairman for Supervision Randal K. Quarles

^[2] Four digital banking trends to watch in 2020- Community Banking brief December 2020

[3] Ibid

[4] Ibid

[5] Ibid