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