At the risk of oversimplification, there are essentially three categories of innovation in banking. There is a small but growing number of banks that have positioned themselves as early adopters of new technology. There are also fast followers, which are not the first banks to try a new technology but don’t lag far behind. Then there are the late adopters.
The digital economy is moving so fast that no bank today can afford to be in the final category. Being an early adopter is probably too risky for many institutions, but at the very least they need to be fast followers or risk getting left behind as the pace of the industry’s digitalization begins to accelerate.
How and when to successfully engage with a fintech company was a recurrent theme at Bank Director’s 2018 FinXTech Annual Summit, held May 10-11 at The Phoenician resort in Scottsdale, Arizona. Deciding to work with a fintech company on the development of a new consumer banking app or the automation of an internal process like small business lending is more than just another vendor relationship. Typically, these are highly collaborative partnerships where the fintech will be given at least some access to the bank’s systems and operations—and could be a risk to the bank if all does not go well.
The first piece of advice for any bank contemplating this kind of engagement is to perform a thorough due diligence of your intended partner. As highly regulated entities, banks need to make sure that any third-party service or product provider they work with have security and compliance processes in place that will satisfy the bank’s regulators. And the younger the fintech company, the less likely they have a compliance environment that most banks would (or should) be comfortable with.
Mark P. Jacobsen, president and chief executive officer at Arlington, Virginia-based Promontory Interfinancial Network, cautioned during a presentation that banks should not consider working with an early-stage fintech unless they have “an extremely experienced CIO, a very robust risk management system and access to very experienced legal talent.” It also makes sense for banks, to check a fintech’s references before finalizing its selection. “There are so many new things out there that it’s important to get that outside validation,” said Adom Greenland, senior vice president and chief operating officer at ChoiceOne Financial Services, a $622 million asset bank headquartered in Sparta, Michigan.
Cultural difference was also a recurrent theme at the Summit. Banks with a culture of innovation are more likely to be early adopters or, at the very least, fast followers. “Culture is a huge barrier to innovation,” said Bill McNulty, operating partner at Capital One Growth Ventures, a unit of Capital One Financial Corp., during a presentation on some of the common obstacles to innovation. “And culture always starts with people.”
McNulty said while he senses the urgency around innovation in banking is beginning to change, he knows of large fintech players that originally wanted to partner with banks, but have grown frustrated with the conservative culture at many institutions. “They decided it is too hard and takes too long and they would do it themselves,” he said. “If we don’t address culture, the best fintechs will do it themselves. Some of these companies will build [their own] banks.”
Bank Director announced the winners for its 2018 Annual Best of FinXTech Awards on May 10, choosing from among 10 finalists across three award categories, and while big banks were represented among the finalists—including U.S. Bancorp, Citizens Financial Corp., Pinnacle Financial Partners and USAA—two of the winners were community banks. And that fact underlines an important point when talking about innovation in banking. Small banks can play this game just as well and maybe even better than their larger peers.