The fintech explosion this past few years has made one thing very clear: banks need to adapt, or they will be left behind. In the wake of the COVID-19 pandemic and fintech surge, banks and other financial institutions (FIs) are now coming face-to-face with rapid industry transformation and lofty consumer demands.
Some banks may look at fintechs as competition, there has been an ongoing shift in mindset that places collaboration at the forefront. Instead of struggling to keep pace with agile, venture-backed startups, many financial institutions are now attempting to map out a new, partnership-driven path to innovation.
Alloy Labs Alliance
One example of this movement is Alloy Labs Alliance, a member-driven banking consortium which works to find and foster operational innovation.
Founded by 12 community and mid-sized banks in 2018, Alloy Labs Alliance has grown its membership to include over 50 banks with over $250 billion in combined assets. These member banks reach over 30 million consumers and 6 million small businesses across the country.
If you combined the Alliance’s members into a single bank, it would rank in the Top 25 of US banks in terms of member assets. This gives the consortium impressive reach, in turn enabling advanced intelligence research, consumer profiling and industry-wide operational insight.
“How do you compete? It really becomes the mission,” Alloy Labs CEO Jason Henrichs told FinLedger. “How can you efficiently keep up in the digital arms race? That’s only defense. How do you effectively find ways to differentiate?”
At its base Alloy Labs Alliance is a gathering of banks, working together to find, address and adopt key banking innovation. While the organization acts as a steward of the effort, it is unlike a consulting firm and the brunt of the work is done by member banks.
Alloy works to accomplish these goals via four pillars, which address key growth areas and build up to accomplish actionable change.
These pillars include: Intelligence, Centers of Excellence, Concept Lab and Investment fund.
Starting from the bottom, the intelligence portion is where members connect with each other with, ask ad hoc questions or work on things.
“One of the famous examples was, ‘I need to do the white paper on what Plaid’s direct deposit switching means for us. Is anybody else supposed to be doing that, too?'”, Henrichs explained, saying that this discussion helps banks perform needed functions faster and better.
Centers of Excellence
The next step up is Centers of Excellence, which could be described as member-led focus groups that look at distinct segments of banking.
These centers hold meetings on a regular basis, usually once a month, where members can bring up specific trends they have noticed or issues they are trying to handle.
“These folks are getting together to discuss their topic area and issues that they’re seeing,” Alloy Labs Alliance’s Director of Insights Amber Buker told FinLedger, “but also to roll up their sleeves and work together toward creating something that is tangible and useful in each of their institutions.”
One of Buker’s key roles at the Alliance is to keep open dialogue with member banks, congregate important points of connection (or contention) that the centers can conduct deep dives on, and build insight packages for Alliance member use.
As an example, Buker mentioned how the cybersecurity segment tackled embedded finance integrations. In response to member comments that “a lot of work was like Groundhog Day when it came to onboarding a fintech”, the Alliance brought in cybersecurity leaders from a dozen banks and led sessions on the best security practices to create an industry white paper.
“We put that all together into a document that we share out for the rest of the industry, that really breaks down API security into two groups—initial onboarding and ongoing or event-based due diligence that needs to be completed,” Buker said.
“Not only is it nice to just have a checklist of how we think you should be addressing those issues, but it really serves as the basis for an API security strategy which a lot of banks just don’t have.”
Alloy Labs currently has eight of these centers, which cover a range of topics, themes and include:
- Strategy & Business Model (highly attended by CEOs according to Buker)
- Data & Analytics (working on creating a shared database among the member banks)
- Marketing (example white paper can be found here)
- Banking-as-a-Service (working to share benchmarks on non-competitive aspects of their programs)
- Innovation Culture (discussing how to build digital dexterity in bank teams)
- Automation & AI (working through a “show and tell” series where members present RPA projects they’ve completed, how they built it, and what the ROI has been)
- Crypto & Blockchain (newest group)
The Concept Lab launched last year and takes these discussions one step further, operating as what Henrichs calls a “reverse accelerator.” Alloy Labs analyzes strategic focus areas identified by member banks, outside of traditional BankTech, and then finds partners “that have never thought of banks necessarily as a partner.”
“One of our banks recently launched the first formal public partnership out of the Concept Lab,” Buker said, explaining the segment’s concept. “Their name is TCB, The Cooperative Bank, and they’re a small community bank that had an issue that a lot of other banks have—they have these aging populations and client bases. That presents a real issue when you’re trying to grow, but your client base is shrinking because they’re naturally just passing away.”
“Through the Concept Lab and working with one of the companies called Carefull, [TCB] were able to identify that their role within the community was really unique … They have these really deeply entrenched roots in their community. No other bank has those connections, so they were able to look at that through the lens of the Concept Lab and identify that as a differentiator,” she said, highlighting the ways a non-traditional banking partner can provide value.
Henrichs says that because the Concept Lab focuses on the edge of money and stories that drive customer banking interaction, it adds potential value in places overlooked by traditional or popular banking conversations and trends.
“The secret sauce for bank partnerships”
Finding and developing these non-traditional partnerships means that the Alliance is constantly working on projects with no formal blueprint. Henrichs says that after launching its first Concept Lab, many of its members asked, ‘What is the secret sauce?'”
Henrichs believes that secret sauce is breaking down these partnerships into incremental steps, instead of focusing on what could be down the line.
“Rather than kind of thinking what the endgame is, you get it down to ‘What is that minimally viable amount? ‘What do I need to invest? What will I get out of it?'”
“One of the biggest benefits of working in this collaborative environment is sometimes two or three of the members have already taken that first step. So you don’t have to repeat it,” Henrichs said.
The last pillar of the Alliance is its investment fund, which started as a test pilot last year and recently closed its first round of funding.
“We’re really investing in those things that banks should be doing, but aren’t because they’re too risky today,” Henrichs said, explaining that the fund is intentionally very small.
“The reason it’s a small fund is the venture capital firms view us as a strategic player, as opposed to competing for the deals with them. It shows, our number one source of deal flow for the Concept Lab and for investment is from other investors.”
Competition vs. Collaboration
An important aspect of the Alloy Labs Alliance is that it is meant to be utilized as a collaborative tool, requiring members to put aside the belief that other members are competition.
Henrichs says that collaboration is key to the structure, and is a key screener when the Alliance evaluates at a potential member banking.
“One of the big screens is if they get hung up on competition, then you’re just not going to be a good fit,” he said, explaining the importance of collaboration over competition.
“You don’t have to say what your secret sauce is, although most of our most successful members would probably flat out tell you and say ‘What do you think of it, can you pick it apart?'”
This is a key differentiator for Alloy Labs, especially when compared to other banking associations like the American Bankers Association (ABA) and Independent Community Bankers of America (ICBA).
While these organizations operate at a large scale with a larger number of member banks, Alloy believes that doing things differently will separate the successful banks moving forward.
“We made the strategic decision two years ago that we’re not just trying to scale this. The scale game is already won by ABA and ICBA,” Henrichs said. “The Wall Street Journal says that by 2030, we’re gonna have gone from over 5000 community banks down to 500. If you want to be on the right side of that relevance curve, you better start thinking about doing things differently.”