As long as fintechs have fought for community banks’ customers, the narrative has been the same: fintechs are technologically, financially and innovatively advanced compared to their local brick-and-mortar counterparts. Community banks are then displayed as hesitant and wary of new advances, having been spurned by previous vendors and overwhelmed by the options that may or may not be compatible with legacy systems.
However, a shift is occurring in the financial ecosystem that chronicles fintechs and community banks as partners in arms rather than technological enemies. In September, the Federal Reserve published a paper describing the landscape of partnerships between community banks and fintech companies, underscoring “it is vital that a community bank’s strategic goals align with the fintech provider and that the bank develop a culture committed to ongoing innovation.”
That point was reiterated at FinLedger’s MiniCon: The Future of Banking Infrastructure on Tuesday, where market innovators that specialize in the cohesive relationship between fintechs and community banks described the challenges, victories and infrastructure that come with finding the middle ground for the two financial behemoths.
Establish the middleware, construct the alliance
Raj Patel, co-founder, COO and CFO of MANTL, recalled watching the neobanks running out ahead from an innovation and customer experience perspective that forced the money center banks (JP Morgan, Wells Fargo, etc.) to invest more financial resources into chasing them. While this is great for consumers overall, he noted that it has widened the gap between the money center banks and community banks.
But where community banks hold themselves back, Patel sees opportunity for smaller fintechs that are incentivized to innovate and for banks that want to up their value; that is, as long as the two teams can agree on the tech. MANTL actually began as a challenger bank when an “aha” moment inspired the founders to pivot from competing to partnering with banks to deploy its technology at scale.
“The single biggest thing you need, whether you’re working with a new mobile or an online banking vendor or basically any FinTech in virtually any context, is you need middleware access to your core banking system,” said Patel.
That middleware access is a set of APIs (or even more archaic tech) that offers different types of interfaces but is a language that sits between the core of the bank and the fintech. This API then allows the fintech to “speak” with the core and lay on top of legacy systems to power automation.
“If you are in a core negotiation or coming up to a core negotiation make sure your next contract includes the rights to this middleware, unlimited licenses at a very reasonable cost for your contract. Because if you don’t have access then the project gets pushed back, money gets owed from all directions and suddenly you’re even further behind,” added Patel.
Beyond establishing the technology, Patel emphasized the importance of creating a synergistic team between the community bank, the fintech and the leaders who will implement the innovation – both long-term and day-to-day. According to the co-founder, community banks should look to executive sponsors, with every engagement having a return on investment calculation and an understanding of measurable success the fintech can quantify.
“Banks actually have all the skills in the world to accurately assess a technology project,” Patel said. “And so vendors need to talk very articulately to banks. And banks need to expect that vendors talk very articulately as if it was alone about the ROI prospects and the risks associated with the project.”
And when you start doing that, a whole lot of budget gets unlocked, because no CFO or board member or CEO in any bank is going to turn down the opportunity to turn $1 into $2, and so on.”
Community banks, compliance and connections
While fintechs get the gold star for technology, community banks shine brightest as a platform for financial freedom to local communities, neighborhoods and marginalized groups.
Carey Ransom, managing director of BankTech Ventures noted how important it is to the industry that the community banks sit as a core foundation of how local economies function. Where technology may leapfrog some of them, it is critical that technology doesn’t overlook the majority of them.
“The past year and a half has brought the two together more than ever. So much so that the definition of community as it becomes more and more digital can be, in some respects, geographically unbounded,” Ransom said.
For Ransom, the community banks that are going to perform well moving forward are going to pick their niches that they believe they can serve particularly well – which may in some cases be geographic, but in other cases could look very different dependent on a community’s life stage. This allows for advanced creative license to think about the needs of these groups within a community
Tarah Herger, SVP and Division Manager of CCBX, the fintech partnership arm of Coastal Community Bank, said her division was created as a result of desire to innovate the bank’s deep connection with the surrounding small- and medium-sized businesses. Maintaining a checking, savings or other type of account with a community bank can also increase their ability to offer competitive mortgages and small business loans.
Simply put, the money being managed in community banks can be reinvested in the community while fintechs simultaneously grow their brand. For Herger, embracing that technology was a means of survival and opportunity abound thanks to incoming fintechs. The catch was looking for providers who instilled solid regulation and expert compliance.
Amanda Swoverland, chief compliance officer at Unit recommended community banks brace themselves for the tough questions when the tech is offered: Who is your KYC partner? Who is going to do your transaction monitoring? What about Regulation E compliance?
“These are questions the banks are good at but the fintechs may look at with glossed over eyes,” Swoverland said. “That transition layer between the bank and fintech has to be spotless so the bank isn’t once again spurned by new technology. If those regulation pipes are built sturdy, our team could stand someone up in four to six weeks, and it will be worth it for everyone.”
These conversations took place during FinLedger’s most recent Mini-Con. Sign up for our newsletter to hear info on our upcoming industry discussions with leaders and innovators in all sectors of fintech.