You’ve heard the narrative: Community banks are dead and, sooner or later, either big banks will subsume them or neobanks will replace them.
There is some truth to it. Community banks still struggle to adopt new technology that makes them competitive with neobanks, and they rarely have the product and engineering resources to build scalable tech solutions from the ground up.
However, community banks have something a lot of fintechs don’t: a banking charter and deep benches of talent who are experts in banking regulations — something much of Silicon Valley’s engineers, as good as they are at slinging code, severely lack.
What has traditionally been an adversarial relationship has now become more symbiotic — even if it feels like, to some, a necessary evil.
But for Peter Hazlehurst, the CEO of Synctera, it’s an opportunity. Our conversation with him gives us insight on how exactly he helps community banks and fintechs realize they are better together.
This interview has been edited for brevity and clarity.
Just this last week Synctera announced its partnership with Plaid, how is this going to benefit community banks and fintech?
There were some changes made regulatory wise, which was requiring that when you have an external bank account to transfer funds or move money back and forth, you have to verify ownership — or access and ownership — of that account by the person that’s sitting in front of the keyboard.
And we actually built this a long time ago when I was at Yodlee. Using our scraping engine and scraping logging we made it really quick. Fast forward to today, and Plaid has built a really great framework and set of customers. So that as a consumer, when I verify my account through one fintech service, I tend to have that profile stored in the cloud network so that when I go to the next one, verification is much, much quicker.
So, we had to partner with somebody, because when fintechs build on our platform, they need the ability to verify an account. Plaid represented the best platform for our fintech developers.
The whole goal of what we do at Synctera is to take all the legal stuff out of the equation for the fintech. So instead of having to go and do direct deals with Plaid themselves, or direct deals with Feedzai or Finix, we’ve done all of that fun work. It’s one set of APIs from us.
How closely are you working with these fintechs and community banks to make them feel confident in your solution? How do you manage that relationship?
We’re building a two-sided marketplace. Our mission only works if we can get a bunch of community banks on the platform. Our banking partners are super aligned with us because we’re cutting them into all of the revenue and they’re part of the trade. So think of it like this: instead of us signing a contract with our fintech customers, the banks do.
It’s a more competitive model, because what we actually have to do is we have to build or source the content, reframe it and make it useful to the developers, and then we have to give it to the banks so to speak. We then coach the banks on how to price it. And then we turn around and match the bank to the fintech.
We have probably three or four new FinTech capable banks starting from scratch on our platform. They aren’t going to have any customers. Literally, their mission – bank fintechs.
What we’ve all been hearing about is community banks starting and then going away. I think if we can help them pivot into a model, where their charter allows them to do business across the US, as opposed to just in this small town, I think we can create something special.
So when you’re empowering these community banks, are you setting them up to compete with the Chase and JP Morgans of the world or are you avoiding that?
I think the bigger model that we go with is — you’re running a successful community bank, your choice for growth is maybe buy a branch from your neighbor, or buy a bank next door in a town adjacent. And our model is to stand up a new part of the bank.
The upside of that is, most of the banks we talked to make one to two, maybe three million dollars a year in total income. A successful FinTech program can generate that much money by itself. So if they get two or three fintechs on their bank, they’re going to double or triple the size of the bank without creating any stress on the existing bank operations.
Is there anyone else attempting to do this? What sets you all apart?
I really think when it comes to our model, it’s the alignment.
So the matchmaking happens based on price, first and foremost. So take an example of a ledger in traditional fintech banking, ledger equals cost for the bank, because fintechs user starts up, they get on boarded by the provider, like a treasury prime, whatever, and that adds a user to the core banking system of the community bank.
I think if we can help them pivot into a model, where their charter allows them to do business across the US, as opposed to just in this small town, I think we can create something special.
-Peter Halehurst, CEO and Co-Founder, Synctera
And most folks charge $1 a month per user just to have an account on the system. So the banks pass that on to the fintechs and the fintechs say, ‘Well, that sucks. Why do I have to pay $1?’ But it’s the cost of doing business. In our model, we built a ledger from scratch, and we give it to the vendor, we give it to the banks for free.
We then tell the banks, you should price it between .75 cents and $1. Because that’s what the fintechs are used to paying. And our business model with the banks across everything that we do is a 50/50 net revenue share. So since there’s no cost, we’re sharing .75 cents to $1 for 50/50. So instead of the bank previously spending $1 per fintech per month per user, now they’re making .50 cents. So we’re inverting the economics in many ways.
How many community banking partnerships do you have today?
We have four today that we’ve done in the last three to six months. And then there will be ten or so more, which should be 15 to 20 by the end of the year.
The Federal Reserve just announced a list of what you need to look for in fintechs if you’re going to partner with them and there’s a bunch of regulations. Are you taking on all that burden when you’re evaluating within tech?
So my team’s job when they’re doing the matchmaking is first saying ‘we need all of this information about you.’ So that when we pitch you to the banks, they understand we’ve done some legwork and ultimately, the banks have to take the responsibility but we serve it up on the planning side.
We’ve looked at different financial background checks for people working there, all of that fun work, we’ve tested that they have had an audit done or not. And then, because we want to make it easier on the banks, what we basically come up with is a rating of A, B and C on risk level — A being little to no risk.
So let’s use Shopify as an example and they partner with a small community bank. But the transaction volumes are small and everything is sort of seed stage. Are you working with that bank to help scale up with them or are you saying maybe at this tier you want to partner with this other sort of bank?
There are practical limits. Some of the bank’s balance sheets won’t allow them to take really big deals. So that’s like, that’s just fundamental. We’re definitely coaching the banks on how to do this and what to do, operationally and functionally.
But we are standing up our own KYC team, a fraud team and AML team, not because we have the obligation to do it, but we’re recognizing there’s a bunch of fintechs that don’t know what to do. And so we do it for them at the start and help them and then show them, okay, you need to worry about these things. Likewise, on the bank side.
We’re helping them get started and and understand what risks they are taking. Because it’s not risk free, right, there is some risk. We’re coaching them on how to do it as effectively as possible. And over time, we’ll get better.