How to build a fruitful fintech partnership

Many community banks, especially smaller ones, are feeling threatened by the new generation of fintech companies. But by working with them instead of against them, community banks can better compete with the megabanks and other tech-forward competitors. Here’s how.

By Karen Epper Hoffman

Nearly a quarter century ago, Microsoft founder Bill Gates famously stated that “banks are dinosaurs.” And so began the love-hate relationship between technology companies and financial institutions that exists to this day.

Even now, U.S. banks see financial technology upstarts (or “fintechs”) as both their best friend and, potentially, their worst enemy, as they vie to develop new means of engaging customers.

Kevin Tweddle, ICBA group executive vice president for innovation and financial technology, points out that many community bank executives are worried that “fintechs would take over and compete. … But for the banks willing to partner, it’s a win-win.”

And community banks offer an appealing draw for these potential fintech partners as well: While a smaller community bank may offer less reach, fewer customers and less brand recognition than a super-regional or money center institution, community banks are nimble, can offer entry to the C-suite and typically operate with less red tape than a fintech would experience working with a megabank.

Brian Unruh is CEO of $662 million-asset NBKC Bank in Overland Park, Kan., which co-ran a fintech accelerator as of October 1 (see Trailblazer article). He says that for his community bank, it has been “rewarding and enlightening to help many [fintechs] work through these challenges while simultaneously working toward solving our strategic initiatives.” 

Unruh adds, “Working closely with the founders of these companies is energizing, and we are continuously learning a great deal. They have such commitment and focus on solving a particular problem.”

As Tweddle points out, the community bank market is “quite dynamic and collaborative. Big banks may have bigger budgets, but in dealing with the red tape of a bigger bank, some of these fintechs may run through all their cash before they get their first deal off the ground.” And, he adds, when one community bank has success in working with a fintech partner, it is more apt to spread the word. “They’ll call all their other community banking friends,” Tweddle says, “which helps scale the business.”

Growing collaboration

Indeed, regional and community banks are increasingly looking to fintechs to help them connect with customers and prospects (see sidebar, end of article).

According to a report by Manatt, Phelps & Phillips, LLP, executives are “optimistic” about future collaboration between the two industries. Fifty-four percent of bank respondents cal fintechs a potential partner, and 89 percent say they believe partnerships between the two will captivate the industry over the next 10 years.


of bank respondents call fintechs a potential partner


say partnerships between banks and fintechs will captivate the industry over the next decade

Source: Manatt, Phelps & Phillips, LLP

In particular, Tweddle says there is a lot of momentum around fintech partnering in lending and payments. According to VentureScanner, 72 percent of venture funding to fintechs is going to firms specializing in these two areas. “That’s where it’s at, because bankers are always looking to be more efficient in those two areas,” Tweddle points out. “Lending is the number-one needle move for a bank. If you’re a bank, you’re always looking for ways to raise revenues, cut costs, mitigate risk and better understand customers.”

One recent case in point: Stuart, Fla.-based $5.9 billion-asset Seacoast Bank announced in May that its recent partnership with SmartBiz Loans had helped the bank cut the time it takes to process a mortgage loan, from application to funding, by half, to roughly 10 days, bank executives told American Banker. In doing so, Seacoast Bank estimated that SmartBiz loans originated in the first quarter represented 74 percent of the total SBA originations in that quarter.

Mercantile Bank of Michigan has been working with a wide variety of fintech partners for more than a dozen years, dating back to being one of the first banks to team up with a then-fledgling PayPal. The $3.3 billion-asset bank, based in Grand Rapids, Mich., most recently partnered this past spring with Abe AI, an Orlando, Fla.-based startup. Abe AI makes a personal financial management application based on machine learning and artificial intelligence, providing “conversational banking solutions grounded in financial health.”

John Schulte, Mercantile Bank’s chief information officer and a longtime advocate for technology advancement among community banks, sees this deal as a win for Mercantile Bank and an opportunity to create a “repeatable model” that can be showcased to other community banks to help them up their game, offer better services to customers and compete with the megabanks.

Adom Greenland, senior vice president and chief operating officer of $620 million-asset ChoiceOne Financial Services of Sparta, Mich., says his bank is taking a decidedly local approach to its fintech partnering. It has teamed up with two Michigan-based technology startups, Autobooks and Plinqit. “In both experiences, we had developed a relationship with the founders of the fintech over the course of a year before entering into an agreement to be a pilot bank,” Greenland says. He adds that the products these companies have developed “augment the services we provide at ChoiceOne and fit well into our strategy of helping small businesses grow and individuals save.”

Greenland says his bank did its homework, too, before plunging into deals with startup companies. “We spent a significant amount of time in upfront due diligence with compliance and legal counsel to ensure the risks were appropriate for our bank,” he says. “In both cases, we found the fintech partner to be very flexible to ensure that we were comfortable both with the legal contract and the information security.” 

Fintechs bring more than tech

For Unruh of NBKC, working with fintechs is not only “smart” but necessary. “This is not entirely a generational or age issue, but rather it is offering solutions to consumers and small businesses that previously did not exist,” he says. 

“This is not entirely a generational or age issue, but rather it is offering solutions to consumers and small businesses that previously did not exist.”
—Brian Unruh, NBKC Bank

“Just a few years ago, a small-business owner did not have access to working capital in the seamless, lightning-fast and non-burdensome manner they do today,” Unruh adds. “First-time homebuyers, people trying to pay down debt or establish emergency savings did not have the effective, incredibly easy-to-use tools that now exist.”

NBKC has been providing home mortgages online to all 50 states for more than two decades through its online channel. “Fintech companies bring technology that will both assist our customers and supplement what we provide at ChoiceOne,” says Greenland. Partnerships with Autobooks helped the community bank’s many small-business customers who need assistance with accounting and invoicing, and provided an excellent user experience and great customer service, Greenland says.

Schulte says of Mercantile Bank’s fintech partnerings, “We’ve gotten into a groove in terms of what the experience is like and what the challenges are. You have to start like a dating process—like a dance. Sometimes, you have to walk away if the arrangement isn’t right. Sometimes the key is waiting to have enough dances.” Schulte stays abreast of the industry buzz by attending conferences and following Twitter and other social media to divine “which companies are worth having a conversation with.”

“You have to start like a dating process—like a dance. Sometimes, you have to walk away if the arrangement isn’t right. Sometimes the key is waiting to have enough dances.”
—John Schulte, Mercantile Bank

Most recently, he has become a devotee of chatbot technology, teaming up with Abe AI to help Mercantile Bank’s customers connect on social media and Google, and by text. “We’re using a conversational interface to reach a different market,” he says. “We found a partner in Abe AI who had the same philosophy about financial health being a focus, and who could leverage existing bank platform investments and APIs to deliver a solution quickly with unique capabilities not seen in the marketplace.”

While it may seem to run counter to every business principle, Schulte and other fintech-lauding community bankers claim that sharing their success and their experience with competing community banks is a benefit. “The experience we bring, and the repeatable model we bring to other similar financial institutions, helps us build a mutual success,” Schulte says. “If we act as a reference and advocate for you and introduce [a fintech partner] to five other banks, we can pay for us. This is really about building a community.”

This matchmaking, in turn, helps reduce risk for each bank that is working with a particular fintech, and strengthens its brand and technology.

What to ask

Fintechs have become more aware of the regulatory and legal environment in which their partner banks work. However, it is still incumbent on the financial institution to determine that its partner is working within compliance guidelines and is not running afoul of rules and guidance set out for the banking industry.

“We have the respect and trust from customers. And we understand working with regulators,” says John Gill, who is senior vice president and chief operating officer of $1.2 billion-asset Somerset Trust Co. in Somerset, Penn. “A lot of fintechs are not used to that kind of insight on you.”

“We always strive for a model of mutual success,” says Schulte. “Build a replicable model the fintech can bring to other community banks, support them when we succeed as a reference and an advocate, and sometimes factor a way for those further victories to offset our first-timer risk and development costs.”

Schulte says his bank has worked with companies at various stages of organizational maturity and takes a risk-based approach to due diligence based on each project’s characteristics. “Security is always a top-of-the-list topic,” he says, “but often we work through other issues together around compliance. Each experience is a learning opportunity for both sides of the partnership, and building a relationship foundation with the fintech is important.”

Strategic alignment needed

Schulte claims that there needs to be “a strategic alignment, even at a philosophical, and not just technical, level. Fintech companies are just as excited, if not more, about launching a success story,” he says, “and are often willing to bring more value to get there, especially in terms of supplementing marketing support and technical expertise and resources community banks need.”

“There must be a commitment from the whole organization, including the compliance team, to be open to doing something different or being the first one to do something new.”
—Adom Greenland, ChoiceOne Financial Services

According to Greenland, the largest challenge is properly assessing the risk, specifically on the use of customer information. “Many fintech companies want access to our information, which brings all kinds of legal and compliance questions,” he says. “There must be a commitment from the whole organization, including the compliance team, to be open to doing something different or being the first one to do something new.

“Another challenge is the scale of the product and impact on the larger customer base,” Greenland adds. “There are many products that are targeted toward a ‘niche’ and simply don’t have enough market for a smaller bank to consider the expense and time in investment.”

Unruh says, “Culture alignment is always front and center for us. We only want to work with people that we feel are creating solutions for the right reasons, are realistic about the challenges and appreciate what each side brings to the table. We have passed quickly on several opportunities that could have provided quick fee revenue, but our approach is to build long-term, high-value solutions. 

“Open, honest communication is an absolute must. In many cases, these startups need to move very quickly.”

Partners in strategy

John Gill of Somerset Trust Co. sees fintech partnering as intrinsically tied to his bank’s “strategic vision” of making its products stand out. The community bank has worked with several fintech companies, including Malauzai, a unit of Finastra, which has helped the bank develop its digital and mobile banking platform. “You can view [fintechs] as a threat or an opportunity,” Gill says. “We view working with them as an opportunity.” And banks, in turn, can help their fintech partners by sharing their experience working with regulators, dealing with compliance and other issues that may be new to fintechs.

“Malauzai has not just been our vendor but a strategic partner,” Gill says. He adds that executives at their startup partner have helped introduce them to other fintechs, offered advice and helped the bank create “a roadmap” for developing everything from data analytics to peer-to-peer payments to digital onboarding of customers. Gill cautions that not every partnership goes so positively and smoothly, though.

“You’re not going to bat a thousand. There will be some [deals] that work OK and some not great, and some you need to walk away from.”
—John Gill, Somerset Trust Co.

“One thing the bank needs to do beforehand is understand what they want to do and set their own expectations,” he says. “You’re not going to bat a thousand. There will be some [deals] that work OK and some not great, and some you need to walk away from.”

What is most important, Gill cautions, is that—like a good marriage—your fintech partner shares your values and vision and can provide product differentiation. “It’s important that the company [you’re working with] is going where you want to go,” Gill says. “Then, you have a better integration.” Case in point: Gill says executives at his bank and executives from Malauzai spent nine months doing due diligence. Somerset Bank had a lot of input in the design and testing “to make sure the product was what we wanted,” Gill adds.

Karen Epper Hoffman is a writer based in Washington state.