Navigating a new vendor relationship isn’t always easy, but what if the company is a startup like many fintechs? Fortunately, the process for community banks looking to partner with or utilize fintechs is not too different than working with traditional vendors.
By Elizabeth Judd
When New York City-based Lendsmart began offering its artificial intelligence-driven digital lending platform to community banks early this year, one of the biggest hurdles was signing its first customer.
“Being a brand-new startup, we didn’t have metrics, unfortunately,” says founder and CEO AK Patel. “You need just one [community bank] to say, ‘I’m going to give you a shot.’”
While a lack of references and track record can scare off some community bankers, Patel is quick to point out the advantages of being a customer of a newly minted fintech. “As we are small and we don’t have 100 or 200 community banks as customers, we can give a white-glove service approach to the customers we do have,” he says, adding that if a customer “finds a bug or wants a feature added, we can usually do that for them in a few hours.”
Fintechs, it should be said, come in all shapes and sizes. When some say fintech, they include legacy players like Fiserv, FIS and Jack Henry under that umbrella because of their technology-oriented lines of business, while others mean “your newer, early-stage, startup-like and highly focused technology companies,” explains Charles E. Potts, senior vice president and chief innovation officer at ICBA.
For community banks, it’s of course a tougher challenge to evaluate the latter category. Potts maintains, however, that community banks can use the same vendor due diligence for all providers, regardless of size and whether they operate at the most innovative fringes of fintech.
“You want to apply the same practices to a start-up fintech as you do to a 50-year-old core processor,” he says. Newcomers may not have a lengthy track record of audited financials or have undergone a SOC 2 examination, but the fundamentals are the same.
Evaluating a fintech relationship
Many community banks find it easier to use their existing core provider for the latest applications rather than seek out fintech newcomers, says Michael Emancipator, vice president and regulatory counsel at ICBA.
While this route has the advantage of being safe—the provider is trusted; integration problems are minimal—establishing new relationships allows community banks to provide cutting-edge offerings immediately, rather than months or years down the road.
One important question when evaluating a fintech is the openness of a community bank’s existing core processor. Here, Potts says, the most critical questions include: How much integration work will be necessary to weave a new fintech solution into a bank’s current technology? And how much effort will be required for a fintech solution to obtain customer and other data necessary for success?
Best practices for negotiating and signing contracts are similar for fintechs and traditional banking vendors. “Contract terms and conditions really shouldn’t change just because it’s a start-up fintech versus a legacy provider,” Potts says.
One exception is that with fintechs, negotiating contingency or “out” clauses assumes greater importance, says Deborah Matthews Phillips, ICBA’s senior vice president of payments and technology policy and ICBA Bancard’s senior vice president of industry relations. “If you’re working with a far less established fintech,” she says, “you should ask: What happens if the fintech gets acquired? What happens if it goes out of business?”
Clarifying your strategy
There’s no question that the latest technologies can come with a wow factor, but Potts argues against “going out and kicking the tires” for an array of fintech solutions.
“Don’t fall in love with a lot of shiny objects,” he says. “Pay close attention to the problem you’re trying to solve as a banker—and how effective or efficient any particular technology is at addressing that problem.”
Potts notes that details like whether a solution uses C++ or Python are “oftentimes irrelevant,” especially with the newest generation of fintechs. These fintechs have evolved, he says, so that the solutions are seamless and “bankers don’t need to get their hands dirty with the technology itself.”
“I’m a big proponent of knowing what it is you want to do as a bank,” he says. “I like the old Yogi Berra-ism: ‘If you don’t know where you’re going, you might wind up somewhere else.’ The banks have to have a very clear strategy and business model—and most of them do.”
Phillips emphasizes that “community bankers have to put their dollars toward the right things.”
She says, “You have to be discriminatory and say, ‘I’m not going to do certain things because they don’t align with our strategic direction.’ Community banks can’t afford to bet on the wrong horse.”
Patel contends that it can be difficult for community bankers to grasp the cost savings by adopting a new solution. Some banks, for instance, don’t realize the true cost of originating a loan, because the process has always been done manually and no one has calculated the cost of employee time in terms of processing loans.
Now that Lendsmart has a track record, it can demonstrate that a community bank using its digital lending platform can originate 600% more loans a month in the same time period with automation.
“A lot of community banks have had to take a hard look at becoming more digitized. COVID-19, in my estimation, has accelerated banks’ digital transformation by at least five years.”
—Donald J. Hawkins, Griffin Technologies
Fintech partnerships are evolving
COVID-19 is arguably creating some seismic changes within relationships between banks and fintechs.
Donald J. Hawkins, founder and CEO of Overland Park, Kan.-based Griffin Technologies, a geo-location intelligence platform that connects financial institutions to their customers, says the crisis is serving as a leveler, giving banks and fintechs more common ground.
“Before the pandemic, fintechs met with banks in beautiful offices with mahogany and granite and stained-glass windows,” he says. “Now we’re all meeting via Zoom in our living rooms or kids’ bedrooms. It’s something we all share.”
Hawkins notes that COVID-19 highlighted challenges that banks are now taking to heart. For instance, he says, “banks that did not offer online account openings felt the pain of not being able to sign on customers without requiring a significant amount of paperwork being faxed or emailed back and forth.
“A lot of community banks have had to take a hard look at becoming more digitized,” he adds. “COVID-19, in my estimation, has accelerated banks’ digital transformation by at least five years.”
Phillips says the crisis gave bankers a chance to assess opportunities to bolster their capabilities. Many are looking to streamline legacy practices, upgrade existing solutions or incorporate new ideas like electronic signatures into their processes.
“Community bankers learned a lot during COVID,” she says, “and they will be using and adopting this knowledge going forward.”
How to find a reputable fintech partner
Most experts agree that due diligence on fintechs is the same for other vendors. References count, and so does listening to the experiences of peers, either by networking or participating in user groups.
Michael Emancipator, vice president and regulatory counsel at ICBA, suggests looking to the guidance from various agencies, especially that of the Office of the Comptroller of the Currency (OCC). He says the OCC maps out questions to ask prospective vendors, including ones that look beyond operational risk to consumer protection risk. “The third-party guidance documents are very valuable at coming at these questions from a multitude of angles for the banks to consider,” he adds. (Find them at bit.ly/OCCguidance)
What matters, too, is the community bank’s chemistry with a fintech. “A vendor-client relationship should be a partnership,” says Deborah Matthews Phillips, senior vice president of payments and technology policy at ICBA and senior vice president of industry relations at ICBA Bancard. “Open and frequent communication is an important goal that community banks should strive for in working with their fintechs.”
To help foster strong fintech relationships, ICBA launched its ThinkTECH Accelerator program in early 2019. Donald J. Hawkins, founder and CEO of Griffin Technologies in Overland Park, Kan., met with 40 different community banks through the 2020 program. He described it as a terrific opportunity to hone his fledgling company’s offerings.
“Being able to speak the bankers’ language and give them something that’s easy to comprehend was extremely important,” Hawkins says. “Community banks gave us the direct feedback we needed, and so we could iterate and build a solution specifically for them.”
Elizabeth Judd is a writer in Maryland.