There’s strength in numbers couldn’t be truer when it comes to community and regional banks as they navigate the ever-increasing digital world. The likes of JPMorgan Chase and Bank of America have the budgets and the staff to develop cutting-edge digital offerings for their customers, their smaller brethren are usually left to their own devices, which means scrambling to catch up.
Aiming to end that cycle and to prevent their banks from becoming irrelevant, a group of a dozen community and regional banks, with the help of consulting firm FinTech Forge, created a consortium that will work with financial technology startups to develop products and services that meet the digital needs of their customers.
The move is driven in part by a desire to innovate and part survival. It comes as millennials are bypassing branches and traditional banking services for the fintech offerings at an increasing rate. Take Quicken Loans, the Detroit-based lender that operates Rocket Mortgage it’s completely digital platform, for one glaring example. In the fourth quarter of last year, it became the nation’s largest residential mortgage provider, surpassing Wells Fargo. “Some of the banks are doing it out of necessity,” said Marc Butterfield, SVP of digital & payment solutions at First National Bank of Omaha, of the new consortium dubbed Alloy Labs Alliance in which the bank is a founding member. “We don’t want to be in that position.” Butterfield began building the foundation to offer more digital products last summer and sees the consortium as a way to not only bounce ideas off of others but share in the risk of testing new innovations. “When you are talking internally it makes people more comfortable if other banks are wanting to do it or have already done it,” said Butterfield. “It’s also going to be helpful when talking to fintechs to prove out their ideas when you say we have ten to 12 banks that are interested instead of one.”
Regional, Community Banks At A Disadvantage
As it stands now, many of the nation’s smaller regional and community banks are beholden to large vendors to manage their data and thus the innovative services they offer. Because the banks are small, they don’t have large research and development budgets to pour into trialing new services. Many face roadblocks when aiming to adopt new digital services because they have to ensure the applications work with the systems of the big vendors. “We’re seeing great, bold new ideas being brought to the market and when you meet these new fintechs and introduce it to the core, the core is not engaging,” said Julieann Thurlow, president, and chief executive of Reading Cooperative Bank. “We’re just a small fish in a big pond. If you want something new and creative it’s very hard to do.” In addition to the challenge of getting the big vendors to listen to these smaller banks, the fintechs are creating cutting edge technology but aren’t considering the regulatory requirements the banks have to adhere to when launching new products. “With the consortium, the banks become a bigger player and represent more dollars. We’ll have an influence on the product as its developed,” she said.
Alloy Labs, which went live earlier in November, was founded by twelve community and regional bank who are acting as the founding members, with an additional 20 joining as charter members. The founders represent assets of between $250 million and $20 billion and are located across the country. The banks will not only identify areas to develop digital services but they will establish smaller working groups to conduct research in specific areas or to solve specific problems. Working collaboratively, the banks will also have the opportunity to engage with fintech startups to shape the products and services and reduce the risk associated with bringing them to market. The consortium will be managed by FinTech Forge while Crowe LLP, the public accounting, consulting and technology company will provide advice and services pertaining to regulatory and compliance issues. Jason Henrichs, managing director at FinTech Forge said the idea is to go beyond the “fintech petting zoo” of introducing banks to fintech startups and actually work with them to develop and adopt products. “They can only take on so many projects because they are limited in terms of resources,” said Henrichs. “Even one of our most active banks can do about 20 proof of concepts with the goal of getting one into production. With this and the same level of resources, they will be able to do 30 proof of concepts and hit a rate of six to ten.”
While the banks are being quiet about what products will come to fruition they did point to certain areas of interest including digital payments, making it easier to move money around, financial literacy, digital account opening, small business lending, and savings and debt reduction to name a few. Many realize that the banking industry is changing and that while it has been consolidating for years, it may no longer be that the big banks snap up the smaller rivals in the next wave. “In the past, it was really about who had the most efficient operations,” said JP Nicols, managing director at FinTech Forge and a veteran of the banking industry. “The winners going forward are those that are more adaptable at meeting clients needs. Those that are not responding to changes are not in a good place.”