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Banks unlock new business with fintech

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Banks are increasingly locking arms with innovative tech startups in hopes of modernizing their offerings

A few years ago, traditional banks largely looked at fintech startups — many of which sought to flip the world of financial services on its head — either dismissively or as foes eager to disrupt their business models.

But banks and fintechs have become darlings in recent years. That trend is resulting in new and modern products, services and revenue streams for banks while simultaneously creating a slew of lucrative opportunities for fintech companies — a sector that has seen $57.9 billion of global investment at mid-year 2018, which is already 52% more than the $38.1 billion invested through the entirety of 2017, according to KPMG’s Pulse of Fintech report.

“I think there might have been historically conventional wisdom to go and build it yourself, particularly if you’re a larger institution,” said Dennis Devine, head of consumer and business banking and co-president of community banking for the $136 billion in assets KeyBank. “We learned quickly there is innovation occurring in the space that we could partner with in ways we had not thought of before.”

Fintech is a term generally ascribed to any financial technology. In that regard, banks have been engaged with fintech since they started using computers and the internet. The term itself could refer to any financial process built around technology or firms developing those. That could involve payments or money management services for consumers, or something that streamlines internal accounting processes for companies, or cryptocurrencies like Bitcoin and the blockchains on which those are built.

Dennis Divine, head of consumer and business banking and co-president of community banking for Key Bank

But it was really just within recent years that fintech companies truly began finding their place in the banking world.

The modern-day dynamic between fintechs and financial institutions began a few years ago as large U.S. banks and regional banks started working with them. That includes Cleveland-based KeyBank, who had consolidated computer systems in 2014 with the Oracle Banking Platform.

A good example of how the company turned an early fintech relationship into an additive service for the bank itself comes with its investment in HelloWallet in 2015.

The 2009-founded startup offers financial management tools, which Key first rolled out for its employees before offering the same platform to customers. Before that partnership, HelloWallet had hardly any users.

Since then, Key has grown into HelloWallet’s largest customer. Key was so enamored with the service it acquired the business from Morningstar in May, adding about 36 employees.

“Four years ago, we might’ve thought about just building that ourselves. Now I have a separate office in Washington, D.C. with tech leaders and designers, most of whom didn’t work with a bank before,” Devine said. “Now they’re designing financial wellness solutions central to the client. That’s an excellent evolution that has occurred.”

Today, thanks to HelloWallet, Devine said the number of clients taken onto the financial wellness platform per banker per day is up by 32%.

“So that’s where this fintech fits,” he said. “There’s a really quantifiable way to look at this.”

Key has engaged a slew of fintech companies through general investments, partnerships and acquisitions since Oracle and HelloWallet. One this spring, with Bolstr, is designed to streamline small business lending. Another, with Billtrust, began in 2017 and offers cloud-based payment cycle management. One from 2015 with AvidXchange establishes automated bill payment solutions. The examples go on from there.

Tech connections

Many others are taking a similar approach toward fintech and innovation, partnering with related startups to ultimately either cut costs, improve services or grow revenues — and those things certainly aren’t mutually exclusive.

“At Fifth Third Bank, we see fintech as an opportunity, not a threat. We have always embraced innovation, and our strategy is to buy, partner and/or build, as illustrated by several of our recent innovations,” said Fifth Third Bank president and CEO Greg Carmichael, whose background is in technology, having worked at Emerson as chief information officer and in IT at GE before that, in an emailed statement. “This strategy is driven by the way our customers and clients want to bank, which is anywhere, anytime. Innovation and technology are in the bank’s DNA. Fifth Third was the first bank to introduce a network ATM infrastructure back in the late 1970s.”

One of the bank’s more recent partnerships involves Intellect Global Transaction Banking, whose services include not just payment transactions but cash management, collections and receivables. Designed to support corporate clients, the firm incorporates machine learning and predictive analytics as well.
For smaller banks, which don’t have the scale to even consider building such comparable tech platforms themselves even if they wanted to, fintech partnerships are an important way to compete for market share just like their larger counterparts.

First Federal Lakewood, a mutual bank with roughly $1.8 billion in assets, invested in Boston startup Numerated Growth Technologies in 2017 out of interest in its small business lending app, which was rolled out in the first quarter of this year. The bank, which has a nearly 5% stake in the company, sought that deal because of concerns customers might seek loans through online lenders like Kabbage (which secured $250 million from SoftBank Group last year) or peer-to-peer lending platforms like LendingClub, said Tom Fraser, president and CEO of First Mutual Holding Co. The new app lets First Federal streamline the traditionally slow loan process while maintaining low rates so it can compete not just with fellow banks but non-bank financial institutions.

So are tiny and agile fintech companies really the disruptors of banking they claimed they could be — or wanted to be — years ago?

Bankers don’t seem to think so. The concern has largely faded, at least.

In fact, partnering with them may be a path toward avoiding impacts from the real disruptors. It’s quickly becoming a common practice in banking today.

“The true disruptors are the Amazons of the world. The Googles. Those accumulating massive amounts of data consumers in general. They’re the greater threats to banks than any startup fintech is,” Fraser said. “Do we want the banking experience to be in the hands of big data providers such as an Apple or Amazon? Or do we as consumers want trust and access available through the local bank? The local bank can make the customer experience better and easier by working with fintech.”

Mutual understanding

In the tech world, banking’s dynamic with fintech companies is due to a confluence of factors from a competitive landscape to the sheer sophistication of technology to the brainpower behind it all that’s allowing these startups to go to market in droves.

In many ways, though, fintech’s themselves weren’t developing products and services with the customer in mind. That’s something that has evolved in the last five years or so, said Nathan Hodgen, a senior product manager in Cleveland for AmTrust Innovation Lab.

“There’s been such an engineering and IT focus for so long in fintech and other tech. But concentrating on the customer experience and what the customer really needs as the focal point — which seems obvious — we’re actually doing now instead of briefly talking about what customers want and then how do you build the infrastructure for it,” Hodgen said. “Also, the discipline of product management is starting to get traction in more traditional institutions.”

Prior to his current job, Hodgen worked with the Federal Reserve Bank of Cleveland, where he worked on a series of projects, including modernization and mobile efforts for banks in the Fed’s system.

“In a lot of ways, people are just coming to their senses as banks have success with technology,” Hodgen said.

As far as the role banks are playing in the fintech revolution, much of that is also simply an evolution of strategies for those fintech firms.

Just like how banks have been leery of startups, some startups, often erroneously, believe they can reinvent financial services without the support of a bank in their corner. Maybe some will be succesful with that. Yet, they ultimately benefit from the customer base and legitimacy a traditional, regulated banking company has to offer.

“You can’t just pull those customers out of thin air,” Hodgen said. “If you’re a fintech company, you’re better off doing things together. And maybe that’s just a natural evolution. Startups and fintechs are drawing this conclusion: I got these great ideas, but how do I get customers?”

But the evolution in thinking for banks can’t be understated.

“Banks are going to be looking to partner with smaller companies because just naturally larger corporations are slower at creating innovation,” said Ari Lewis, co-founder of Grasshopper Capital, a cryptocurrency hedge fund launched in Cleveland, and a consultant to blockchain and other fintech companies. “Many corporations are concerned more with preserving management and making sure bottom lines are good.”

It’s all about growth and revenue for banks.

Take, for instance, Goldman Sachs. The massive bank, which is known for banking some of the world’s wealthiest people, now offers a lending product for middle-class people through Marcus, an online banking business that started in 2016. There have been some hiccups there. But for Goldman Sachs, the opportunity is in creating new revenue streams by serving people it hasn’t before all while cutting costs or otherwise keeping them super low.

All those factors mean there is a dearth of opportunity for fintech startups today, which could very well see a lucrative payday if they build something the traditional finance sector really wants.

“As technology grows and you see more advancements with AI or blockchain or whatever, there’s always going to be opportunity. I believe startups are better versed for that opportunity because they have the ability to not have to worry about things like shareholders and have the opportunity to move quickly,” Lewis said.

“Banks are recognizing this. And that will only create more opportunity.”

Oliver Smith

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