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The amount of venture capital dollars invested in U.S. financial technology startups nearly tripled last year to $63 billion, according to CB Insights research. Investment in the sector has been trending higher since 2016.
It’s not hard to imagine a world where that investment surpasses community banks and smaller markets, but the reality is technology offers smaller banks a chance to compete on a more level playing field that otherwise could be dominated by big players.
“There is this friction that has been moved, these barriers that have been moved with the massive advancements in technology that now allows this to be possible that a community bank can provide for the needs of its business customers with equal footing of any of the other larger competitors out there,” said Charles Potts, executive vice president and chief innovation officer at Independent Community Bankers of America.
A September paper from the Federal Reserve highlighted the ability of fintech to help community banks in a number of areas, including improving a bank’s processes, monitoring technical infrastructure, enhancing customer-facing aspects of the business and even diversifying a bank’s customers and revenue sources.
“As the landscape of financial technology continues to evolve, a bank’s access to and understanding of that technology will play a vital part in its ability to effectively meet the needs of its community,” the paper concluded. “With appropriate risk management and compliance guardrails, fintech partnerships present a notable opportunity for community banks to strengthen existing operations, particularly when the partnership serves the unique strategic objectives of both parties.”
In some cases, banks are purchasing software or partnering with technology providers. In others, banks are acquiring fintech companies. For example, Horicon Bank, which has 19 offices in Wisconsin, acquired Atlanta-based Monotto last year. Monotto aims to improve financial literacy and planning among millennials and offers banks products to better engage those customers.
Mark Nelson, chief information officer at Horicon Bank, said when the deal was announced that the flexibility offered by its core banking provider made it possible for the bank to work with fintechs to offer customers the best products.
“By bringing Monotto’s software development capabilities in house, we hope to be able to offer those same solutions to other financial institutions in a step forward to modernize the world of banking,” Nelson said.
The COVID-19 pandemic only served to push banks to adopt new technologies. Madison-based FIPCO, which provides software that helps banks with compliance and forms, saw a 50% increase in use of e-sign among its software clients, and many took advantage of the firm incorporating PPP forms into its software.
“A lot of banks were not offering online tools,” said Pam Kelly, president of FIPCO.
She noted that while COVID did push adoption, the need to move quickly meant some banks went for creative analog options, like conducting loan closings through a bank drive thru.
Kelly said banks lagging in technology see the need to be in the space but are challenged by not having internal teams to research, analyze and implement products. She added not all financial technology products are aimed at community banks.
“They aren’t always positioning their marketing and their cost at a mid-to-small community bank price,” Kelly said.
Potts and ICBA, a Washington D.C.-based organization representing community banks nationally, run an annual accelerator program to help fintech companies better match their product to the community bank market. When the effort started, the number of applicants was in the dozens or low hundreds. Now in its fourth year, the program will interact with 1,200 to 1,500 companies.
Potts said the program’s growth is the result of bankers using the products that are homed in it and large, well-capitalized companies seeing value in the needs of community banks.
“We’re no longer having to sell ourselves to justify what we’re doing,” Potts said.
When technology allows community banks to better compete with larger institutions, they’re able to also utilize their more traditional differentiator: customer service. As Potts described it, community banks can be both high tech and high touch.
For Wausau-based Incredible Bank, mixing technology and quality service is a point of pride. The bank, which describes itself as the first online, national community bank, has 16 offices, primarily in northern Wisconsin and Michigan’s Upper Peninsula but has customers in every state, according to Kathy Strasser, executive vice president and chief operating and information officer at Incredible Bank.
“We have gone to the market with a very different approach of, ‘We are going to be a community bank, but we’re not. We’re a national online bank that’s technology-focused, but we’re going to deliver an experience like none other,’” Strasser said.
Incredible Bank started in 2009 as a vehicle to collect deposits for its holding company, River Valley Bank. Initially, it didn’t receive much attention internally as River Valley worked to recover from the Great Recession. Eventually, when executives did turn their attention to it, they knew they needed to find a niche if they wanted to operate the bank nationally and match the experience consumers receive elsewhere.
“We knew that we had to make whatever we were doing online very simple,” Strasser said.
The niche came in the form of high-end motorcoach financing and then to the market for converted touring coaches and buses. The idea is that by serving those customers well and getting loans approved quickly, the bank will get a chance to provide a mortgage on the customer’s next home or to offer business financing.
“Next thing you know, they’re moving all their deposit relationships to us and now you have a full-blown customer in Nevada or Oklahoma or Florida or wherever it may be,” Strasser said.
Competing at the national level as a smaller bank means Incredible Bank needs technology that matches big banks, Strasser said, adding that her team will take claims from major brands about how fast customers can open an account or close on a mortgage and use them as a benchmark.
“The big banks have hundreds of people in their technology department. The community banks, we don’t have the budget to go out and build technology, right?” Strasser said.
She said community banks instead need to get creative with their use of technology, be willing to take on some risk and supplement with people where possible.
In some cases, Strasser said technology won’t work as needed, isn’t available or could be too expensive.
“We’ll put people behind it and I say, ‘Let’s use people until it hurts,’” Strasser said. “Why go out and buy a $100,000 piece of software if I can put maybe one person behind it manually?”
Eventually, as use of a service grows, the bank may need to add people or find ways to incorporate technology, but not relying solely on technology allows the bank to get started.
“Obviously automation is a priority, but you’ve got to balance it,” Strasser said.
She added that at industry conferences other bank leaders will explain that their bank doesn’t have the size or resources to adopt technology, or they suggest Incredible should be charging for services like sending money.
“Our opinion is some of these things are just table stakes,” she said. “How do I charge you for Zelle when you can get it for free at Capital One?”
Many smaller banks may be worried about their return on investment, costs, or having a core technology provider that does not integrate well with fintech offerings, Strasser said. Those concerns can delay implementation of new technology.
“But if I’ve waited, the market keeps moving and changing, and now I’ve waited two years. Now I’m so far behind and I have all these investments to make, I worry that a lot of these banks won’t be able to keep up,” she said. “It’s almost like you need a strategic initiative that says we are going to keep up, we have to keep up, we’re going to make investments every single year.”