Benefits of beta: Small banks look past risk in pairing with startups

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Radius Bank in Boston has relied heavily on early-stage technology firms to reinvent itself.

Radius has partnered with three startups in recent years to add products and capabilities on its way to becoming an online-only bank. Mike Butler, the $1 billion-asset bank's president and CEO, is eager to work with more firms.

Similarly, Belmont Savings Bank in Massachusetts is working with an early-stage company to improve its customer onboarding process. The customer experience is vital to the $2.7 billion-asset bank because it often poaches customers from larger banks.

"The fintech revolution is going to help community banks compete in a competitive marketplace with big banks,” said Hal Tovin, Belmont's chief operating officer.

While working with young firms that lack proven track records is risky, industry experts note that there are advantages to being among a startup’s first clients. It can be less expensive to add a product or technology from a startup than through an established vendor. A startup’s initial few clients also receive the fledgling company’s undivided attention, and younger firms tend to be more nimble and flexible than larger providers.

Although larger banks have worked with fintech companies for years — and some have accelerator programs for high-growth startups — community banks can also be attractive partners. More small banks are realizing that, said Michael Perito, an analyst at Keefe, Bruyette & Woods.

“I do think you're starting to see an increase in banks trying to control their own destiny,” Perito said. “At the same time, no one wants to be a huge outlier spending millions on this when other peers aren’t.”

Small banks can often make decisions and changes faster than larger institutions.

Still, most community banks prefer to wait until a startup is more established before doing business with them, said David Albertazzi, a senior analyst at Aite Group. Some of the reluctance is rooted in a fear that fintechs do not fully understand the regulatory environment. But partnerships with younger companies can be an affordable way to gain a competitive edge.

Small banks and startups “actually lend themselves fairly well to work together,” Albertazzi said.

It takes due diligence by both parties to make a partnership work, industry experts said. Butler said he vets the founders of potential fintech partners, looking for previous fintech experience, venture capital backing, determination and an appreciation for the regulatory environment.

Butler informs potential fintech partners that Radius operates in a regulated environment and, as a partner, the startup must work within certain boundaries.

If a startup "shows disdain for the regulatory environment, or they don’t respect it, then we aren’t going to do business with them,” Butler said.

Often, fintechs can learn about regulatory requirements by working with a community bank, said Neil Underwood, president of Live Oak Bancshares in Wilmington, N.C., which spun out the lending platform nCino.

Treasury Prime, a startup, approached Radius in December with a vague business pitch because it had heard the Boston bank works with fintechs, Butler said. Rather than turning the startup away, Radius described its pain points to the firm's founders. By late March the bank had a new product for opening small-business accounts online.

“They trusted us that we are a company that has credentials and knows how to work with tech companies in an agile environment,” Butler said.

Belmont found onboarding new customers to be a challenge. Digital Onboarding, a Boston startup with seven bank and credit union clients, replaced Belmont's paper-intensive onboarding process with a digital platform.

Digital Onboarding receives plenty of interest from other financial institutions, said Ted Brown, the firm's founder and CEO. Brown, who started his career with a fintech called Andera, said he hopes to have 50 financial institutions on the platform by the end of this year.

Staying engaged with a fintech partner is critical, Tovin said. Belmont treats Digital Onboarding as if it were part of the bank’s development team, and the companies work together to improve and tweak the product, Tovin said.

“You can make changes as you're learning," Tovin said. "When you do, you can see results fairly quickly."

Belmont has introduced Digital Onboarding at half of its six branches. Customer engagement has increased as a result of the partnership, Tovin said.

Customers who open accounts at the Belmont branches with the new platform receive an email directing them to a landing page with information on how to activate their debit cards, sign up for mobile banking and switch to direct deposit.

“That’s how people want to interact,” Tovin said. “No one is going home to read that $10 brochure. The financial justification is, ‘Oh, well, you can save money by not handing out these brochures.’ But the real value is creating a more engaged customer that tends to then have additional products and services.”

Community banks should seek fintech partnerships that solve real problems or enhance services, industry experts said. Fads or technology, for the sake of technology, are not sound investments, Perito said.

“Ultimately, the big question is how is this partnership or initiative going to differentiate what you are doing? If it doesn’t, it’s probably not worth it,” Perito said.

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