Some financial institutions are taking tech innovation so seriously that they’re turning it into a whole new business.
Sure, plenty of banks are far behind on technology, let alone in a position to spin out technology they’ve developed. But for the already tech-savvy, two recent examples might be worth noting.
Goldman Sachs announced recently that it would spin out some of its mobile security technology into a joint venture with Synchronoss Technologies with the hopes of creating a standard for BYOD, or "bring your own device" — the practice, increasingly common in many industries, of letting employees conduct business on the personal phone or tablet of their choice. On the opposite end of the asset-size spectrum is the $2.3 billion-asset Washington State Employees Credit Union, which began marketing its mobile short-term loan app to other financial institutions earlier this year.
"Financial institutions are among the most advanced tech buyers, but they are also innovators. Some of them have technology budgets as big as some governments," said Stephen Waldis, chairman and chief executive of Synchronoss, in a recent interview. "And I think we are seeing a pivot from them being primarily tech buyers to leaders and innovators and having the ability to monetize their developments."
Such spin-offs will likely represent just a small, but growing piece of the confluence of banking and technology in the coming years. More banks will likely be on the hunt to buy technology companies, rather than create new ones based on internal developments, observers say. Still, with the technologists at bank innovation labs being pushed to approach innovation with a startup mentality, bigger banks may be in position to push out more solutions to the market. Meanwhile, a select group of smaller institutions are using the nimbleness afforded by their size to innovate. That too could lead to more opportunities to monetize technology. Essentially, the industry might be ripe for some home-grown tech companies.
"I think the examples already out there say volumes about the ways that banks are thinking about the transformation happening in the industry," said Tery Spataro, executive vice president and director of innovation at CCG Catalyst, a consulting firm. "And I think the increase in fintech companies is propelling banks to look at the different opportunities they may have with innovation."
In the long term, the spin-offs could give banks another revenue source. After all, many are on the hunt for ways to boost fee income, so they are not as reliant on interest rates.
The poster child for recent bank spin-offs is nCino, a small-business loan platform that was developed internally by Live Oak Bancshares in Wilmington, N.C. Other banks’ inquiries about Live Oak's rapid growth led to its spin-out into a subsidiary in 2012. This year, Live Oak sold its remaining stake in the venture.
WSECU was also inspired to spin-out its Q-Cash product by interest from the outside.
"There is a lot of appetite for this product right now, we’ve seen more and more interest [from other financial institutions] as they’ve heard about it," said the credit union’s CEO, Kevin Foster-Keddie.
Currently, WSECU members can get a Q-Cash loan, $50 to $700 with a 60-day term, or a Q-Cash Plus loan, $701 to $4,000 with repayment terms set from nine to 36 months, with just six taps on the mobile app. The funds are deposited into applicants' linked accounts once the loans are approved. WSECU began offering this product to its customers in May 2014.
One of the major benefits of monetizing an internal product is having proof that it works and passes regulatory muster. nCino, for example, was developed by industry experts, tested internally and vetted with federal regulators "before nCino was ever launched as an independent legal entity," said Pullen Daniel, executive vice president of enterprise banking for the firm, in an email.
"Therefore, when we entered the marketplace, we did so with credentials that would have been difficult to attain in a reasonable timeframe," he said.
WSECU has inked a deal with what Foster-Keddie termed "a large credit union" as the subsidiary’s first customer.
The interest from other financial institutions was not the only impetus to create a new company, Foster-Keddie said. The credit union also wants to transform the short-term lending industry.
"When we saw the payday lenders growing, we thought that we could disrupt this whole space," he said. He added that consumers are more inclined to use their financial institution for these kinds of loans than a payday lender. But with regulators such as the Consumer Financial Protection Bureau more closely scrutinizing storefront lenders and the like, the time is ripe for banks and credit unions to enter the market.
The platform is compliant with the small-dollar loan requirements set by the Federal Deposit Insurance Corp., he said, and is completely configurable, meaning the client has the flexibility to adapt parameters to comply with any future regulatory developments.
"I think these products can really change things for consumers," he said.
Q-Cash's proprietary algorithms utilize customer data to determine approval. WSECU has a base underwriting rules set it offers to the purchasing institution, but ultimately it is adjusted to each bank’s own data, said Ben Morales, CEO of Q-Cash and WSECU’s chief technology officer.
Michael Moeser, director of payments for Javelin Strategy & Research, said "there’s definitely a big market" for financial institutions to offer such loans, especially considering the regulatory crackdown on payday lenders.
"I think it’s a great option for credit unions to offer their customers, and it’s also easier to underwrite someone who is already a customer," he added. Many banks, he said, typically have little interest in small-dollar loans, but if they could offer them in a more cost-effective and efficient manner — such as with a mobile app — it could be appealing.
Indeed, Morales and Foster-Keddie maintain that the fact financial institutions can automate Q-cash makes the proposition of short-term loans more palatable and potentially profitable since paperwork and many administrative costs are eliminated.
The technology that Goldman Sachs is spinning out consists of two products. The first is what it calls Lagoon, a mobile application management framework for BYOD. The other component is its Orbit Suite, which allows for secure document management. Synchronoss is already a major player in mobile security and works directly with the carriers, and the venture with Goldman will serve as a major cornerstone of the tech company's effort to sell solutions directly to enterprises.
"Lagoon and Orbit have created significant value and efficiency at our organization, and we are excited that Synchronoss intends to extend this solution to other enterprise users," said Don Duet, global co-head of the technology division at Goldman Sachs, in a press release.
For Goldman Sachs, the joint venture with Synchronoss follows its partnership with several other large financial institutions to turn its internal messaging system into its own venture. That platform, called Symphony, launched last month. It is perhaps not surprising that the company has various opportunities to monetize internal enterprise software; after all, the company boasts that 11,000 of its 34,000 employees are engineers and its tech division is the company’s largest division.
While companies like Goldman Sachs can make developing new technology a business line, Javelin's Moeser said that WSECU is an example of how small institutions can excel because they tend to be more nimble organizations and are more open to technology partnerships.
"Smaller banks tend to be scrappy, and offering a product such as this that solves a problem helps foster customer loyalty," he said.