Partnering with fintechs: How banks should approach incorporating new technology into their institutions

Learning Objectives:
Identifying additional Regulatory responsibilities related to working with a Fintech. These include Third Party/Vendor Risk Management, Model Validation if the Fintech employs a solution that is identified as a "model", data quality and completeness and it is monitored by the financial institutions Model Governance Program.

Transcript:

Mark Javelin (00:06):

Okay folks, we're going to get rolling because we know that there is a chance to run back and perhaps find some libation and some other things to talk about meeting people and all that good stuff on day two. What I wanted to start with was one of the show of hands things about why you're in this room, because I think it'll help us to sort of talk about why we're here and what you can get out of this session. Does the word frustration bring you into this room? Could it be that any of you are disappointed with what's available from your tech vendors and you're trying to figure out how to have a better experience for your customers? Can I see a show of hands for frustration? Hey, we have one hand from the guy in Navy who's frustrated. Everybody else in this room is apparently content with the products that are available and that they don't need to partner. Is that true? Raise your hands. If that's true. There's nothing to worry about. You're just here because filling out 30 minutes, one guy in the AV, we're going to have a great time when we do the raffle or the auction. You're going to be buying something at the end of the day. Guys, the reason I'm asking these questions is because I think that the word frustration is in your minds and you're trying to figure out, how do I make things happen? Now, possibly one of the things that's affecting your answers is that many of you may not be bankers that you might be selling to bankers, but this panel has a banker on it and it has somebody who is trying to sell to bankers. And I hope what you'll come away with today is a sense of what it's going to take to make partnerships work. It's real easy to talk about the idea of partnering and the need to do so to have a best in breed kind of technology. The challenge is easier said than done. And so I hope what you'll come away with is a sense of the kinds of things you need to be thinking about, whether you're a banker or whether you're a vendor to try to make these partnerships work. So what we've got on the people we have on this panel, we have Corey LeBlanc, who you may have seen if you went on a tour on Monday. He started at Novo Bank with his partners, one of the few Denovo banks in years it seems like that you're seeing, and he's been a long time proponent of trying to build that best in breed digital experience. We also have Meenaz Sunderji who is hopefully I've got this right, is basically enabling small businesses or banks rather, to provide credit card programs on their own rather than just being at the end of the trickle of interchange and the fees and the like to actually take that program inside. So he is knocking on the doors at places like Locality Bank and trying to find ways to make a connection to the bank to say, take charge, do something. So with that in mind, I'm going to start questions with Meenaz, which is that I was thinking that the folks in this room are going to say they were frustrated that they were missing opportunities to improve the product they have for their clients and that they were seeing bits of their business taken away bit by bit by outsiders eroding that primary relationships with banks. Well, only the two guys in the back seem to have that problem, but we're going to pretend that maybe that issue exists with you guys. So one question I want to start with Meenaz is do you find that bankers are too comfortable or what is it that is preventing them from saying, I need to partner?

Meenaz Sunderji (03:58):

Yeah, I mean, every time I speak to a banker, whether it's a community bank, a regional bank, or even large banks, I think change is difficult and change is difficult because people don't want to take risk. They may not believe in the solutions that are out there, whether they're modern platforms like ourselves or the experience they've had with their legacy providers, the large ones like an FIS or a Pfizer or what, so on. And so I think that change is difficult because people believe that if they go down the path of change, that it may fail. And so they don't go down that path. And so they'll be comfortable. They'll take the few BIP's that they may get or referral fees that they get, especially in the credit card space, which is what we live in today. And so I think that that is a challenge, but it has to change. You have to change, otherwise you'll become obsolete, not for yourselves, but for your end customers, whether they're consumers or small business or commercials or corporate customers because they're looking for different things in the market today. The notion of digitization is really empowering them. Everything they do today, five years ago or even before pre pandemic, if you wanted to sell something, people would come to your store, there'll be a physical presence during the pandemic. Everybody had to shift to a digital presence. When you go digital, the expectation of that end business is very different now than it was three years ago. So if you're not up to speed in terms of how you service them, so help them run their business today, then you're no longer useful for them. So they don't have to come to you for banking services or anything else. And so I think that's where people need to change, and it's a people mindset. It's also if people within an organization can drive change and have a culture of change for success, they'll be successful, in my opinion. Otherwise, I think you look at the number of finance institutions that have decreased in the US from five years ago or 10 years ago, it is consolidating is because a lot of these community banks that are out there cannot survive. But there are ones that are actually trying to make change and do it differently. And so I think Corey and team is a great example of that.

Mark Javelin (06:02):

Yeah. So let's take you back to when you started Locality Bank two years ago.

Corey LeBlanc (06:06):

Yes. Two years ago.

Mark Javelin (06:07):

What kind of frame in mind were you were coming from a bank where you had a relationship, an advisory relationship with one of your vendors? Amex? We'll get to that in a bit perhaps, but can you take us to your state of mind when you said we can do this from scratch in terms of what you wanted out of partners, how you wanted to build the text, the capabilities and the like?

Corey LeBlanc (06:32):

Yeah, so I'm going to start with something that you said Meenaz, that it's people. And so I want to put a twist on that though. I don't know that it's necessarily just culture of change. I don't think we have the right people in most organizations to make change, to be honest with you. And what I was seeing, and that's no slight to my previous bank, an amazing organization, they had a legitimate mission. I still love a lot of those people that are there, and I still bring bottles of wine when I go back into town and we have good conversations, but at the end of the day, they didn't have the talent to either take control and make those changes themselves or they didn't have the right people that they were working with on the contract side, on the vendor side, on the core side to be able to control any of that anyway. And so what ends up happening is even if you have a culture of change, change becomes still very costly and hard. And so if you look at a lot of the things that we try to do, there's a massive amount of failure rate. So this failure rate is what 60, 70% of most new ideas are probably not going to be as beautiful of an idea as you thought it was. And so if you spend the massive amount of your resources on two to three ideas and none of them work well, where's the budget to go do something else? And for me, what I was seeing is we had taken Origin, which was Community Trust Bank when I got there from 640 million assets to seven and a half billion. We went IPO. And it became really difficult for me to be there because we became a quarterback quarter organization. We didn't have really the right, I guess, muscle to make that change internally for ourselves. And I was seeing that we were becoming this large regional bank that was picking up all these other community banks, which is the type of institution I love being in. And we were seeing where if those banks don't exist anymore, it changes local economies quite a bit. It changes banking quite a bit. It really was kind of this thesis that we could from scratch build this ideal version of an infrastructure or architecture that we could create a community bank that was survivable, that was sustainable, that could grow, that could maintain its ability to be competitive in a market that is being dominated by people who don't have to play in all the same spaces that we do.

Mark Javelin (08:55):

You talk about how banks have to have the people, they have to have the talent that can enable them to do this type of thing. Do you feel like you have an advantage then because you were de Novo, you were starting from scratch, whereas perhaps a lot of the bankers in this conference who might not be in this room are stuck in some ways with vendor relationships that are tough to evolve from, may not feel confident that they can make the change. So did you have it easy?

Corey LeBlanc (09:24):

Yeah, I would actually say I did have it easy. We had the tour group come through yesterday. They were telling me how crazy it was that I did this thing with the group of people that I did it with and how all of us had to have a lot of, well, I probably can't say that on the microphone, but obviously we were brave of some sense. It was like absolutely not. It was easier for me to go start this thing from scratch because I could go pick the infrastructure and the vendors that wouldn't be vendors that would be partners in us to be able to control that. And so from day one, we committed across the board, the entire organization, all of our investors, all of our board members knew that we weren't going to take easy path. We weren't going to check the boxes, we weren't going to go sign the same contracts. And by way of that, we wouldn't be stuck. And we were joking in the hallway with a diner menu version of possibility where you go look at the list of products or services that you can or cannot roll out, and you pick from the things you think might work best for your organization as opposed to actually looking at the gaps that your customers have and fixing it. So in that sense, absolutely we have it way easier and I love it that way. To be honest with you, one

Mark Javelin (10:38):

Of the things he said in the hallway was that when he and his wife go out for dinner, he says, we don't go and say, what have you got today? Okay, we'll take that. I guess. I think that's an interesting mental approach in banking. We have to, I think what I'm hearing from you and Manas in previous conversations is we have to be willing to say, I'm not willing to take it anymore. I've got to go out and develop the capabilities that the people to go take this on Meenaz. When you're able to provide banks with an opportunity to change the way many of them do their credit card programs to basically take it in-house, which I would imagine can be kind of scary sounding because in the traditional sense it's kind of like a, okay, I found a vendor, I picked them, now they're going to kind of take care of it and they'll send me the checks basically. And you're saying, no, there's an opportunity here if you want it and can capitalize that, but you're going to have to be more than just a check the box, sign the deal and sit back and cash the checks kind of thing. Talk a little bit about that idea of being a partner versus being a buyer.

Meenaz Sunderji (11:51):

Yeah, I mean, I think it's important. If you look at the credit card business today in the community banking world, you're either a self issue, which means that you issue your own cards, you bring your own balance sheet to the table, or you're an agent bank program. And so when you're in an agent bank program, what ends up happening today is that the customer relationship for that particular card that's open, that account resides with the agent bank. They take on the risk from a balanced perspective to own the credit risk, and they give you almost like a bounty or referral fee based on all the customers you refer to them. The penetration rate today in an agent banking program is less than 2%. That means if you have a hundred thousand members in a credit union or no customers in the bank, less than 2% actually get that card. And on top of that, if you ask your sales team, how many of them actually sell that particular card, that's not your product to these customers, I guarantee you it's going to be zero because they don't believe in the product, they don't believe in that product, customer service issues that they had in the past. The experience of that product from a end user cardholder perspective, et cetera, are all things that have mounted over time. And that's because that's spaghetti web and that legacy continues to evolve and stay as is. It doesn't change. I think that's a huge opportunity. So if you were to repatriate that program internally and run it on your own books, you would make significant more money not only on the 2% that you're getting a referral fee on whatever it is, but I think your penetration rate could be as high as 10% if not more, because your sales staff will sell that product today. The difference between today and maybe five years ago is that there are providers like ourselves who do end-to-end credit card solution. I mean, not only the technology platform that you can use from an onboarding perspective and user app perspective, empowering your agents or your brand staff to service those customers, navigate with them, all of those things that are available to fully integrated. On top of that, if you didn't have the capacity of the people from a call center, you can outsource that back to us until you build capacity if you ever want to own the future. So there's a lot more options that exist today and the value is huge. And then when there are commercial banks that tell me that, Hey, we do not want to carry the balance of credit risk because it doesn't make sense for us for a credit card, it's because you're looking at it from the sense of, Hey, traditionally it's another product, it's another unsecured product. You already lend to these businesses. You give them loans, you give them line of credits, et cetera. What usually happens today is when you give those loans or LOCs, they have another spend mechanism. So they'll go to Chase or somewhere else or an Amex card or what so on. So they spend through that. They take the funds out of your line of credit, your loan, and to pay off that card.

Mark Javelin (14:41):

So you're making a good business case for why some a bank might want to do this, and yet there's that, at least to my year. The scary part, which is what you're saying is in order to get those bigger returns, I have to take on a bigger role. How do you talk to bankers about what they need to do and how they can deal with that anxiety?

Meenaz Sunderji (15:07):

Yeah, I mean, it's a business at the end of the day. It's not a product. Credit cards is a business. It's a business line, just the way deposits it or mortgages are. But I think that it's a huge opportunity. And so it's either you want to get into it or you don't. And it's not meant for everybody. I'm not saying every single community bank needs to own their own card program and soft issue and run it, but for a lot of them it does make sense. Now, if you look at a lot of the community banks today, there are below 10 billion in asset size. They rely on debit and debit interchange, the shoe source of revenue. After that, once they get to that threshold, they have to think different source of revenue because the game changes there. But on top of that, if you look at the ecosystem, the world today and digital payments, RTP and so on in the next five to 10 years is debit. Even a product that's going to exist is a question you have to ask for yourself. So you as an institution have to evolve to serve and ensure that you're going to be relevant as you move forward.

Corey LeBlanc (16:05):

It'll be a product, right? But it's going to be a lot smaller product, I think the only reason I use my debit card is to make sure that our system works and keep testing our debit card. I just like pulling it out because it's ours. But yeah, you're right. You use a credit card. I use my Amex everywhere, so it's definitely an idea. But I got a question for you real quick. No, that's good. Just because when you go in there and you're talking about how these banks, they can take this as an opportunity for them, but I think that a lot of banks may already know that part, but they don't have the ability to make that change or that shift without creating a massive investment to do so. Right? That's where Brimm comes in and helps. But most banks don't know how to work with Brimm. And I think that's the big problem that we have is that we don't really have a common language oftentimes when we're sitting down at the table to discuss what we're trying to do for me, how do we create a mutually beneficial opportunity? Is that where you see as one of your big hurdles too?

Meenaz Sunderji (17:04):

Yeah, I think so. I think that when someone thinks about credit cards, and it's much more complicated than debit, so you have to go through the entire onboarding process, obviously KYC, KYB or what's on, then you got to do fraud detection, you got to do the adjudication and decisioning and provide the end card. Then you've got to manage that portfolio, that risk. So all these different elements, there's a lot to do. And so if Corey had to go build this and say he's going to go pick an adjudication decisioning a processor and what so on, it becomes big amount. It's very, very complicated.

Corey LeBlanc (17:37):

It's not the business I want to build.

Meenaz Sunderji (17:38):

It's not the business he wants to build. So that's exactly what we as Brimm have done. And when I say we as Brim, I was listening to the other panel before our panel, and there was a lot of frustration on two bankers and one from credit union, one from bank that are talking about how they've had very bad experiences with fintechs. And so I think they have justified, you need to make sure you work with somebody who's done it before, has the experience. It's not a Figma presentation, it's an actual live demo that works. They can call somebody, they can see it. And I think fortunately for us, we've been in the market for almost seven years. We've done it right? We've ran our own credit cards in the key market with the only FinTech that's a license assure by MasterCard or Visa from a credit card perspective. That's not a finance institution. Now in Canada, we can issue directly, we need the sponsor bank in the US because direct requirements we do, but that gives us an advantage because we've ran the business, we do it today, and now we've enabled that platform enabled others, whether they're fintechs, FIs, credit unions, or large brands like Fran, KLM, that leverage that platform today to run a much better experience and a much more efficient scale.

Mark Javelin (18:42):

So I think what I'm taking away from you is you're saying, look, we can show you our expertise and soothe your mind on that regard. Corey, the one thing you've talked about, and this maybe ties back in with the relationship you had previously with Amex, was it's about more than just the product. It's about being able to shape the product. It's about the relationship. Talk about what you want from a banker to vendor relationship besides a good product.

Corey LeBlanc (19:09):

Yeah. First, based on your questions at the beginning, raise your hand if you're a bank or a credit union. Well, Three of them are my guys, right? Three of them are with me. It's still a small group of bankers, lots of technology companies or people. Yeah, absolutely.

Mark Javelin (19:26):

She's not with you. You're a banker, right? No. Okay. Sorry. We probably should hook you closer to the door because there's going to be 17 people who want your card. Yeah,

Corey LeBlanc (19:35):

I'm going to go without that one. Yeah, no, absolutely. And where I think that we also get a little confused at what we're doing as banks or credit unions or financial institutions is that we go look for this thing that we want to buy today. And so we see this version and we purchase it, and then we go through implementation and the project completes and everyone high fives, and we did it, but there was really nothing probably discussed upfront that really set some standards or expectations on both sides. And so the relationship that I had with Amex in my previous organization was much more consumer focused Today, localities more commercial. So it doesn't make sense on that side. But the conversation we had is what does Amex want from a relationship with my bank? And then the other question, the opposite side of that is what does my bank want from Amex? Not today what's not, what the current version of the product is, but what's the future version of the product we're both going to be successful with and how much contribution are you going to give me into shaping that? Right? And look, I'll take a client advisory seat all day long with a contract vendor that I'm going to assign. I hope to become a partner, but even if you can't give me a seat at an official table, I want to know that we have common objectives that we can both agree to that at the end of the day, if you don't live up to what you promised me or I don't live up to what I promised you we do, we owe the technology vendor something back in return, whether that's promotion or a commitment to working with you to make sure your product is successful, whether it's marketing, I mean, how many times does a product not work because the bank didn't market it? Well, it just happens all the time. So, so that relationship with Amex Next spun out from a friendship that I created with one of the founders there, and we were just able to be very authentic and honest with what we were trying to achieve.

Mark Javelin (21:35):

And that's an unusual kind of relationship you have. Not everybody's going to be able to have a personal relationship with a founder, not some of our clients, for instance. We'll try in some cases to identify an emerging partner and maybe even invest in them. But to take a first innovator role with that and shape the product, that's not something that everybody can do. But what you're talking about is something that everybody can do, right? Absolutely. They can have the relationship of the give and the take, the push and the pull.

Corey LeBlanc (22:08):

It does two things. Not only does it set the expectation between our two companies, but it also starts to set the expectation within your own companies, both as the technology service provider or vendor, but also from the bank side as well. Because when we sit down and start to come up with this common objective for common objectives, we start to realize what we're actually trying to achieve. And so now you're almost setting this baseline of analytics that you can kind of follow to see if it's successful or not. I mean, why do so many different projects get through implementation, but then in three to five years it gets forklifts because there was never set expectations on what we were trying to get out of it. It's just based on a contract term and the current version of a product in some form of an ROI, someone pretended that they knew what they were talking about. At the end of the day, no one really knew what they were trying to do with it.

Mark Javelin (22:58):

Let me shift gears a little bit to the opportunity with small business in particular. We see this as being an area that community banks have been serving for ages quite effectively. And yet what we're seeing is from a digital banking perspective that there's an awakening of sorts to the idea that the digital banking isn't where it needs to be, that there are opportunities to do a whole lot more, that we've lost pieces of the business to QuickBooks, to PayPal, to Square to Shopify, other big players. We've seen business go away, so we have to upgrade the digital banking. Talk a little bit about the small business opportunities and is this a place where partnership can work better? I'm wondering if it can work better than in retail because it's more early in the evolution of digital banking for small business. And I think you'll probably have some thoughts on that as well.

Meenaz Sunderji (23:58):

Yeah, I mean, if you look at small business today, the medium spend on small businesses, 25,000, 30% of the small businesses today paid their credit card specifically twice in a billing cycle, which tells you that they don't have asked enough credit to be able to run their business today. And as you like said, it's not about just the financial product and getting a loan or running a business, but a lot of them want to focus on running the business, selling their products or services, not on figuring out how they take the data from their banking app or the card and pushing into an accounting software like a QuickBooks or a Concur or what. So on not trying to figure out, Hey, how do I issue a one-time card or PCard to my employee, or do I give my employees credit cards and I can control where they're spending it at, how much they're spending? Do I get notified? Do I have all those facets today? Those solutions in banking specifically do not exist. And some things that we bring to about, that's what ends up happening then is you have a Brex or a ramp or divvy and they're going to start eating the lunch and they're going to go after the SMBs, an underserved market, and then they're going to go up market. So I think there is an opportunity there. It's sort of been the backbone of almost every community bank that existed in. You can talk about that relationship that community bank has with the business. It's massive. And so if you're able to drive value to those businesses, not only the loyalty in the context of the overall relationship, but I'd say greater wallet share of the relationship will expand with that particular business. And maybe you can talk about that because right now it's multifaceted when it comes to what is primary relationship and so on.

Corey LeBlanc (25:36):

Right. Well, and I love that you mentioned Brex, right? Because Brex did a great job at going out to that small business market and making a great product. But what did Brex just do? They just had to pivot. Why? Because that market is also not very profitable for a company like Brex. Now, they created great tools, great services, and great capability, but it's not the totality of a business. And so that's where Brex saw an opportunity to start to make some pivots. One of the things that I keep trying to tell banks in general is that we don't have to sit there and go compete with Brex. We don't have to go compete with QuickBooks. So stop trying to go buy or build a bookkeeping software, work with QuickBooks, make sure that it integrates, make sure that it's a seamless process for your customer. Now, there's versions of product, right? Cards and deposit accounts and those things that you want to be competitive, but some of these things aren't even technology based that we can do. I don't have to have a bunch of APIs. I don't have to go through an integration to work with a fractional CFO provider to give my customers access to fractional CFO services. It can simply just be a link on my website. But we have to look at though, when we see these opportunities or these markets specifically, when we see something that's underserved in our business segment that we're losing traction to is well, why? And what can we do to solve for that? And again, this where it comes down for me in the people side is do you have the right people to ask that question and figure out how to solve it? And then do you have the right people on the other side to help you support making it work? But everyone tries to rebuild everything, and I don't understand why everything is centered around how cool your mobile app looks versus what you actually produce for value.

Mark Javelin (27:31):

We've got about two minutes. So I want to wind up with a question. Since most of the room is vendors and to our banker escape.

Meenaz Sunderji (27:40):

We have.

Corey LeBlanc (27:41):

You did warn them.

Mark Javelin (27:42):

Was she escorted? What advice do you guys have for the vendors in the room who are trying to make a case to a banker? What is going to make them more successful in making the connection, making that partnership work? Who's first?

Meenaz Sunderji (28:02):

I think you have to be honest and transparent. Don't sell something you don't have. And if you don't have it, it's okay. You can tell your client, look, we're working on a roadmap this, we're building this with experience. Looks like this is a timeframe, and that will help you a lot in that journey. So I think that sometimes in sales, and I've been doing it for many years across the globe, I think that goes a long way because that's where you build trust. And as Corey said, you want this to be a partnership. And that relationship is a lot of times based on trust. So if you lose trust from the first get-go, then forget ever earning it back. It's never going to happen. And this carries with you for as an individual, for the rest of your life and as a company, as a reputation in industry. So I truly believe in that. And so success is not easy, especially when you're just getting started, but sometimes people will appreciate the honesty and take a chance on you versus being dishonest.

Mark Javelin (28:54):

How about you Corey?

Corey LeBlanc (28:55):

Yes. So my wife is in the back of the room. She's in FinTech, she's on the FinTech side. I'm on the banker side. You could imagine the debates we have. It's fun. But she told me this a while ago.

Mark Javelin (29:07):

It's not just about how to organize the dishwasher.

Corey LeBlanc (29:10):

No, I wish it was that simple. It's about, Hey, your stuff sucks and this is why. Lemme show you every reason why you need this. Okay. And she's always right. That's the terrible part. I still argue it, but we just sat down and had a cocktail with Max, who's one of our newer employees over at Locality about things that we really have to do. And what I can recommend, whether you're a banker, whether you're the technology vendor or provider, is stop talking so dang much. Start asking more questions. Sit down and understand what it is that the person in front of you needs, and then start to tell them where authentically and honestly, don't sell them something you don't like. Yeah, absolutely. I could do all of that stuff. Tell them what you can do and if it works out and it matches up, then you probably will have a good conversation if you sell them something you don't have or you just start on your pitch. First of all, if it's, I'm just going to leave. I'm not going to listen to another pitch, but you're probably going to have a more valuable conversation moving forward. It works on our side in banking with our customers. How do you have relevant conversations versus quantity or quality over quantity for me sell. So just stop talking so much and ask more questions.

Mark Javelin (30:25):

Okay, well with that, asking more questions, I'm going to say no more questions because I think we hit our 5 06. We're ready to hold the raffle or the auction so the folks in the back can buy whatever it might be. Thank you very much for your participation today. I hope you got something out of this.