The Role of Fintech in Modernizing Community Banks

Bank-fintech partnerships can enable community banks to leverage new technologies and compete with larger banks in offering innovative products and services. Learn about the different types of fintech partnerships–operational technology, customer oriented and front-end (BaaS)–and how to develop a playbook for community banks to gain a competitive edge over other banks and nonbanks.


Transcription:

Mary Ellen Egan (00:11):

Hello everyone. I'm Mary Ellen Egan. I am the Senior Director of Strategy and Content for American Banker. I'm today. I'm here today with Gary Fan, EVP and Chief Operations Officer for Royal Business Bank and with Rodrigo Suarez, Chief Banking Officer at Piermont Bank. So why don't you both talk to me just a little bit about what you do at your banks and kind of your everyday role, your dayday roles?

Gary Fan (00:41):

Yeah, so my name's Gary Fan, I'm the COO at Roy Business Bank. I lead most of our back office functions, so central operations it TIS, product marketing and all the digital initiatives. And then I lead also our mortgage business and wealth management.

Rodrigo Suarez (01:01):

Rodrigo Suarez, Chief Banking Officer at Piermont Bank. I run product business development and relationship management at the bank. A lot of the work that we do with technology partners as well.

Mary Ellen Egan (01:13):

So what, I mean we know that the big banks obviously work with a lot of fintechs, but it's different for a big bank because a lot of resources, a lot of employees, and it's important for community banks because they don't want to be left behind obviously. So why is their need for a community bank to work with a FinTech?

Gary Fan (01:34):

From our end, I think we tend to think of our business as a way we like our business to be differentiated from a product standpoint. So when we look into the ecosystem and the environment, we're looking for FinTech partnerships that give us a competitive advantage somewhere so we can continue to compete. And I think if you find the right FinTech partner, I think you can accelerate your business outcomes and you can then compete with some of the larger banks further upstream. So that's generally what we're looking for.

Rodrigo Suarez (02:07):

Yeah, I think that's part of it. Part is budget related as opposed to a big bank that may have a huge budget to hire developers and product teams. At a smaller bank, you need to figure out ways to be nimble and still produce output and product that will allow you to differentiate vis-a-vis some of those larger banks. But part of it I think is also just understanding where your strengths are. And as bankers, we know how to do banking. There are technology companies that can build technology in a much more efficient way that we can, and where that's the case where something is not necessarily core to what we do, whether that's from a distribution perspective or a digital enablement perspective, we look for partnerships to allow us to get there faster and more efficiently. And we actually think of ourselves from a technology standpoint as an entity that needs to learn how to integrate those different solutions so that we can also quickly adapt to whatever is out there and whatever tools are more effective for us to deliver banking products in a differentiated way.

Mary Ellen Egan (03:17):

One of the things you talked about is kind of like trends. What's going on in the industry or in your market area that you think that needs addressing? What problems are you going to try and solve with the FinTech?

Gary Fan (03:30):

Well, I think in the last couple years, liquidity has been one of the biggest things across the board that everyone's trying to get at. I think deposit gathering is tougher for community banks, so that's one of the main issues that I think a lot of the FinTech partnerships that we've looked at. At the end of the day, we're all looking for opportunities to generate more sustainable earnings. So I think those are the other things that we tend to look at. And then lastly, internal efficiencies. So kind of helping using technology to refocus our cost structure a bit. So I think those are other opportunities that we tend to look at in our bank

Rodrigo Suarez (04:08):

For us. So I guess maybe I'll start by giving a little bit of context into the bank and what we're focusing on. We're relatively new as a bank, so we just got our charter in 2019 and have been building and growing the bank for the last six years. And the main problem that we're trying to address is understanding how to distribute banking products in a more effective way because we have seen a continued trend from branch-based distribution to digital distribution and now also to distribution through non-bank digital channels with embedded finance and so on and so forth. So we're trying to identify the right ways to do that without building a traditional branch-based model. And for us that means identifying fintechs that we can work with as distribution partners who we're the underlying sponsor bank for them, but also the right companies that we can work with purely from an enablement perspective to handle onboarding through digital channels, customer verification. Also a lot of the compliance work that goes into what we do with more efficient tooling that will allow us to build a more relevant bank over time, grow more efficiently and also be a little bit different from what other players are doing.

Mary Ellen Egan (05:38):

I think one of the things we talked about too is that you use it for automated credit underwriting or customer account openings. So how does that work if you partner with the FinTech to make that easier? You said people are not going into, not always, but aren't going into branches probably as much as they used to probably 20 years ago.

Gary Fan (05:57):

Yeah, I think that's one of the trends that we see in our business. I think a lot of the community banks and just banking in general, a lot of the customer base that we grew with over the last 10, 20 years, they're sort of getting to retirement age. I think the decision makers for a lot of the assets and the wealth that some of these customers have generated is moving and I think that demographic has shifted less from the in-person kind of branch relationship to something more digitally native. And so I think that's what the bank's trying to evolve towards. So we take a certain process like credit underwriting for us when we underwrite a commercial deal, if it's for $50,000 versus $10 million, we're usually spending the same amount of time to do that. So we are looking for FinTech partners to help us automate certain processes to make that smoother. At the end of the day, it's kind of gets back to the things I mentioned a little bit earlier. We're looking for more efficiencies, ways to scale, do things quicker and get the customer experience better. I think we're trying to figure out what resonates with the new generation, who's going to overtake some of the business owners that we bank and figuring out how to deliver them the process and the experiences services that they need to run their business. So that's how we tend to think about it.

Rodrigo Suarez (07:19):

I'll maybe answer the question about account opening. So I think everyone here has probably heard stuff around digital account opening for the last 10 years at this conference, but especially if you're serving business customers as we are, they're still not something that's a hundred percent there as far as opening business or commercial accounts completely off the shelf. So that's been a focus area of ours as we look to onboard those customers digitally. And that has a lot of nuance around it because you need to capture a lot more information that you would capture just for a consumer account. You need to run verification that's a lot more nuance run KYB, collect beneficial ownership data and so on and so forth. So getting that right digitally in a way where you don't have to be requesting a lot more documentation is key for us in a way where we're looking to continue to grow and differentiate and that goes or is relevant across the different channels that we work on. Whether that's us directly opening accounts for customers that we onboard into our own Piermont branded product or accounts that we open through third party fintechs or vertical SaaS companies where we are embedding an account opening widget to allow them to open accounts through us. So something that's I guess at least on our side, continually top of mind how we're getting customers in to begin with.

Mary Ellen Egan (08:51):

One of the things we had discussed too on our prep call when we were discussing some of the challenges that community bank will face rather than a huge commercial bank is getting buy-in from the board because before you even get to the point where you're going to vet someone or vet a FinTech, you've got to get the buy-in. So how challenging has that been or what are some of your experiences with that?

Gary Fan (09:15):

Yeah, I can go first on that. I feel most of the boards that I've come into contact with in my bank and other banks I think are not digitally native people. So I think a lot of the ways that they think about FinTech partnerships is they're scared of new technology. So I think one of the things that we've tried to do is to help bridge that gap a bit. I think some of it is trying to show them exactly how the technology is going to work in a way that they understand, and sometimes that means not helping them understand how they would do banking, but think about their kids or even their grandkids. I joke about this a little bit, but some of our board members still like using paper instead of using an iPad to look at board materials. And I think when we're trying to tell 'em the whole industry's moving to a digital kind of native space, I think some of that obstacles harder to get over. But I think if we focus on the generations in their families that are using digital tools to run their business or run their day-to-day lives even outside of banking, it really helps bridge that gap and it's easier for us to get buy-in from the board, but at the end of the day, my board is hopefully like other boards, they're all entrepreneurs at their core. So if we can figure out ways to help the bottom line at the bank most important and they'll let management do what we needed to execute. So

Rodrigo Suarez (10:42):

Yeah, I generally agree with what Gary said. I think if you make the right business case, it's relatively straightforward for a board, especially at a smaller institution that can hopefully move faster to get things done. In our case, especially given that a lot of the work we're doing with fintechs as part of the thesis behind building the bank, we are lucky to have a very supportive board that has been doing everything to allow us to actually deliver on what we sought out to do. Where it's not necessarily challenging, but definitely tricky is in getting the right mix of folks with the right experience to be part of that journey because you need very deep banking expertise. And to Gary's point, a lot of the people that have that deep banking expertise are folks that have been in banking in the more traditional sense of the word for a very long time. But you also need folks that have technology experience and FinTech experience or that can learn that fairly quickly. And bringing those things together is critical not only at the board level but at the management level if you're going to do something successfully in the broader FinTech partnership space.

Mary Ellen Egan (12:02):

So now that your board's on board so to speak. So then potentially how do you vet potential or identify and then vet potential FinTech partners because again, you're in a very regulated industry, but you also want to make sure it's the right partner for a bunch of different reasons. So what are some thoughts on how you do that?

Gary Fan (12:23):

I mean, one way is to come to conferences like this to meet with the FinTech partners that are available. I think at our bank we also rely on external parties to help us do that. We are an investor in a few VC funds and those funds help us sort through what we're looking for. I think sometimes when I meet with fintechs, I think sometimes they're trying to pitch whatever they're building and whatever they're good at. I think sometimes the alignment can be a little bit better. And for us, again, we have sources where we can outsource that we have people helping us sort through that. But ultimately at the end of the day, if there's a good value proposition that helps us differentiate ourselves from our competition and gives us sort of an edge versus the general market as a whole, those are opportunities that I'm happy to spend some time learning about the FinTech and what it can do for us.

(13:16):

As long as you can find a mutually beneficial outcome, I think those are the ones that tend to be most important. I think for the fintechs out there, one of the things you guys can do is go look at call report data and see how a bank is doing relative to other banks in the same peer group. And then from there, if you can show them this is how I can get this particular metric up, whether it's R-O-E-R-O-A or liquidity or something like that, I think that's a great way to relate to the decision-maker at the bank. So you give a higher probability for them to engage and actually have a good project to work on.

Rodrigo Suarez (13:51):

Yeah, similar starts with understanding your needs and your priorities and from there, connecting with other folks in the space. We have a lot of connections with VCs, for example, other fintechs we work with that refer us to folks they know, but once we're there also understanding who we're partnering with and what risks we're willing or not willing to take. Depending on what we're building, we may want a more established partner to work with or vendor or we may be willing to take a risk in an earlier stage company where we may be able to influence roadmap or get more favorable pricing and build more differentiation earlier on. So understanding those considerations is very important because the position that you don't want to be in is one where you potentially need a more established player to do something table stakes that a lot of folks do and end up working with an early stage company that still doesn't quite have their product where you need it. So knowing those risks is critical as we vet folks. And then obviously going through the proper diligence, not just by reviewing whatever documentation and demos we get from them, but also by connecting with other folks that have actually worked with them before and investors that we trust that know their teams in a much better way than we do.

Mary Ellen Egan (15:19):

Without naming names, can you and just broadly talk about maybe some problems or pitfalls that you've experienced? Because I think, and we had talked before, it could be that the technology is fine, but maybe it's not what you need or the partner, there's whatever the problem may be.

Gary Fan (15:40):

Yeah, I think for a lot of the community banks, I think the idea of partnering with a technology company outside of the core is relatively new. I mean in the last 10 years, I think there's a lot more activity for us. We have signed deals where the FinTech delivered exactly what they said that they were going to deliver, but we didn't get to the overall outcome that we were looking for. Partially, that's sometimes a misalignment of what the bank thinks is going to happen. I think for us, a lot of the revenue generating opportunities or efficiency expectations were misaligned because the bank wasn't able to deliver the business development piece of it. So I think a lot of the FinTech companies are solving problems that help make the bank more efficient, help you scale, but I think the customer acquisition piece is a key part.

(16:29):

I think for us historically, we've never really led from a digital customer acquisition perspective. So a lot of the projects we've signed on are to help the back office be more effective process loans faster, reduce headcount, those types of initiatives. And so picking one like the automation of credit underwriting, if we sort of misalign what type of business we wanted to help automate, I think that was an issue that we sort of learned the hard way. So now I think moving forward, I think there is that alignment upfront with the FinTech partner to understand that this is exactly the type of business we can capture. This is how we can acquire those new customers and those new customers can follow this process flow smoother. And I think that's something, I think there's some people at our bank that may be thought sort of that kind of the saying, the build it and they will come, and I think as a community bank, we still have to go out there and generate that business ourselves. So I think that's something we've experienced at Royal Business Bank.

Rodrigo Suarez (17:34):

In our case, I wouldn't necessarily say pitfalls, but definitely something that has happened that we're now a lot more aware of is just the issues with timelines. For example, most folks that we talk to generally tell you that what you need, they already have or they will have very soon. And we have found ourselves in situations where we start working with a company that has something very close to what we need and tells us that whatever it is we're looking for, we'll be ready in three or six months and then we're at that point of time and it's not there yet, which is normal and probably has happened to most people. What we have started doing, especially in cases where whatever we're building is more time sensitive and critical for us to deliver something, is to actually make sure that folks also have skin in the game, whether through contractual clawbacks or other incentives that will ensure that we're both driving towards the same timelines, especially being a bank that's new, that's building something from scratch that's been important and sometimes challenging as we partner with fintechs for a number of different purposes.

Mary Ellen Egan (18:45):

So for both of you, does the buck stop with you that you're in charge of the fintechs and that you monitor their work or how does that work?

Gary Fan (18:55):

Yeah, I think it depends on the structure of the organization, but yeah, in our bank, all the FinTech partnerships does get it to an executive sponsor. So depending on the business unit, it could be me or it could be another one of my colleagues in the executive management team. But yeah, we're the ones monitoring the progress of the partnership, tweaking if necessary. I think Rodrigo talked about timelines. That is a frustration I think regardless of whether you're a FinTech or a core provider or any technology provider, I think that's one of the biggest obstacles that we always see no matter what the implementation's going to look like. So yeah, definitely. It's usually at a bank our size. It's usually one of the executive management people that is managing some of those relationships and managing the project from start to finish.

Mary Ellen Egan (19:46):

I mean, I personally know Wendy Kile, you're the CEO and she's very FinTech forward, very tech forward. So how has that been?

Rodrigo Suarez (19:53):

Yeah, I mean it's been great because to your earlier point on the board and now including Wendy, our CEO, there's deep support for what we're doing. So there is definitely an executive owner in many cases that would be me for a number of the partnerships that we decide to undertake. But everyone is involved going all the way up to our CEO and our board. So everyone is monitoring the performance of the different partnerships that we have. So core to what we do as a bank, it's not an isolated need that we may have. It's really part of how we're building the bank to begin with and how we've been growing. So if we have a partner in whatever area that's underperforming, that usually becomes a part of a conversation with the entire executive team, which is also a way to ensure that those partnerships are successful because there's collaboration across the bank. It's not just one person defining what we're not doing or not doing or how to fix a situation. It's the broader executive team. And again, in certain cases, even the board chiming in on the best way to course correct. If we do have an issue,

Mary Ellen Egan (21:06):

We have time. A few minutes for questions.

Audience Member 1 (21:14):

Hey guys, quick question. With regulations easing here in the us, how do you both plan? How do both of your banks, I should say, plan on using and leveraging a digital asset strategy, whether that be using something like stable coins for international remittances or partnering with a digital asset custody firm to hold digital assets for your clients to ultimately compete with larger banks for the more FinTech forward offering?

Rodrigo Suarez (21:43):

Sure. I would say at least in our case, we're monitoring how the digital asset space is evolving. We're not necessarily planning anything specific right now. What we have learned is especially with new propositions including the digital asset category, at least for us, it's not necessarily advantageous to be an early mover. And that's still at an inflection point, at least from our perspective, where we need to make sure that what we build is relevant, but also not necessarily just following a trend or something. It's not new, but it's become almost like a new shiny thing with the change in tone and the regulatory domain. So we first want see whether that's going to really sustain the test of time and be something sustainable. And as that happens and we see a real value for the bank's growth and our customers, we will decide what priorities follow from there.

Gary Fan (22:56):

For us, similar to Rodrigo, I think we're monitoring the space. We were somewhat active during the runup for Bitcoin originally, so we have a little bit of experience there, but I think for us, we have to see how the regulatory agencies play out. A lot of the times, I think the management teams want to do something more innovative or we want to be first to market, but for us, we do have the regulatory agencies above us and unless those people are comfortable, it's very, very difficult for us to lead in new areas like that. So it really depends on the risk tolerance of the bank, so other institutions may be willing to lead there. I think for us specifically, we're looking at it, but it's probably not the top one or two priorities that we're going to be working on in the next 12 months.

Audience Member 2 (23:46):

You sort of touched on this earlier, but when you're a small community bank or smaller institution, both human capital and budget are a challenge. How do you manage that to be able to stay at the speed that you need to be close enough to those larger competitors? Is there a strategy you use in your institution to make sure you have the right budget and human capital to be able to stand up these technologies?

Rodrigo Suarez (24:21):

I guess less than a strategy. I would give maybe a more practical suggestion. For us, what has worked is bringing people from different backgrounds into the bank. You mentioned human capital, so it's hard to do something that's more FinTech forward if you only have people that have been in traditional banking for the last 20 years. We have intentionally built a team with folks from backgrounds and traditional banks and more digital forward banks and also folks that don't have a banking experience, but that have worked in technology companies or at fintechs. And the combination of people with those backgrounds I think has been very important for us to be able to get certain things done. And then what you just mentioned, luckily having a lot of support from our CEO and our board as well. So again, not necessarily a strategy, but definitely important things if you really want to get stuff done.

Gary Fan (25:20):

Yeah, we approach it similarly as well. We built some internal training programs and ways where we can train up people that don't have a traditional background in banking but have peripheral skill sets that we really want to use. So in teams that I run like product, we've hired people that have never been in banking but made me have managed a product at a different industry. And we feel like getting people oriented in how banking at the core works, just how lending works, how deposit, what their business model is actually hasn't been that difficult. And so having the external experiences from different industries has actually really helped us differentiate, and I think that's one of the things that even in smaller banks, you can run your business a little bit differently and give you a little bit of an edge, something that helps you refocus and really deliver the types of products and services that are valuable in the marketplace.

Audience Member 3 (26:21):

This question is really in your sponsor bank capacities. I'm at Plaid. We're an open finance platform, a data network, and we work with 8,000 FinTech applications in the us. Most of them, if not many of them, are powered by wonderful community sponsor banks. One thing that I'm seeing more of, and I'm curious of your point of view on is the same sponsor bank is kind of managing ecosystem risk differently for each of their FinTech partners. And it might be the same powered products or infrastructure, but the compliance or the onboarding obligations look different and the explanation isn't really different, so it doesn't seem to necessarily be on risk profile. So I'm just curious, is there a model for you all as a sponsor bank as you have these FinTech partnerships and they continue to grow? What is the right model in managing your fintech's, FinTech partnerships or risk managing the ecosystem as it grows? How do you think about that?

Rodrigo Suarez (27:18):

Yeah, I mean, we've been in the banking as a service space since 2021, and a lot has changed over the last four years, and one of those things is what you just described a few years ago, if you looked at banks doing banking as a service, there was a lot of fragmentation and how they manage different programs. It was very program driven, so you would have program with a certain set of onboarding rules or policies, program B, slightly different ones and so on and so forth. What we have done more recently and where I think this space is trending towards is actually standardizing everything in the backend so that you have instead of a situation where you're requesting, let's say an onboarding policy from program A and different one from program B, in our case, we are actually now giving them our policy. So these are the requirements, these are the parameters, and they can then show us how they're going to operationalize those. So and as it relates to the explainability of what we do in the background, it's all the same, even if there's differentiation from a product standpoint, my own view is that in the last few years we have seen a lot of risk arbitrage where certain fintechs were maybe taking advantage not just of what they could do from a technology perspective, but also how they could sideline certain regulatory requirements and that's not sustainable. What's sustainable is product delivery and distribution differentiation, and that should not require different sets of parameters across different programs.

Gary Fan (29:06):

I think for us, we definitely centralize a lot of this in vendor management, and it's something we've just recently started doing more intentionally. I think in the beginning, every FinTech partnership I think felt like a one-off, but now that we've had some experience and we've onboarded a few over the last couple of years, I think there's a set process and I think that's what banks are good at, processes, policies, procedures, those types of things. So we do have kind of a set standard of how we onboard, how we manage even up to the regulatory approvals. We have sort of a set cadence that we have now, and I think each bank may be a little bit different, but a bank who has maybe signed on four or five different partnerships over the last couple of years should have a structured way, just like how we do any business. We have a repeatable kind of way of doing things, and for us, that's what's worked. Can't speak for everyone else, but I do know a lot of community banks are also looking for that kind of playbook on how we can standardize and more effectively, more efficiently onboard and work with the fintechs.

Mary Ellen Egan (30:09):

Unfortunately, we're out of time. Thank you, Gary and Rodrigo, this is really helpful. They'll be here afterwards I assume, for a few minutes, and if you have any additional questions you can ask them, but thank you so much. Appreciate it.

Gary Fan (30:19):

Thank you. Thank you.