Because of legacy core systems, manual loan processes and poor digital account opening applications, many community financial institutions lag in offering a modern banking experience. This can lead to customer attrition, especially when big banks like Chase, Bank of America and Wells Fargo are investing billions in innovation.
Community banks lack the people, funds and scale to keep up with not only megabanks, but big-tech competition. Bank Director’s 2022 Technology Survey found that while 81% of small banks were increasing their technology budget for 2022, 45% also say they rely on outdated technology.
A new consortium led by a venture capital firm, an alternative asset manager and a few large community banks is addressing that problem. The group believes it can help community banks adopt the technologies they need with less cost and risk by pooling resources and fostering collaboration between banks and fintech startups.
“New technologies have finally reached the point where banks don’t have to rip out all of their infrastructures and start over. They can do it in pieces — mix and match.”
— Kevin Covert, Strandview Capital
“There’s a real need for community banks to catch up,” Kevin Covert, Co-Founder and Managing Director of Strandview Capital, tells The Financial Brand. “Many banks are still operating with legacy systems, and it’s hard for them to implement new technology quickly. We can help them get up to speed to better compete with money-center banks and ultimately serve their communities better.”
A New Option to Advance Community Bank Technology
The new group — the Btech Consortium — is a partnership between several community banks, Elizabeth Park Capital Management, and Strandview Capital. Btech helps bank members pool their capital and resources to invest in emerging technology companies that serve the community banking market.
Consortium members can gain insight into emerging fintech trends, develop better IT roadmap decisions and more effectively vet fintechs. On the vendor side, emerging tech companies benefit by receiving capital and potential new customers. The consortium will operate as an investment fund where Btech member banks are limited partners.
The consortium’s initial group of member banks includes Customers Bank, East West Bank, Farmers National Bank, First Community Bank and Peoples Bank.
Why Customers Bank Joined Btech Consortium
Customers Bank was one of the first banks to join the new consortium. The bank nearly doubled in size over the past three years due to innovation and adopting new technologies, David Patti, director of communications at Customers Bank, says in an interview. When the Paycheck Protection Program rolled out, the bank was still using manual processes, holding committee meetings in person and still faxing papers, he states.
“Because we had learned how to use technology, it transformed us, and we became a $20 billion bank. Given that success, we were a likely prospect to join the consortium, with knowledge to share.”
— David Patti, Customers Bank
After aggressively adopting fintech applications, Customers Bank quickly put new technologies in place and was able to aggressively pursue loans in the second and third rounds of PPP. The consortium will enable Customers to learn about and test new technologies while sharing ideas, Patti believes.
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With Bank Technology, There Is Power in Numbers
One of the key components of the Btech Consortium is the Consortium HUB, a proprietary, online information exchange where members can dig deep into trends in bank technology and investigate emerging fintech companies and co-investment opportunities.
In addition, member banks can use the HUB to explore new market opportunities, says Covert. For example, a bank considering launching an equipment finance business can use the portal to research the space and gather feedback on whether certain tech companies are a good fit for the bank.
Particular areas of focus for the consortium include business payments, cybersecurity, commercial loan origination and servicing, regulatory compliance, API integration, automation, and document management.
Key Areas of Focus:
Smaller banks are often looking to add digital payments and automate workflows and loan applications, so their processing isn't so labor and paper-intensive.
Some Btech members may overlap markets and be considered competitors, but they often have more to gain by working together than they stand to lose, says Patti. Before entering the banking industry, he spent 25 years working in industry trade associations, where he learned the value of industry-wide collaboration.
Additionally, exploring new technologies in numbers also enables banks to try ideas with less risk, Patti maintains.
“If three companies are using a new technology, you may not know right away if the platform is good,” he explains, “but if 300 are using it, you know it works.”
The consortium will ultimately limit the number of member banks to foster stronger engagement and more hands-on involvement to maximize the value.
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Collaborating on Practical, Near-Term Approaches
The idea of banks forming a technology consortium is not a new concept. For example, Fintech Forge works with financial institutions to foster innovation internally through investments and partnerships. In 2018, it founded Alloy Labs Alliance as a shared innovation lab for institutions lacking a megabank’s resources.
The USDF Consortium was founded in January 2022 by five community banks seeking an on-ramp to facilitate real-time payments, loans and processing using blockchain technology.
Having skin in the game through investments and participation encourages collaboration to build out new technologies and support them through development, according to analysts at Accenture. That investment commits banks and startups to each other with a shared interest in meeting the technology needs. “The consortium model also gives smaller banks access to a pipeline of quality startups that they might not have access to if they were to invest independently,” Accenture points out.
Yet Btech Consortium is focused less on “shiny objects” and more on practical, near-term approaches to help banks achieve a digital-native, API-driven, mobile-first banking environment, says Mike Sekits, co-founder at Strandview Capital. Btech approaches fintech investing in a pragmatic and collaborative manner based on decades of experience in investments and financial technology.
The Group Advantage:
Whichever consortium a community bank goes with, a key benefit is greater access to quality startups.
The consortium may help them find technologies to jumpstart and quickly get into a new business. “They don’t have to build a new platform or hire a bunch of people,” says Covert. “Technologies are also enabling community banks to expand their geographic reach.”
When empowered with the right technologies, community banks have a strong value proposition, even against big brand competitors, Covert observes.