Who really wants to stand in line to conduct simple transactions in a brick-and-mortar bank that is only open to fit the lifestyle of retirees? Almost any major financial transaction from financing a car to securing a mortgage can be conducted using mobile apps developed by fintechs. But these innovations have not made their way to the majority of traditional banking institutions yet.
It is not a lack of interest in elevating the personal banking experience that keeps banking stuck in the digital dark ages. In reality, most community banking institutions are seriously constrained by the legacy technology that powers their current banking systems. Most banks and credit unions run on platforms that are provided by three legacy core providers with slow turnaround times, minimal options, and high costs. This makes personal banking ripe for disruption, especially among community institutions. They don’t have the buying power or the ability to force widespread technological changes like large banks, so they are the most constrained by the current system.
Fintechs recognize this and have jumped into the market in a big way. At the close of 2018, there were 39 venture-capital-backed fintech unicorns (valuations of $1 billion and up) worth $147 billion, according to CB Insights. However, these fintechs are technology companies, which means they don’t reside within the highly regulated and complex banking ecosystem, so they need guidance to navigate unique rules and regulations. To overcome these hurdles, partnerships have emerged.
A good example on a large scale is the Apple credit card. Apple is not a bank so Goldman Sachs provides the back-end services to make all of the transactions work and white labels this with the Apple name and brand recognition. Other big banks like Wells Fargo have partnered with big fintech players like Stripe. It is a solid strategy, and can be successfully implemented by far smaller financial institutions, and smaller fintechs.
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Greater Customer Intimacy, Plus Agility
A successful partnership between community financial institutions and fintechs results in a hybrid entity that blends the agility, adaptivity, and innovation of a fintech and pollinates it with a firm understanding of banking compliance rules and regulations. Community banks and credit unions have the agility and ability to cultivate fintech relationships and grow them, helping the banking revolution take root.
“Community banks are the perfect size for fintech partnerships, and can provide all of the core tools needed to stay compliant.”
— Patrick Sells, Quontic Bank
Community banking providers may be the current underdogs in banking, but they are the most dialed-in about the services their customers want because they have a long history working with their customer base and understand their needs. The smaller size of community institutions allows them to build intimate partnerships with fintechs, and provide dedicated resources, without layers of bureaucracy and the complexity of dealing with many business units.
The fact is community banks and credit unions are fully capable of giving the service and guidance that fintechs need, and have the same access to the Fed Wire, ACH and Mastercard/Visa rails as the big banks. In short, community banks are the perfect size for partnerships and can provide all of the core tools needed to stay compliant in this industry.
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How Small Institutions Can Break Free from Tech Constraints
Some traditional community institutions are staying in the shade of the status quo. But that shade is only temporary. The time is now for community banks to step into the sunlight and reinvent the customer experience with new technology that unlocks the power of their consumer data and customer knowledge.
This step is very much possible. Quontic Bank grew from a very small troubled traditional bank acquired in 2009. It had operated under a traditional branch-based model, but Steven Schnall, Quontic’s CEO, knew in 2009 that brick and mortar branches were not the future of banking. Instead, he believed that banking would become all about using technology to deliver financial products and services to consumers digitally — including the under-banked — and so Quontic has never opened another branch and only has one now. Quontic is a U.S. Treasury designated Community Development Financial Institution.
What helped make this strategy work is that we were able to build our own new technology platform, a middle layer, or “wrapper,” which works with our existing core system. This step proved to be relatively affordable and was deployed in less than a year. We call this platform Quontic Works and it wraps around not just our core, but almost all of the software platforms we use, including Encompass on the mortgage side.
To do this took full stakeholder buy-in, an emphasis on standardization, and the willingness to make mistakes. Innovation is rarely clean and you don’t want to automate bad or messy processes.
In order to have the freedom and flexibility to compete and stay relevant, I believe community banks and credit unions must create such a middle layer, or “wrapper,” over core systems and other software systems to centralize all data sources. This will connect them to the larger financial world with the ability to leverage API’s (application programming interfaces) to push and pull data automatically in and out, and create partnerships with fintechs who need access to API’s and data.
This change does not require a brand new core, just a new, smarter layer that leverages the best of what is in place now and keeps banks compliant with regulations while removing current traditional banking platform constraints. The new layer allows for ease of integration and accelerated turn-around times that save everyone time and money.
Further, this improved tech arrangement gives community banks a competitive advantage: affordable access to data reporting. Large banks often spend $30 million or more for this insight. The change also enables automation, machine learning and artificial intelligence software to predict trends and patterns to better manage banking.
Bypassing the legacy core platform provides smaller banks and credit unions with the agility and flexibility to partner with fintechs and saves millions of dollars that they would have spent to run services on legacy banking platforms. Within a week of launching a new smart layer on the core platform, connections can be established with fintechs and new partnerships can be up and running.
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Quick Payoffs Confirmed by Multiple Indicators
It is well worth the effort to stay relevant to customers and refresh and optimize the way work is done and establish new partnerships. After just nine months, Quontic Bank is reaping clear benefits:
- A 36% increase in bank efficiency through automation of hundreds of man-hours of work
- Tripled our core deposit franchise through online account opening (a growth rate of 136%)
- Increased new banking customers by 127%
- Added customers in 41 new states.
These new channels of revenue and income are a direct result of our partnerships with fintechs and our new automation and technology. The time is now for community banks to plant and sow the seeds of innovation to reap the harvest of the fintech revolution in the next decade.