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Banking and Fintech: Friend or Foe?
Agenda
 Fintech: What and Why
 Competitive Assessment of Fintech Lenders: Fad or Fundamental
Change?
 Implications for Bank Actions Steps
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Fintech: What and Why?
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Fintech: Why & Why Now?
Bank retrenchment post crisis, regulatory constraints
Access to venture capital
Dramatically lower cost of technology
(e.g., Amazon Web Services “AWS”)
Lagging investment and innovation in bank legacy systems
Customer adoption of technology (shift to online, mobile, 24/7)
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Resulting in Bewildering Array of Companies
Source: Orchard Platform
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Targeting Virtually Every Element of Traditional Banking
Source: CBinsights
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Fintech Examples
Bank
Non-Bank
Payments
Lending
Investing
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Partnerships
Competitive Assessment of Fintech and Banking:
Fad or Fundamental Change?
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What’s Really New in Fintech?
• Speed
• Mobile
• Cost
• Customer Experience
Lending
• Application data
collection
• Speed
• Automated Underwriting
(small business)
•
•
•
•
Investing
• Aggregation across
accounts
• Transparency
• Indexing, ETFs
• Fees
• Automated Analytics
& Advice
• Mobile
• Customer Experience
Payments
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Cost
Automated Servicing
Mobile
Customer Experience
Fintech Impact on Customer Experience
Source: Retail Banking 2016: Fintech: Fact of Fiction? and LendIt 2016 LC Presentation
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“Winter is Coming” to Fintech
Shakeout is well underway
Irony and omens abound
Venture capital has retrenched, reducing availability of operating funds
Wholesale funding has retrenched, reducing availability and increasing cost of
lending capital
Lending Club management issues both accelerate and magnify the problem
Like the internet boom and bust in the 1990’s, failure of some startups doesn’t
change powerful underlying revolution in how financial services are delivered
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Relative Strengths & Weakness of Banks vs. Fintech
Strengths
Weaknesses
Technology
Customer acquisition
Efficiency
Credit
expertise/stability
Myths
Speed
Cost of capital
Customer experience*
No branches
No capital
requirements
Compliance*
New underwriting
analytics*
*Subject to a few caveats
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Stability of capital
sources
Key Advantages Enjoyed by Banks
What’s Unique
Customer
Relationships
Customer
Data
Cost of Capital
Why?
Under Attack?
• YES, if full range
• Long-standing
of products &
provider of capital
services not
• Trust (including
offered
regulatory)
• Connection to
small business
customers
• YES, if full range
• Transaction data • Position as
checking deposit
of products &
on small business
account
services not
offered
• Bank leverage
• Bank cost of debt
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• Bank Charter
• NO
Particular Considerations for Community banks
Less to lose
Advantages relative to larger banks
 Stronger customer relationships
 Low cost, often underinvested capital
Disadvantages relative to larger banks




Resources (time and money)
Scale of opportunity relative to costs
Narrower current product set
Ability to get attention of potential fintech partners
Fintech offers promise through “democratization” of access to technology
But community banks face significant obstacles in achieving that promise
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Fad or Fundamental Change?
Should bankers breathe a sigh of relief as the upstarts run into a more difficult
period? Was all the hype about fintech the last few years just that?
It is likely the case that fintech is both a fad and a harbinger of fundamental
change
Early 2000s “dot com” bubble is a good analogy




IPO market overheated
Many startup failures (Pets.com)
Fundamental changes driven by technology innovation remained post bubble
Market leaders emerged (Google, Amazon, Apple, etc.)
Focus of bankers should be on what is changing, not (other than in terms of
picking a potential partner) which firms will win or lose
 Customers will expect and demand more
 Banks must meet changing customer demands
 Efficiency and flexibility is imperative
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Implications for Bank Action Steps
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Five Basic Choices for Community Banks Regarding Fintech
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Ignore and hope it goes away
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Force fintech into the banking system through legislative or regulatory
action
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Buy - Generally not available to community banks
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Build - Generally not available to community banks
 Good for customers?
 Political deadlock and lack of clarity among regulatory agencies
 Larger banks more likely to benefit from resources available to handle
compliance burden associated with deploying fintech technology
Bank forges distinct partnership
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 Bank collaborates with other like-situated institutions to forge a customizable
partnership
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Recent Examples: Buy a Fintech Player
 In 2014, BBVA purchased Simple for $117
million
Simple provides FDIC-insured checking accounts and
surcharge-free access to 55,000 ATMs
 In 2015, BBVA acquired a 30% stake in
Atom Bank for $68 million
Atom is the UK’s first digital only bank
 In 2016, BBVA acquired Holvi for an
undisclosed amount

Holvi provides entrepreneurs, freelancers and small
business with online business banking services
tailored to their needs
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Recent Examples: Build Proprietary Platform
 Eastern Bank ($9.6 billion in assets)
hired a team to launch an internal
innovation initiative, Eastern Labs,
tasked with creating new data-based
technologies
 Such a commitment supports the
banking industry shift towards tech
investment as part of the long-term
strategic plan
 Seeking to offer everything from deposit  Expects to license its technology to
accounts to prepaid cards to small
other banks with which it does not
business loans
compete
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Recent Examples: Partnering by Leasing a Software Platform
 In 2015, JP Morgan Chase announced a
partnership with OnDeck Capital, whereby
Chase uses OnDeck’s software platform to
originate smaller small business loans (up
to $250,000)
 Chase controls the credit policies, pricing,
product features, servicing, etc. and
operates the entire lending business other
than the origination system
 OnDeck is invisible to the Chase customer
and is prohibited from pitching loans to
Chase borrowers
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Recent Examples: Integrated Partnerships
 In 2015, Regions Bank announced a
partnership with Fundation, whereby
Regions will essentially outsource its
online small business lending function to
Fundation on a co-branded basis.
 In 2016, BancAlliance announced a
partnership with Fundation, whereby a
network of over 200 community banks will
be provided with access to a technology
enabled lending platform on a co-branded
basis.
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Types of Bank/Fintech Partnerships
Summary
Customer
Experience
Branding
• Mixed
Referral
• Bank refers
customer to a
fintech partner
• Typically branded
with fintech
partner
Platform
• Bank leases
customized
fintech platform
• Defined by the
bank
• Typically white
labeled
Integrated
• Marriage of bank • Emphasize bank
• Integrated
brand with clear
and fintech
arrangement in
partner role
which fintech
disclosures
partner provides
client solution 22
What it Takes to Forge a Fintech Partnership
Partner Selection
Partner Negotiation
 Direct costs (legal, audit,
model validation, etc.)
 Investment of staff time
upfront & ongoing
Vendor Management
Bank review, approvals, policies,
governance
Implementation
Ongoing monitoring and management
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My Advice
 Ignore seems quite risky
 Buy and build generally off the table for all but the largest banks
 “Go it alone” partnerships with fintech lenders are intriguing but face big hurdles

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Significant upfront investment of time and money
Challenge in getting focus of high quality partners
 Collaborative approaches offer compelling avenue
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Sharing costs among a number of banks can significantly improve the return on investment
Pooled diligence can enhance quality of the work while reducing per bank costs
Collaboration can gain focus of any potential partners and negotiate favorable terms
Sharing information (e.g. loan performance, customer experience) among the collaborative can
enhance program management
 Regulators seem to have recognized this opportunity
 OCC “An Opportunity for Community Banks: Working Collaboratively” (January 2015)
 “The OCC supports community banks in exploring opportunities to achieve economics of scale
and the other potential benefits of collaboration.”
 But uncertainty remains as always
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Washington, D.C.
4445 Willard Avenue, Suite 1100
Chevy Chase, MD 20815
Telephone: (301) 232-5400
www.bancalliance.com