Fintechs and Community Banks – The Odd (and Potentially Happy) Couple
If starting a new business is hard, building a financial technology (fintech) company is incredibly hard. From finding a fit in a crowded global marketplace to navigating a complex regulatory environment, the deck is often stacked against young fintech companies.
If being a bank these days is hard, growing a community bank is incredibly hard. From compressing margins due to increasing competition from global banking conglomerates to fighting off fintech upstarts looking to “disrupt” traditional banking services, the deck is often stacked against established community banks.
Funny how that works, huh? The market doesn’t make it easy for anyone these days.
I do a fair bit of work for both fintechs and community banks. And while, at first glance, these two business models appear to be diametrically opposed to one other, there is actually a huge opportunity for fintechs and banks to partner together.
Let me explain.
Most fintechs, hopefully, have cool technology. Indeed, the word “technology” is the second half of “fintech.” Fintechs are usually built around novel technology that is designed, in some way or another, to help financial market participants do something quicker, cheaper or better. But that old Silicon Valley/Field of Dreams mantra “if you built it they will come” doesn’t always carry the day in a competitive marketplace.
The number one reason why startups—including fintechs—fail is due to a “lack of market fit.” This is just a fancy way of saying that not enough people used the product. The second most common reason fintechs go under is that they run out of cash. Again, this is really due to the fact that not enough people used the tech. It may sound antiquated in today’s VC-driven economy, but more customers typically means more revenue. It follows, then, that if fintechs had access to more customers, more would survive and prosper.
Community Banks, on the other hand, have great customer bases. Their customers (at least the older ones) tend to be loyal and their products are “sticky” meaning that folks rarely leave their bank once they are there. Having lots of loyal customers allows the bank to lend out its customers’ money at a higher interest rate than it pays its customers for keeping their money at the bank. This isn’t a revolutionary concept.
The problem is that the younger generations (Gen X, Millennials, and younger) don’t really go to banks anymore, so customer loyalty is eroding. These customers not only want—but expect—fast and secure digital banking solutions, such as mobile apps, online banking, digital payments, cryptocurrency solutions, etc. and are happy to move their accounts to bigger banks with better tech-forward products. Moreover, companies that are not even banks (ever hear of Apple Inc. or Amazon?) are moving into customer banking, increasing the erosion of community banks’ customer bases and, accordingly, their bottom lines.
And, of course, fintechs are working hard to erode almost every aspect of a community banks’ business model. CBInsights put out this great infographic a few years ago showing the Wells Fargo banking login page and identifying the various fintech companies attacking each of the bank’s particular service lines, from home lending to payroll and everything in-between:
Photo credit: CB Insights, https://www.cbinsights.com/research/disrupting-banking-fintech-startups-2016/
If this graphic doesn’t make community banks anxious, I’m not sure what will.
So what are fintechs and community banks to do? My advice is: partner together!
Fintechs need customers and cash and community banks need new technology and to appeal to younger generations. Partnering together potentially solves both their problems. Of course, the parties need to do their due diligence, properly paper the transaction, and ensure that the partnership makes financial and business sense. There can also be technological and cultural integration issues when you bring together such different organizations, but those can be worked through over time.
If you represent a bank or a fintech and want to discuss any of these issues, please feel free to reach out to me. Every situation is different and partnering with another business requires a thoughtful approach and significant planning and negotiation.