Financial Institutions (FIs) have long had a curiosity regarding fintech.
There were concerns that these digital disruptors would create more competition for traditional financial services providers (without as much regulatory oversight), but banks and startups are starting to embrace opportunities to collaborate.
Conversations about partnerships between FIs and fintech intensified in the wake of the coronavirus pandemic, as scores of consumers and businesses became digital converts and there was a greater need to make day-to-day tasks easier (and safer) for those customers.
While some large banks have the capability to develop digital products in-house, many FIs are looking to work with fintechs. And there are many examples already of banks that already are.
One such example would be MVB Financial in Fairmont, in W.Va., which has a portfolio of fintech investments and has acquired a software company and a consulting firm that work with startups. MVB reported $4.4 million in consulting income last year, along with $3.5 million in gains from largely selling holdings in its fintech investment portfolio.
Another would be ConnectOne Bancorp in Englewood Cliffs, N.J., which bought Boefly, an online loan exchange, in 2019. The fintech generated $2.3 million of loan referral fee income last year, after serving as an agent for more than $750 million of Paycheck Protection Program (PPP) loans.
Some FIs, including First Foundation Bank in Dallas and Suncrest Bank in Visalia, Calif., are dipping their toes into cryptocurrency. The Independent Community Bankers of America has a fintech incubator, and several small and midsize banks have invested in a $150 million fund focused on startups. These endeavors, for the most part, are in their earliest stages.
“There’s no need for banks to build things themselves when there are so many opportunities out there,” Arushi Joshi, founder and CEO of AtCash Inc., a fintech that focuses on cryptocurrency, said during a recent panel discussion at the virtual Fintech Generations conference.
Among the standouts in this movement is KeyCorp in Cleveland, which has announced scores of fintech partnerships in the past decade – and its dealings in the digital realm have increased in recent years.
The regional bank has a three-pronged approach to fintech – partner, invest, and acquire –adopting methods that are applicable to banks of varying sizes.
Jamie Warder, an executive vice president and KeyCorp’s head of digital banking, reviewed this methodology during a panel discussion at Fintech Generations. While implementing the approach, KeyCorp learns more about its partners as it accepts greater risk. “I think fintechs have a place with banks, and vice versa, and they can work together to do better things for customers,” Warder said.
“I view fintechs as taking a customer-backed view of needs that can be better met,” he added. “We have example after example of where fintechs have found that need … and created great solutions.”
KeyCorp has many traditional commercial partnerships with fintech, including XUP Inc. and Boomtown Network Inc. in merchant services, Bill.com for commercial payments, and Optimal Blue in home equity servicing.
“We’re working with dozens of others to create a better experience for our clients,” Warder said.
The bank has also taken minority stakes in startups which has allowed it to “shape the roadmaps” for fintechs “and figure out how we can be a part of their growth,” Warder said.
Examples of KeyCorp investments include InstaMed, a fintech that handles health care payments; Billtrust, which focuses on accounts receivable; and Snapsheet, a startup that deals in insurance claims. (JPMorgan Chase bought InstaMed in July 2019.)
The bank’s most-aggressive moves have involved outright purchases of fintech.
KeyCorp bought Hello Wallet, a financial wellness product, in 2017 and Bolstr, a digital small business lending startup, a year later. It acquired Laurel Road, a digital student lending platform, then leveraged that technology to create a national digital bank aimed at health care professionals.
“Those were the instances where we liked them so much, we acquired them,” Warder said.
These digital additions have allowed KeyCorp to innovate its products and services. The bank, through Laurel Road, recently created a credit card that allows doctors and other medical professionals to earn 2% cash back that can be used to help pay off their student loans.
“The reason we had a vision [to make digital strides] is because that’s what our clients are telling us they want,” Warder said.
“More and more they’re telling us they want to do things on their own and that they’re comfortable doing things on their own,” he added. “We’re seeing 100% year-over-year increases in just about every digital activity, be it origination or servicing. I think we’ll feel even more pressure to speed up.”
There are other recent examples of fintech investments and partnerships evolving into outright acquisitions.
Fifth Third Bancorp in Cincinnati is buying Provide, a fintech that focuses on the healthcare sector, after investing in the startup in 2018. Fifth Third, which holds about $400 million of loans originated by Provide on its own balance sheet, plans to retain all loans made by the fintech going forward.
CRB Group, the parent of Cross River Bank in Fort Lee, N.J., bought PeerIQ, a data analytics firm that provides services to fintechs and banks. CRB has worked with PeerIQ for the past three years.
The Bottom Line:
Shifting customer demands will lead more FIs to pursue partnerships with digital startups to add products, platforms, and services designed to retain and recruit business. Those moves will touch on all aspects of revenue, including loan generation and fee income.
Banks and credit unions will need to evaluate the risks and benefits of these collaborations, along with the terms of their contracts. FIs that understand the unique due diligence needed for these partnerships will have an advantage over the long term.
To learn more about how SRM helps clients consider the synergies with fintechs and evaluate the next best action, you can contact Ben Mrva, EVP at SRM.