Financial technology mania is spreading from Wall Street to smaller banks that are increasingly eager to participate online as consumers' adoption of fintech shows no signs of abating.
Wall Street institutions' adoption of online financial services products outpaced regional and community banks for years. Many big banks hedged against their own future with urban accelerator labs that launch products designed to do everything from detecting compliance issues to speeding research to managing automated investor portfolios.
For better, and for worse, Wall Street serves as an innovation hub of financial services products; smaller banks have limited access to pioneering entrepreneurs and must forage for partners. Fortunately for them, many start-ups are at a point where they, too, are eager to drum up more business, as asset-backed securities deals and initial public offerings that helped fintech companies amass cash in recent years became scarce in 2016.
"We've got a lot of smaller banks starting to think nationally," said Tom Michaud, CEO at financial services investment bank KBW. "We think fintech is going to converge with the banking industry."
While most small bankers are eager to embrace digital capabilities, uncertainty lingers. Al Dominick, president and CEO of conference organizer and magazine Bank Director, said at his company's conference in New York in early March that a whopping 55 percent of small, community and regional bank executives had not set up any meetings or presentations with potential partners, despite aspiring to do so.
The fintech revolution comes at a crucial time for small banks. Economic growth and predictions regarding the Federal Reserve's upcoming decisions on interest rates will be felt acutely by smaller firms in the industry. Because smaller banks focus more on interest-sensitive products such as mortgages, prolonged low rates by the Fed will hurt them disproportionately.
Banks face shifting consumer tastes, and may be compelled to act quickly. The 2016 Millennial Money Mindset Report, released by iQuantifi earlier this year, reported that nearly 42 percent of millennials want to manage their bank relationship exclusively online.
"Millennials do not want to go to a bank branch," said Silicon Valley Bank head of payments services Eduardo Vergara, speaking at the Bank Director event.
The success of apps such as Venmo and in-house industry developments, like JPMorgan Chase's Chase Pay, is already pushing more small banks to partner up with digital services. While mobile options have become increasingly popular for consumer bank transactions, other lines of business have not made as much of a transition to the smartphone, leaving opportunities for smaller and community banks, as long as they can generate margin.
"It's difficult for banks of any size to generate loans that are profitable below a certain threshold," said Colleen Poynton, vice president with venture investor Core Innovation Capital, which backs fintech startups.
In the years after the global financial crisis, as Wall Street banks were forced to simplify operations, trim staff and pursue fintech opportunities, their smaller competitors were brokering mergers just to survive. From 2008 until early March, the number of FDIC-backed banks in the U.S. plummeted 25 percent, from more than 8,300 to fewer than 6,200. Being able to outsource functions such as customer acquisition to start-ups means smaller banks have a broader opportunity of clients to pursue. It puts them in position to tap into revenue that previously would have been inaccessible.
"Partnering with an online lender and losing the cost of their consumer business could be a massive boost to [return on equity]," said SoFi CEO and co-founder Mike Cagney.
JPMorgan, which dialed down business lending in the wake of the global financial crisis, recently partnered with On Deck Capital to originate new loans.
Smaller banks are mimicking JPMorgan, as well. Some banks look for acquisitions while others band together to find partners.
In 2012, SunTrust acquired the assets of online lender FirstAgain, rebranded it and launched its own consumer lending platform on the web, called LightStream. Lending Club, which provides online loans to consumers, last year tapped into community banks by partnering with BancAlliance, a national consortium of banks with assets as little of $250 million.
Sam Hodges, co-founder and U.S. managing director of small business lender Funding Circle, says smaller banks are equally eager to get into online lending to diversify portfolios, both geographically and by type of loan. Funding Circle is in talks with several smaller banks looking to put more capital to work via the web, Hodges said, though he declined to elaborate.
"Many of them are concentrated to real estate," Hodges said. "It's going to take sometime to get this concept working."
Time is not on their side. Part of regional and community banks' motivation to take on new online initiatives is also owed to a growing number of online-only competitors relying on new technology to cut out overhead legacy costs banks still face. Upstarts like Live Oak Bancshares, Bank of the Internet and Cross River Bank are part of a wave of institutions conducting business online and advertising via social media rather than relying on brick-and-mortar operations and radio or print advertisements.
If smaller banks want to go online, but want to control their brand more, they can turn to companies like R.C. Giltner Services in Louisville, Kentucky. CEO Greg Schreacke said the digital lending platform already has about 20 clients and expects to partner with dozens more banks over the course of the year. In late 2015, the company partnered with Kentucky Bank, a local and publicly traded bank, to sell more online and mobile loans.
It's a difficult business proposition for many CEOs, said Norm DeLuca, general manager of digital banking with Bottomline Technologies, a Portsmouth, New Hampshire-based provider of automation processes for financial services firms. On one hand, they're in need of higher returns and can leverage the consumer data they own to generate digital offerings; but small banks have to protect proprietary relationships so that their customers do not disappear into the digital ether, never to return.
"They're trying to think of the best way to survive," said Suk Shah, CFO of online consumer lender Avant, which also expects to announce a partnership with a number of private banks soon.