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Financial Technology Roadmap:
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Routes: Approaches to Financial Technology for Community Banks

Community banks are, and will remain, the keystone for providing consumer financial services. This is because they are responsible for maintaining the insured deposit accounts with which customers identify as the foundation of their primary financial relationship. Nonetheless, the way banks provide services will continue to change in the coming decades, due both to technological advances and in response to demographic shifts in the US population.

Once a bank has identified financial technology projects to supplement and support its strategic plan, it should next consider how it will go about developing those projects.
 

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Route 1: Create In-House

Some banks have elected to develop financial technology products or services internally, either directly in the bank itself, or in an affiliate of the bank.

PROS:

  • Differentiation: Successful, internally developed product can be leveraged not only for the benefit of the bank’s existing customers but can serve as a differentiator to attract new customers to the bank.
  • New Revenue/Added Value: The product can generate new revenue through sales and/or leases to other banks or financial institutions. For example, increases in computing power have led to an increase in the amount of data that can be stored, processed and analyzed. Recognizing the value of this data for business development, many banks have developed in-house “big data” financial technology teams to manage customer data, develop new analytical methodologies and tools, and to leverage technology to provide more efficient financial services to bank customers.

CONS:

  • Higher Costs: The costs associated with an extended rollout of a new product or service can be cost prohibitive.
  • Hard to Find Talent: Finding the right expertise to staff such projects can be a challenge.

Route 2: Collaborate

A bank could choose to collaborate with a third party to bring a new product to market. Potential partners may be sought out and identified by a bank itself, or a bank may find itself approached by potential partners with fintech business proposals.
 

PROS:

  • Play to Your Strengths: The tasks associated with developing the product could be divided and allocated to the party best suited for such tasks. The bank could retain regulatory compliance, marketing, securing liquidity and access to settlement infrastructure while the bank’s partner could be responsible for software development and other IT-related functions.
  • Faster Than Producing In House: This could enable a bank to bring its idea to the market faster and with less cost than if the bank had tried to bring its idea to market by itself.

CONS:

  • Be Sure the Partner is Good: Prior to entering into a partnership or joint venture with a financial technology company, a community bank should consider several regulatory steps and conduct due diligence.

The Three Types of Collaboration

(Click to see marketplace lending fintech product examples below)

  • 1. Business Partnerships

  • 2. Investment Collaboration:

  • 3. Technology Collaboration:

Route 3: Purchase or Invest

A third option is for a bank to purchase an established product or invest in an established company.
 

PROS

  • Fastest Route: Purchasing an existing product is the fastest path to offering a new service to the bank’s customers.
  • Plug and Play: Other banks have integrated off-the-shelf products—essentially, plug and play, out-of-the-box technology—to offer clients new financial technology services like finance management and financial planning capabilities. By doing this, banks can leverage financial technology to provide customized, highly self-directed services that have the potential to deepen relationships with digitally savvy customers with little effort.
  • Acquisition is Similar to In-House Production Minus Risks: Acquiring an established company has many of the same benefits of creating a product in-house (e.g., potential for additional revenue streams) without some of the associated risk (e.g., that the product developed may not be viable).
  • Investment is Similar to Collaboration: If a bank chooses to make an investment in a company, rather than acquire it, the potential risks and rewards resemble those associated with a collaboration business model.

CONS

  • Limited Customization: A bank may have a limited ability to customize the product.
  • Exposure to Vendor Management Risk: A bank may expose itself to vendor management risk if the bank is also purchasing ongoing services related to the use of the product.