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Shake hands—and come out cooperating

Find a partner and your small bank doesn’t have to miss out on fintech disruption

Do community banks have to sit on the sidelines as fintech players from outside the industry pour in? In this followup to his series on fintech, CCG Catalyst’s Paul Schaus reviews strategies small banks can pursue. Do community banks have to sit on the sidelines as fintech players from outside the industry pour in? In this followup to his series on fintech, CCG Catalyst’s Paul Schaus reviews strategies small banks can pursue.

Community and regional banks seem to be at an inherent disadvantage right now as digital disruption threatens to upend the industry. They don’t have the massive resources of large national and multinational banks that can pour resources into innovation labs and venture capital arms.

At the same time, community and regional banks aren’t as agile and responsive to consumer demand and technology trends as a startup.

They are still burdened by industry regulations, organizational bureaucracy, and legacy technology. Additionally, many smaller banks are depend heavily on their core vendor for their technology needs. Yet with the rapid proliferation of fintech startups and venture capital investment in the industry, it’s simply impossible for the four major core vendors to keep up with the accelerating pace of change in financial technology.

All of these factors make it hard for smaller banks to pull off major innovations.

However, they can still partner with the players who will pull those off.

Understand this: Despite the massive resources that the biggest banks are pouring into innovation efforts, the catalyst for digital disruption in banking is going to come from outsiders, the fintech startup community. The big banks are burdened by many of the same issues as smaller ones: legacy systems, regulatory burdens, and bureaucratic layers that have stacked up across their business silos.

Threat … and opportunity

So the fintech startup community represents both a threat and opportunity for smaller banks. Some of these startups are looking to compete with banks, and some have even turned into small banks themselves. However, many of them are looking to partner with banks, and small banks should grab the opportunity to work with companies that will help shape the future of financial services.

Every bank should be engaged with the fintech startup world in some way. The big banks already are: they’ve been investing in these startups through their own venture capital arms, and even acquiring them in some cases. To compete with these big players, community and regional banks must form relationships with startups as well.

Where do you begin?

For those that want to ease their way into the startup scene, they can do so by hosting hackathons and rewards-based competitions. These are simple and cost-effective ways to gain connections with startups while familiarizing staff with emerging technologies.

Such events don’t always lead to immediate or lasting business relationships. But there are ways smaller banks can reward the winners of these competitions to grow those relationships over time. For instance, they could offer legal or marketing support to the winner of the competition, or offer to work together towards piloting the startup’s product with the bank’s customers. If that pilot is successful, and both organizations feel that they work well together, then they both have incentive to keep their relationship going.

Community banks bring real plusses to the table

Smaller banks might not have lots of money to throw around, but they have other resources to offer startups: their existing customer relationships and industry knowledge.

Startups need to test their products in the real world with real customers to gain validation and business partners. To build deeper partnerships with startups, smaller banks can leverage those relationships.

Additionally, startups often have little experience navigating the confusing maze of industry regulations. Turn your longstanding experience with regulators into an advantage. Banks can help guide startups through that maze, which is a major step for a startup looking to gain a foothold in financial services.

Banks can use new products from startups to expand their customer base in their core markets, deepen their existing customer relationships, or expand into new business lines.

For example, WSFS Bank, a Delaware-based regional bank, has partnered with a startup called ZenBanx to offer a digital-only account designed specifically for consumers that travel or send money overseas often.

Account holders can store their money in up to five different currencies, and can make international transfers and exchange currencies straight from the account.

The two organizations announced earlier this year that they would offer the account in California and the northeastern US, targeting immigrants and foreign students from Asian countries that are concentrated in those regions. This product and marketing strategy is helping WSFS expand its geographic footprint while also serving the specific banking needs of this customer segment.

WSFS has helped ZenBanx navigate the complications of Know Your Customer and anti-money laundering regulations to offer this internationally focused product. In exchange, WSFS has been introduced with other startups that provide some of the technology behind ZenBanx’s product, helping deepen the bank’s roots in the startup community.

Working together

Small banks don’t have to do it on their own, though. They can band together through industry associations to build relationships with startups.

One example of this is BancAlliance, an industry group that fosters partnerships between community banks to develop products in tandem.

The group helped facilitate a partnership between some of its member banks and the well-known P2P lending site Lending Club to offer consumer loans earlier this year.

Larger competitors had driven some of these smaller banks out of the consumer loan business. Lending Club usually offers better loan rates than banks can, giving these smaller banks a chance to regain a footing in this business. The banks direct their customers looking for loans to Lending Club’s site. In exchange, they get a share of the upfront fee that Lending Club charges to facilitate loans, and they can also fund their customers’ loan themselves or buy bundles of P2P loans made through Lending Club. This gives the banks revenue-generating assets in a business that they were chased out of by the big banks.

Go for it!

As these examples illustrate, partnership is no mere concept—it can really work for smaller banks.

Community banks can’t ignore the transformative trends in the industry anymore. They will have to be more creative in how they partner with startups than bigger banks. That means they need to get involved with the startup community as soon as possible to learn how they can best leverage their resources to get the most out of these partnerships.

To read part 1 of the original Paul Schaus series, “Who will consumers choose?,” click here

To read part 2, “Fintech’s wallets don’t pay, for banks,” click here 

To read part 3, “Why humans should worry about robo-advisors,” click here

To read part 4, "Will online lenders disrupt small business banking?" click here

Paul Schaus

Paul Schaus is CEO & President at CCG Catalyst. Follow CCG Catalyst on Twitter and LinkedIn.

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