5 ways small financial institutions collaborated on tech

January 13, 2023 3:39 PM

Community banks have single-handedly created online lending technology and products such as a rate-comparison resource that are meant to serve the industry at large. Other times, these institutions find they benefit when joining forces.

"Bankers love bank-born products because they have had to deal with the same compliance issues, so they generally don't create products that are not compliant," said Dave Mayo, CEO of the data provider FedFis and founder of the Bankers Helping Bankers BaaS Association.

The phenomenon of community banks or credit unions coming together to pool resources, share ideas, collectively engage with fintechs and produce apps or services that their peers or even the public will benefit from, dates back decades. Here are five examples of situations where these institutions collaborated on technology projects and how these innovations help the industry at large.

"We have made a conscious effort to treat customers differently," said Sarah Fankhauser, president and CEO of DCI.

A nimble core processor

This year marks the sixtieth anniversary of core processor DCI, or Data Center Inc. It was founded by four banks in Hutchinson, Kansas, with the idea of saving expenses on core processing.

"This was back in the days of huge mainframes, before Check 21," said Sarah Fankhauser, president and CEO of DCI, in an interview. "To have all this processing equipment and everything that was involved in running a bank was very costly."

First National Bank of Hutchinson is the only one of the original four that is still a customer today; the other three have been acquired. Today, 34 community banks across the country co-own DCI. All but one use DCI as their core processor; the outlier did as well until it was acquired by another institution.

DCI doesn't have the name recognition of FIS or Fiserv, but Fankhauser says it sets itself apart by the way it takes care of its customers. "We have made a conscious effort to treat customers differently," she said. "We have dedicated support individuals that are bankers. We have relationship managers that go onsite at our expense quarterly and meet face to face to ensure customer satisfaction." DCI's bank customers range in size from $30 million of assets to about $6 billion of assets. About 160 financial institutions buy the whole core processing package from DCI, while another 100 will use individual products related to internet banking, tellers or something else.

"When first exploring the idea of a direct digital bank, we contacted our current core provider, and while they are a great vendor for our main bank processing, they were simply unable to confidently assist us in creating a solution for our direct digital bank needs," said Mike Fernandez, president and CEO of Texas National Bank in Sweetwater, Texas, in a March 2022 press release announcing Texas National's partnership with DCI to launch its digital brand Bankers Lender. "I knew we weren't just another contract to [DCI] and that they really were invested in helping us succeed."

A better way to handle escrow

Five community banks struggling to manage escrow and subaccounting aligned themselves with ZSuite Technologies, a company that helps financial institutions streamline these processes, to find an answer.

The product they created, ZEscrow, is a responsive web app for digital commercial escrow and subaccounting that is branded for each institution and enables its clients to create subaccounts online, automate statements, perform complex interest calculations, ensure compliance with local regulations and more. It went live in July 2021 after nearly a year in development. The five banks that collaborated with ZSuite to build it — Bank of New Hampshire in Laconia, New Hampshire; Haven Savings Bank in Hoboken, New Jersey; Kearny Financial in Fairfield, New Jersey; Leader Bancorp in Arlington, Massachusetts; and Patriot National Bancorp in Stamford, Connecticut — shared the development costs, advised on which features they wanted ZSuite to prioritize, received deep discounts on product licensing fees and went first to market.

Core systems are not well set up to handle these unusual relationships, said Nathan Baumeister, CEO of ZSuite, in April 2021. "Core systems within banking are really good at handling access and management and compliance when one entity is holding the money and it's that entity's money," he said. "They are not good at managing that third party relationship between the trustee and the beneficiary."

Twenty-eight banks now use ZEscrow, including Encore Bank in Little Rock, Arkansas. Leader Bank, which has $3.9 billion of assets, reported saving $116,000 year over year due to a reduction in core processing fees for escrow and subaccounts after it started using ZEscrow.

A bilingual challenger bank for the underserved

Many challenger banks say they are targeting the underbanked and underserved. Dora Financial does the same, with a unique origin story: it is a product of four credit unions.

USAlliance Financial, a credit union in Rye, New York, conceived of Dora and started developing the neobank in early 2020. (It is named after credit union pioneer Dora Maxwell.) But three other credit unions — Affinity Plus Federal Credit Union in Saint Paul, Minnesota, Digital Federal Credit Union in Marlborough, Massachusetts, and Service Credit Union in Portsmouth, New Hampshire — were eager to contribute. The four of them formed a credit union services organization and invested in Dora in 2021 along with Inclusiv, which develops products and advocates for community development credit unions. An executive from each credit union and Inclusiv also form the board of managers for Dora to strategize its next steps.

Dora launched to the public in September 2021. Kristi Kenworthy, the managing director of Dora, said her team is actively marketing the app in geographies with large populations of unbanked and underbanked individuals. It is also partnering with community groups serving audiences who would benefit, such as reentry programs for incarcerated individuals. Dora has 4,000 accounts.

Brian Volkmann, chief financial officer of the $3.9 billion-asset Affinity Plus, viewed the credit union's contributions to Dora as a way to reach people where Affinity Plus doesn't have a presence or those who do not trust traditional financial institutions.

The fully bilingual nature of the app, in English and Spanish, was another draw for the investors, said Kenworthy in an interview. "When you have a portfolio of products and services, multiple branches, a call center, and online and mobile banking, it's a tremendous task to create a great bilingual experience," she said. "Dora gives the credit unions an opportunity to get into the space."

An affordable P2P service

Seven large banks own Early Warning System, the company behind peer-to-peer payment service Zelle. In 2021, a group of community banks came together to develop a more affordable alternative.

An open payments network called Chuck that went live in early 2022 is the result. Users can initiate P2P payments that recipients may collect through several channels, including ACH, Venmo, and to their debit card. Recipients are notified of the payout and must enter a one-word code to guard against fraud. The product was incubated at Alloy Labs and relies on instant-payment technology from Payrailz, which was recently acquired by core company Jack Henry.

"As far as utilization, we have seen steady adoption with both the number and dollars more than doubling every month," said Julieann Thurlow, president and CEO of Reading Cooperative Bank in Reading, Massachusetts, in a 2022 interview. The $722 million-asset Reading was the first to go live with Chuck.

Chuck may become even more appealing to community banks compared with Zelle if the latter requires banks to reimburse victims who lose money to scams over the network. Participating banks are guaranteed to incur no fraud costs with Chuck.

Efforts to ramp up banking-as-a-service

There are two recent widespread efforts by community banks to reinforce safer, more consistent standards for sponsor banks and encourage more fruitful partnerships with fintechs.

More than a dozen members of the Alloy Labs Alliance bank technology consortium and several fintechs published a playbook for banking-as-a-service relationships in October 2022, spelling out which parties are responsible for different aspects of compliance, customer service, data stewardship, disaster recovery and more. They also pinned down definitions for terms like "program manager" and "BaaS."

One big topic in the playbook is how banks should enforce data use policies at their fintech partners. Questions around how to make sure fintechs are careful stewards of customer data come up, said Curt Queyrouze, president of Coastal Community Bank in Everett, Washington, in an October story. "That's the primary challenge and focus today that we're working on," he said.

Another effort to promote BaaS relationships that emerged in 2022 was the BaaS Association affiliated with Bankers Helping Bankers. Bankers Helping Bankers is a social platform for community banks to network and exchange ideas; in October, the group also announced an initiative where bankers can beta test screened, early-stage fintech products.

The BaaS Association has several community bankers on its board. Its goals are to advocate for responsible delivery of BaaS, promote best practices, standardize compliance and connect banks with partners. One early accomplishment was matching Obsidian, a neobank for Black individuals, with Five Star Bank, a $5.6 billion-asset bank in Warsaw, New York, as a partner.