Are Fintech and Community Banks a Perfect Match?

ATLANTA — It was a fintech conference, but a decidedly different one.

Nearly everyone was wearing a jacket, there were no "master senseis," and only one person mentioned APIs by name.

Yet what it lacked in stereotypes, it made up for in practical advice about how community bankers could use fintech to reshape their business. For instance, small banks may have an easier time persuading regulators to OK partnerships with fintech companies because those under $10 billion in assets are not directly supervised by the Consumer Financial Protection Bureau. (Of course, the CFPB could still weigh in at some point given the agency's broad powers.)

The name of the conference, Crossroads: Banking and Fintech, was especially apt for community banks given the juncture many of them have reached. The operating environment has stressed their ability to make money. Technology could strip out some of the costs, but some thrifty, and perhaps shortsighted, bankers are unwilling to make investments.

Also, retail customers are judging their banks by their digital products, and larger banks have at least the perceived advantage there. But community banks should not give up too soon, several bankers said.

"Technology, I believe, is a great equalizer for community banks," Chris Nichols, the chief strategy officer of the $4 billion-asset CenterState Banks in Davenport, Fla., said in an interview. "I'm bullish on the ability for us to leverage it to be more competitive."

"Community banks often think only big banks can innovate," he continued, "but they are often huge animals with wasted resources and legacy systems. I can move on a dime."

Nichols was also one of the speakers at the conference, which was hosted by the boutique investment bank Banks Street Partners, the law firm Bryan Cave and the venture fund TTV Capital. It was designed as a beginner's course on fintech, given that community banks might be overwhelmed by the size of the growing industry.

"I don't know that many bank CEOs have had a chance to pause and figure out what might be a complement to their business and what their vulnerabilities could be on a path toward obsolescence," said Lee Burrows, chief executive of Banks Street. The firm is a staple in advising community banks particularly in the South on acquisitions, but Burrows said the Atlanta-based company is increasingly working with fintech companies, either as they pursue capital or potential acquisitions by banks.

"My guess is that some of the banks will meet with some of the presenting companies to discuss how they can form an alliance or if they can't, banks will then think, 'Well, who else might be a good fit for me?' "

For all the potential, however, there are still several hurdles for community banks to overcome. One of them, not surprisingly, is regulation. Following the financial crisis, community bankers have tended to stay in their respective lanes for fear of inviting scrutiny from regulators. In the world of bank M&A, deals are vetted with regulators in their early stages. Banks were advised to take the same approach when considering partnerships with online lenders or other tech-focused moves.

But bankers like Bryan Cohen, the chief executive of Quantum National Bank in Suwanee, Ga., say that banks should not assume that regulators will stifle innovation.

"If you can prove that it is strategically viable, I've found the regulators to be receptive," Cohen said during a panel discussion.

Another challenge is finding the right technology. There is a natural disconnect between fintech, which has tended to skew toward consumer offerings, and community banks, which have found their niche in commercial banking. Several banks have struck partnerships with marketplace lenders to improve loan growth, but not all bankers want to do that.

"I don't need technology that is going to help me make more loans," said William Easterlin 3rd, president and CEO of Queensborough National Bank & Trust Co. in Louisville, Ga. "I need something that is going to help me make the loans I'm already making more efficiently."

Easterlin might be soon find what he is looking for — increasingly, fintech is expanding from consumer-focused products to ones that seek to streamline business-banking processes.

Being commercially focused presents other challenges, too. Some business customers are just not all that interested in technology. That presents a conundrum for community banks. Is it worth investing in a channel that its current customers may not want but the bank needs in order to stay viable? Easterlin says it is something he has to grapple with continually.

"We have online banking and mobile banking. We just started offering Apple Pay, but our customers aren't asking for it," Easterlin said. "We do it because I'm afraid if we don't we'll be left two or three generations behind in technology."

Nichols said that sometimes banks need to work on teaching their customers the technology in order to juice usage. Still, he said, that the focus on the customers of tomorrow is crucial.

"Often these products are not a runaway success, and the knee-jerk reaction is that our customers don't want this," Nichols said. "If you take a step back, sometimes [adoption problems] are a training issue. Too often we introduce something and move on. But our focus shouldn't be on who are customers are today, but who they will be tomorrow."