How this Ohio mutual is getting an edge in tech

To keep up with the pace of innovation and meeting customer demand for digital services, community banks sometimes have to get creative.

That’s what First Federal Lakewood, a $1.7 billion-asset mutual in Ohio, is doing. Recently, First Federal was one of the founders of an Ohio-based fintech accelerator. It’s also invested in Numerated Growth Technologies — a commercial lending technology that lets banks make lending decisions in as little as five minutes. It was created by Eastern Labs, the innovation unit of the Boston mutual Eastern Bank, and spun out recently.

While each project has its specific draw, they both speak to a common motivation: the opportunity for First Federal to punch above its weight by collaborating on technology.

“We have to be open-minded" about pursuing technology "so we can make sure we can continue to deliver a great experience our customers,” said Thomas Fraser, First Federal's president and CEO.

“Why can’t a group of 10 community banks figure out how to make investments in an innovative platform down the road?” he said. “Or a group of banks being part of a development fund to steer a variety of tech initiatives?”

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Indeed, increased collaboration among community banks is a “logical next step” in the advancement of technology in the industry, said Christine Barry, senior analyst with Aite Group.

“You see this more commonly in the credit union industry, with things like a shared branch network and shared technology,” she said. “It makes perfect sense for community banks, and I’m surprised they haven’t been doing it sooner.”

Barry expects to see more cooperation between community banks as a strategy to compete against larger banks.

“It’s kind of an us-against-them mentality,” she said.

With the accelerator, First Federal is teaming up with larger banks. Its partners in the accelerator include Fifth Third Bancorp, Huntington Bancshares, KeyCorp and the insurer Progressive. JPMorgan Chase and Silicon Valley Bank are also part of the initiative.

Fraser said the bank’s participation in the fintech accelerator is in part to help spur economic growth in the state and is “part of our role as a bank in fostering local communities economically.”

Still, it is a prime chance to give fintechs a place to test their technology with an eye toward bringing it formally into the bank.

“Having a seat at the table and access to fintech solutions is certainly a benefit to us,” Fraser said. “For ideas that fit into our business model, we can be in a position to deploy those solutions rapidly.”

Fraser says regulators are becoming more open to collaboration between banks and “looking at how we can use existing rules to help banks work together.”

Community banks should be at the forefront, Fraser said.

“Look at what some of the larger banks are doing with Zelle,” he said. “There’s no reason why smaller banks can’t band together. Forty years ago, the payments system was built by banks in regional areas on a small scale, and then connected by nodes over time. The lesson from the past is banks can work together on innovation.”

The investment in Numerated was another chance for First Federal to improve its offerings.

“We saw great value in the technology, how they were using the data to deliver credit decisions,” Fraser said. “And we liked that they also had mutual-bank roots.”

Fraser said First Federal was familiar with Eastern Bank, as executives from the two institutions would see each other "at various industry events. We had a good networking relationship.” After realizing how well the Numerated technology was working at Eastern, First Federal decided to become an investor when Eastern spun it out and licensed the technology for its own use.

Fraser said the technology will help the bank compete against the customer experience offered by “the high-priced, nonbank solutions.”

While First Federal’s moves will certainly give it a front row to some shiny new innovations, Fraser said the bank will stay focused on products that stand to benefit its core services.

“Small-business lending is a big area for us, and we want those customers to have a great experience,” he said. “We look for what is a good cultural fit.”

Areas the bank is considering for tech investment and partnership in the future include payments and mortgage lending, Fraser said.

Expect other community bankers to go down the tech path together, says Frank Sorrentino, CEO of ConnectOne Bank in Englewood Cliffs, N.J., another tech-savvy community bank. (Sorrentino, however, declined to say what collaborations ConnectOne has in the works.)

“You’re going to continue to see a pooling of resources" as community banks share the cost of technology, he said. “Or you’ll see a series of community banks come together with a technology partner to solve a particular issue.”