Looking to solve tech issues, small banks stumble into revenue stream

Leader Bank in Boston didn’t set out to become a tech innovator, but that's where it has ended up.

The $1.3 billion-asset company began licensing some of the technology it developed in-house after receiving inquiries from other institutions about the products, said Jay Tuli, executive vice president of retail banking and residential lending.

Now Leader licenses two products — an online rent paying tool for landlords and a rewards checking account that has brought $70 million in new deposits to the bank — to a handful of other institutions. Tuli expects to have a third solution, ZDeposit, a digital tool that manages the security deposit collection process, on the market by the end of the year.

“I found that really surprisingly interesting that we would be able to help another bank,” Tuli said. “They are using the products and we are assisting and building value, so from a personal side, that is a really cool feeling.”

Community banks have become more open to fintech partnerships over the last few years, but a handful of them are taking it a step further by incubating solutions inside their own walls. Some are then licensing these products to other institutions once the concept has been tested on their own platform.

Licensing homegrown products could become a revenue generator for banks willing to take the risk, observers said. It also helps a community bank build a brand as an innovative company willing to think outside the box in a competitive industry.

The key is creating a product that solves a real problem or adds value, experts said.

“If you look at fintechs today, they are very good at technology, but they don’t necessarily understand banking,” said Kevin Tweddle, leader of innovation and financial technology with the Independent Community Bankers of America. “It’s frustrating to banks, so some say, hey, why don’t we build a technology shop or a fintech within the bank and solve one of our banking problems?”

Neil Underwood, president of Live Oak Bancshares in Wilmington, N.C., which has a reputation for innovation, said commercializing a product allows a bank to share the research and development costs with other financial institutions.

Live Oak developed the cloud-based operating system called nCino, which it spun off into its own software company in 2012. The $3.4 billion-asset company also partnered with First Data last year to build Apiture, an open API banking platform.

“It’s not easy, but we do think it is a recipe for success,” Underwood said. “Shouldering the burden of the research and development for a single instance of software can become expensive. The ability to commercialize that, share the costs among many banks and add to the investment is way more optimal.”

Christine Barry, senior analyst at Aite Group, said she is not surprised to see more community banks creating technology products on their own, especially as many hire talent from outside of the banking industry. Barry said that there is also more camaraderie among community banks thank among larger peer groups.

“They see it as an opportunity to join forces to help each other advance by creating products and selling them to help compete against larger institutions,” Barry said.

Eastern Bank also incubated a product that is now a standalone company called Numerated Growth Technologies, a small-business lending upstart. Don Westermann, Eastern’s chief information officer, said the $11 billion-asset company also didn’t set out to build technology for other companies but rather was focused on building tools to help its customers.

The Boston company spun off Numerated in 2017. Since then the company has hired a new chief digital officer from State Street to lead a new version of Eastern Labs.

Westermann said the new lab should spark innovation throughout the entire organization, rather than focusing solely on one product. Still, he said the company would consider licensing another product if the right idea came about.

“That’s not our end goal, but to the extent we find that again, we will evaluate it,” Westermann said. “We are certainly smarter now than we were having gone through" Numerated.

Citizens Bank of Edmond in Oklahoma co-created an interactive teller machine in 2013 before the hardware was available to most banks, said Jill Castilla, the bank’s president and CEO. The $263 million-asset Citizens was closing branches and had a commitment from a large ATM provider to deploy ITMs, or ATMs with videoconferencing capabilities, to replace some of the branches.

The ATM provider backed out at the last minute, so Castilla’s team scrambled to find an alternative solution. Castilla said she made calls to find a local firm that built similar kiosks for other industries. The bank ended up partnering with a company called NueQ to co-design the ITMs, which they then marketed to other financial institutions.

Castilla said it would have cost the bank hundreds of thousands of dollars to deploy each of the ITMs from the large ATM provider. Partnering with the local firm brought the cost down to $15,000 for each machine, Castilla said.

Castilla says bankers are in the best position to create meaningful technology solutions for the industry. Citizens is testing out another concept that Castilla said could be licensed to other banks. Still, she said, there is a learning curve, especially when it comes to finding proper legal support to protect the intellectual property.

“We are such great risk managers on the credit side or investment options,” Castilla said. “I think we can transfer those skills to emerging technology.”

Tuli, the executive at Leader, says licensing technology solutions to other banks could become a major revenue generator for his bank in five years. He said selling the technology to other banks takes time, but once clients are on board it’s easier to sell them other products.

“It’s really interesting to see how much community banks are looking for innovative ways to grow,” Tuli said. “There are a lot of banks out there that want to bring on new products and offerings to customers to grow, and so interest has been substantial.”