Fintech partnerships aren't just for big banks anymore.
Take for instance the partnerships Lincoln Savings Bank in Cedar Falls, Iowa, has fostered with the popular microsavings app Acorns and challenger bank MoneyLion.
Acorns partnered with Lincoln so it could begin offering a checking account and debit card earlier this year. Lincoln provided similar help to MoneyLion, which has 3 million active users. The fintechs received help to offer banking products, and the bank got access to the kind of digital-first customers who might normally lean toward larger institutions — and at a scale unachievable on its own.
“I think there are cases where banks are very comfortable with partnering with fintechs, and they feel that is the way to their long-term success,” said David Hunkele, the head of products for Live Oak Bank in Wilmington, N.C., in pointing to the $1.2 billion-asset Lincoln as a model example.
Yet panelists at a conference hosted by The Clearing House and the Bank Policy Institute this week warned executives that partnerships should not be substitutes for internal investments in technology — even at small banks.
Doug Gross, division executive for corporate banking solutions at FIS, said an increase in bank-fintech partnerships is partly due to record startup valuations that make acquisitions by banks impractical. For instance, in mid-November Acorns was valued at $700 million.
“That model of buy versus build is dead,” Gross said during the panel discussion. “The fintech valuations are too high. They’re inflated. The new model is partnering to get things done.”
Michael Nonaka, a partner at the law firm Covington & Burling, mentioned how banks focused on improving their technology have shown a propensity to quickly enter into fintech partnerships.
“One of the most interesting developments is now small and large banks have gotten to the point where these partnerships are just business as usual,” he said. “There is a lot more streamlining of these partnerships.”
Nonaka said part of his firm’s directive is to help banks and fintechs “enter into these partnerships in a smooth fashion.”
“It’s been a sea change into how these banks have been able to enter into these partnerships, and that benefits the customer experience,” he said.
Much has been made in recent weeks about large technology investments from both big and regional banks. Institutions such as Bank of America, BB&T, JPMorgan Chase and others said in recent earnings calls and reports they are investing billions of dollars in technology, whether in consumer-facing products or infrastructure improvements. BB&T recently said it is investing in fintech startups.
Still, community banks were urged not to over-rely on partnerships or shun investments in their own operations.
For a smaller bank like Live Oak, Hunkele said, the key is identifying priorities with technology investments.
“I think you have to be smart about where you’re applying those investment dollars,” Hunkele said. "You could innovate on the front-end side, and the customer experience may be improved at least superficially. You can do some things on the servicing side, but you can only get so far if you don't put the right infrastructure around that. And then when you get to the back office, you’re stuck.”
Live Oak’s past investments actually have led to the company creating a couple of fintechs of its own.
The $3.3 billion-asset institution in 2012 spun off nCino, which provides banks with a digital lending platform. In 2017, Live Oak and First Data Corp. created Apiture, an open application programming interface banking platform.
On the sidelines of the conference, Hunkele shared his bank’s desire to help small businesses run their operations through current and future investments.
“There are a lot of components that have to come together for that business to be successful,” he said. “What can we do as a bank to help solve those problems?”
Hunkele said the benefit to such investments is the creation of a better relationship between a bank and a small business.
“The benefit for the bank is, the deeper I am into how their business operates, the more early warning signals I'll have for when things might not be going well and how I can help correct it,” he said.
