There is no shortage of technology available to small banks hoping to compete with larger institutions with heftier budgets. But the challenges in adopting it include and extend beyond cost.
This realization was driven home for Nicole Elam, president and CEO of the National Bankers Association, when a core provider introduced a free service that would help banks push out Paycheck Protection Program loans more efficiently, but found very little uptake. The problem: in its original form, institutions needed in-house expertise to integrate the product.
The National Bankers Association, whose member banks are minority depository institutions that hold assets of $400 million on average (excluding East West Bancorp in Pasadena, California, which has $62.5 billion of assets), has conducted further research to identify the biggest needs among its member banks in a 2021 survey, and sought products and software that its members could use at an accessible price, whether on a pilot basis or at a discounted rate.
Still, "it's not just about going out and finding solutions for peer-to-peer payments or online onboarding or automated lending," said Elam. "If they don't have the in-house tech capacity, it's null and void."
A new initiative from the Alliance for Innovative Regulation, the National Bankers Association and Inclusiv, which develops products and advocates for community development credit unions, is exploring ways to upgrade technology stacks and digital capabilities at minority depository institution banks and credit unions. At an event on Nov. 30 announcing the project, along with follow-up interviews with bankers and stakeholders, a clearer picture of the challenges facing MDIs emerged, as did possible solutions.
"We recognize that small banks don't have a lot of leverage when they are looking at partnering," said Michelle Bowman, governor of the Federal Reserve Board, at the event announcing the MDI ConnectTech initiative.
Billions of government and corporate dollars are pouring into minority banks and community development lenders, complicating the efforts of some investment funds that had similar goals. Still, banks owned and run by African Americans say the equity infusions are small in the context of the nation’s wide racial wealth gap.
Elam sums up the major challenges facing her member banks as the "four Cs": cost, capacity on staff to tackle technology problems, core integration and change management.
The price of engaging with vendors is not always obvious.
"The initial cost is not just implementation but vendor due diligence, compliance, onboarding, making sure they are a good partner," Dominik Mjartan, president and CEO of Optus Bank in Columbia, South Carolina, said in an interview. "These tech companies are notorious for overselling their solutions." There are also ongoing charges tied to licensing, development and integration.
Moreover, the less tangible cost of due diligence is steep.
When Texas National Bank in Edinburg upgraded its digital capabilities in 2022 to make loan applications more online- and mobile-friendly, the staff sifted through dozens of vendors to find a comprehensive solution.
"I needed to be able to type the customer's information or loan amount at the front end to capture it once and never type it again in," said Joe Quiroga, president of the $650 million-asset Texas National. "That holistic approach to work flow is necessary."
Texas National, which has $650 million of assets, has also struggled to integrate data that it captured on the front end through these loan applications into its core.
Staff capacity affects an institution's ability to conduct due diligence and "evaluate as many opportunities coming our way as fast as they are coming," Doyle Mitchell, CEO of the $688.6 million-asset Industrial Bank in Washington, D.C., said on a panel at the ConnectTech event.
He has also felt an imbalance when his services overlap with fintech offerings.
"We compete unfairly with a lot of digital mortgage loan providers because we have the burden of compliance and regulation," said Mitchell. "The compliance issue will never go away if you have a competitor who is not held to the fire."
The MDIs interviewed are devising solutions, some that rely on external sources of support and others that require changes internally.
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"ECIP will be a huge boost for us and other banks to compete at a level where we can make a difference," said Quiroga.
Secondment programs, or pro bono consulting, can also benefit small banks.
Optus Bank is taking advantage of such a program through Citi. It wanted a temporary chief technology officer to help manage risk and recovery systems, build application programming interface capacity and strategize how to partner with fintechs more seamlessly. The $380.9 million-asset bank advertised for a chief technology officer within Citi and received several hundred applications. Abhijit Bhattacharya, whom Optus hired from Citi to serve as CTO for a year, started in May 2022. The position is paid for by Citi.
Sometimes assistance comes from fintechs themselves.
Optus formed a relationship with the consumer lending company Upstart about a year ago to originate unsecured loans, both through a white-labeled Optus landing page and directly through Upstart.
"They came in with an incredible history of over-representing communities of color with better products and services and with lower rates. They were able to demonstrate with real data and with blessings from the regulators that they are a credible partner," said Mjartan. "They were also not a take-it-or-leave-it partner; they said, what do you need from us to further your mission?" Upstart defrayed some integration costs that Mjartan said would normally be a prohibitive upfront expense.
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"If you partner with folks that appreciate and share your mission, you can work through some of these complexities and costs much more smoothly than if you had one of the mega core providers where you are a tiny sliver of their customer base," said Mjartan.
For its digital lending capabilities, Texas National settled on Abrigo, a company that produces compliance, credit risk and lending software. The bank is also piloting alternative underwriting capabilities with Lendio, a small-business lending company, and will soon debut a microloan product for amounts up to $1,500. There will be no fees, and the interest rate will rest at 18% — far below what payday lenders charge, an industry that Quiroga says runs rampant in his community.
Another way forward is to change the mindset within the bank.
Quiroga opened his mind to hiring people who may be more experienced in data than in banking, including a college intern with coding experience who dived into the projects Texas National threw his way.
"We were so focused on whether they worked at a bank and understood compliance," Quiroga said, "that we lost sight of the key word 'technology.' "
