Q&A
Fintech, short for financial technology, has been one of the most watched developments in the industry in the past few years. Founders, bankers and customers have said a lot about it: It’s disruptive to
incumbent financial corporations, an alternative way to lend,
and a new way to reach clients and conduct transactions.
The Business Journal’s Michael de los Reyes asked executives at Orange County banks and credit unions for their perspectives, relationships and strategies around fintech. Will they invest in it, develop a fintech department or division, or partner with fintech developers? And what would be the upside or downside of such an endeavor?
Here are edited excerpts of what they had to say:
Edward Carpenter
Chairman, Chief Executive Officer
Jack Wielebinski
Associate
Carpenter and Company
Irvine
Fintech, or financial technology, has evolved from a series of fledgling businesses to a nascent industry, with over $20 billion in venture capital investment in the past five years. Fintech companies are now working with more than 70% of local community banks in mobile banking applications. With a banker’s view of the current low interest rate environment, expense control is paramount for high-performance banks. Fintech is helping banks lower their cost of operations while adding new services.
Community banks lend to nearly 50% of small-business owners in the U.S. To this large base of clients they offer unique, highly personalized services. For today’s business managers and owners, fintech accomplishes many of these services faster and at lower costs. Given this environment, we are currently evaluating several new partnerships for local banks.
Community banks’ strong experience with regulators and favorable regulatory standing will be important to their fintech partners. Many banks are helping their fintech partners through the current maze of regulation and compliance.
We are facilitating multiple fintech groups seeking regulatory guidance in starting or buying banks. Our view is simple. Both fintech and the community banking industry will be more profitable with these current and future partnerships playing a significant role.
David DePillo
President
First Foundation Bank
Irvine
First Foundation’s approach to fintech is that while we are always interested in learning about the cutting edge, our strength is in providing a secure and safe banking experience. As a bank, we’re required to be more rigorous than nonregulated companies on the lending side and take customer protection seriously. And on the depository side, many of the fintech initiatives for alternative payments don’t abide by the same regulatory rules we have.
Furthermore, we take pride in continually enhancing our technology solutions. We seek to invest where it makes sense to enhance the client experience. This includes a better experience with mobile and online banking. And for us and our clients, that’s more important than many of the mass-market fintech solutions being developed today. Many of our initiatives to create more efficiency and automated workflows for our clients serve a similar purpose, though we operate in a much more controlled environment on both the depository and lending side. While there are developers focused on speeding up payments and other things outside of the traditional format, we would likely be an early adopter but wouldn’t be the inventor in those areas.
Many of the new applications are not functional in the banking environment. One reason is because banks’ compliance to the Bank Secrecy Act/Anti-Money Laundering risk assessment and “know your customer” bank regulations require significant due diligence, as well as tracking origination and source of payments as they come in and go out. As a safeguard to our customers and for the stability of the global banking economy, those types of fintech developments are easy from a technology standpoint, but very difficult to implement in the current regulatory environment of banks—and for good reasons.
David Hanighen
Chief Information Officer
Chief Information Security Officer
Credit Union of Southern California
Anaheim Hills
Most of my experience with fintech occurred during my recent 3 ½ year employment as CIO of an $800 million community bank. While we attended their semiannual conferences and attempted to partner with a couple of their companies, we had very little success implementing any of their services. We found that fintech was uniquely positioned to support/assist large innovative banks that had the resources to evaluate and implement “bleeding edge” technologies. Several of the lending and transaction processing technologies that we reviewed were either in the very early development stages or alpha/beta testing and
required a level of customer design/
development/testing participation that we simply could not provide.
Based on that information, our $1.2 billion organization is not pursuing interaction or a relationship with fintech at this time. We have a “fast follower” philosophy regarding technology that does not align with the requirements of a fintech relationship. As a community credit union, we recognize the need for continual awareness of new and innovative technologies, but our current resource levels do not allow us to invest or fully participate effectively with fintech. However, as we expand our technology capabilities in an effort to provide greater levels of service and convenience to our members, we will want to seek partnerships with innovative technology providers in the financial services industry. Fintech will certainly be a candidate for this kind of future partnership.
Jeff Harper
SVP, Chief Lending Officer
Orange County’s Credit Union
Santa Ana
We believe fintech is simply using software to provide a better financial service experience for your customer. But there’s more to it than simply automating old processes. What is important is how technology is leveraged to create that experience. In other words, if you are not designing your processes with the customer experience in mind, you will be hard pressed to compete effectively against those who are creating value through ease and convenience.
At our organization, our strategic focus over the last few years has been in several key areas. First, we accelerated our pace of transformation by beefing up our investment in technology. This included evaluating and implementing strategies and road maps around systems, project planning, and building our capabilities in programming and analytics so that we could automate and anticipate needs more effectively. We also developed additional ways to capture more feedback from our customers and staff regarding what is working well in customer service and what pain points need to be removed. Finally and most importantly, we challenged our team to think differently about how we serve and meet customer needs when designing processes. The result is a culture where all decisions are made with the customer experience in mind, including how we design and leverage technology to provide value.
To be successful in delivering the best digital banking experience, from our perspective it is important that we have the customer experience in mind while leveraging technology. For example, for more complex functions, such as driving the best in digital payments and lending experience, we rely on our partners to keep their technology current and relevant. This is especially true for customer-facing services, where customers rely on smartphone technology and automation to keep processes convenient and frictionless. At the same time, we expect our partners to offer technology that is open and extensible so that we can program and build customized services that bring unique value to our customers. It also should be noted that in the credit union industry, there are several credit union service organizations that are dedicated to advancing fintech capabilities in our industry (CU Ledger, Best Innovation Group, etc.). The combination of all of these efforts will ensure we remain relevant to our customers as a trusted financial services organization.
Rick Nogueira
Head of Orange County Middle Market/Commercial Banking
JPMorgan Chase
Irvine
There has always been innovation in the financial services industry, it’s just happening faster today. The reason for much of the innovation is simple—to take friction out of the customer experience so banking is convenient, simple and seamless. We’ve seen a major change as many fintechs have begun to shift their focus from competing directly with traditional banks to identifying opportunities to partner with them. In the fintech space, the reality is our strengths and opportunities are quite complementary with emerging entrants. We want speed to market, fresh thinking, and digital brand/image. They want regulatory-savvy partners, customers and scale.
Our fintech strategy is really twofold: build our own solutions where we have in-house expertise, differentiation and strategic interest, e.g. Chase Pay; and leverage relationships with innovative fintech companies to partner on combined solutions and in certain cases invest. We’ve focused on being connected to emerging companies developing solutions in areas such as alternative lending, digital wealth management, and digital payments.
In addition, JPMorgan Chase has invested $30 million in a five-year initiative called the Financial Solutions Lab, which is managed by the Center for Financial Services Innovation. The lab seeks to identify, test and bring to scale promising innovations that help Americans increase savings, improve credit and build assets.
Ash Patel
Chief Executive Officer
Commercial Bank of California
Irvine
As community banks across the country scramble to keep up with emerging fintech programs, which have brought easy and fast loans to deserving small businesses, Commercial Bank of California is standing out from what is becoming an increasingly crowded pack of banking giants and middle-market lenders.
Proving again that it is a bank run by entrepreneurs for entrepreneurs, CBC has formed several partnerships with emerging fintech developers in Southern California. Fintech allows for the convenience of a quicker application process with the same due diligence of our time-tested underwriting practice.
These partnerships will bring capital to many entrepreneurs, including minorities, who have been some of the most under-banked, and consequently underutilized, members of the American economy. It will be incumbent upon underwriting banks, as it has always been with CBC as shown by our second straight five-star rating from BauerFinancial, to manage the risk appropriately and remain well-capitalized.
With fintech, the upside is enormous for small businesses, entrepreneurs, their lenders and the economy at large. Last year, online small business lending grew into a sizeable market with close to $8 billion in loan originations, an increase of 68% from the year before. This is a particularly critical metric, because large investment banks have drastically reduced funding to small businesses since the Great Recession, and the number of community banks, which are typically friendlier to small businesses, has been plunging for years.
This leaves a massive void for the surviving community banks of Orange County to fill in order to maintain the region’s thriving entrepreneurial ecosystem. Fintech will play a huge role, because it is the best way to get capital to the small businesses that need it the most. Using a one-page online loan application, entrepreneurs with FICO scores starting as low as 500 (compared with the 680 that big banks typically require) can get their funding within 48 hours. With that kind of speed and convenience, anything is possible.
Scott Rains
CEO/President
Eagle Community Credit Union
Lake Forest
The term fintech encompasses such a wide array of services and uses, both financial and nonfinancial-related, that narrowing the potential effects on a specific industry can be daunting. Some of the aspects of fintech that are financially related are P2P, B2B, cryptocurrency, and mobile and smartphone financial transaction applications. These services are a few that pose a dilemma for traditional banks and credit unions. How to adapt and remain relevant in a changing financial environment poses a significant challenge for the traditional financial institution.
I believe that internal development or strategic partnerships with fintech providers of many of the transactional services falling under the fintech umbrella will be necessary to meet market demand, grow and remain relevant. Many of these services have already been adopted by many financial institutions; remote deposit capture, mobile apps that allow for funds transfers, bill payment and account access are very much staples offered by financial institutions. Smaller institutions will benefit from strategic partnerships, while larger institutions may have the resources to internally develop their own systems.
On a broader note, the lack of standardized systems and transaction-clearing platforms can create a significant problem within the fintech world. One only has to look at ApplePay to see the many alternatives that have arisen since its introduction. The lack of standardized settlement platforms is actually a limiting factor for the end user. Those services that can be utilized across multiple platforms will be the most advantageous.
That trust factor financial institutions have and the lack of regulation of many of the fintech services are also concerns. Consumer safety is always a concern at traditional financial institutions from both reputational and regulatory standpoints. The regulations provide some degree of safety and recourse for consumers when conducting financial transactions, payments, deposits and loans. These same safeguards are not always provided for financial transactions made through nonregulated service providers.
Logically, a partnership between developers, banks and credit unions would seem the most advantageous alternative for consumers. Consumers should fully realize the risk of utilizing nonfinancial service providers for many transactions. There are already abuses of P2P and B2B lending in terms of both financial loss associated with uniformed or fraudulent transactions and the loss of personal data. At a minimum, stand-alone fintech service providers should be subject to regulation that ensures consumer safety of both financial transaction and personal information.
Allen Staff
Orange County Market President
Bank of America
Irvine
Separating our digital and physical selves is becoming increasingly difficult, and understanding that reality is critical to understanding banking customers’ behavior. Put another way, the future of banking does not lie in a duel between traditional and digital services. Every customer is now a digital customer, and as technology becomes more pervasive, Bank of America is retooling everything we do to leverage technology in the delivery of our services.
To that end, we believe innovation has to be directed, solving a market issue or creating a capability that is magnetic to customers. And we are investing $3 billion in new capabilities, specifically in digital, mobile and online platforms. We also believe innovation is everyone’s job, and that in order to be effective and meaningful for our customers and clients, innovation needs to happen closest to the action that demands it.
You could say we are looking for best of breed. That includes hiring staff with the ability to recognize how our technology solutions must evolve to meet changing customer needs. It also includes working with fintech firms in order to become more agile; we recognize these smaller companies can at times deliver faster because they are laser-focused on a single solution. We look to leverage that benefit through programs like our annual two-day Technology Innovation Summit, which has included meeting with more than 275 companies, 17% of which have become vendors. We also participate in external opportunities like the FinTech Innovation Lab, a 12-week mentorship program created by Accenture and the Partnership Fund for New York City to foster fintech innovation and drive high-tech job growth.
At the end of the day, everything we do begins and ends with customers. We deliver on our promise to make our clients’ financial lives better by seamlessly integrating banking and investment technologies so we can be there when it counts.
