Threats and Opportunities: Partnering With Fintech Companies. Naomi Snyder Editor, Bank Director magazine

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1 Threats and Opportunities: Partnering With Fintech Companies Naomi Snyder Editor, Bank Director magazine

2 THE LEADERS: Amazon s Alexa Apple s Siri What s artificial intelligence? A branch of computer science dealing with the simulation of intelligent behavior in computers. Source: Merriam Webster

3 How is AI different from automation?

4 What Are Banks Doing With Artificial Intelligence? Bank of America is launching Erica in fourth quarter Capital One lets you pay your credit card using Alexa. U.S. Bank lets you pay your credit card using Alexa.

5 Robo advisory is bringing artificial intelligence to the advisory space. Betterment and Wealthfront are startup fintech companies. Schwab, Fidelity and Vanguard have some $51 billion in assets under robo-advisory in Assets under robo-management will grow to $450 billion by S&P Global Market Intelligence

6 Consumer Expectations Are Changing (and so are the expectations of your business customers)

7 50% of Gen Y respondents in the U.S. would consider banking with Google or Amazon. They tend to like the big banks because they offer better technology than smaller banks, and so the challenges of servicing the coming generation of some 84 million people will be significant. Source: Capgemini

8 36% of Gen Y respondents would consider buying insurance from an online service provider, such as Google or Amazon. 46% of Gen Y respondents would consider purchasing investment advisory services from an online service provider. Source: Capgemini

9 Source: Capgemini Globally, about 29% of all consumers use some kind of nontraditional firm to get banking services. This number is higher in Asia, where one-third of all consumers do, and lower in North America, where 24% do.

10 What s A Nontraditional Firm? Fintech firms Bigtech firms Challenger banks

11 THREATS: Fintech firms SoFi and Square have applied for industrial banking charters.

12 71% of consumers would use entirely computer-generated support for banking services. 74% would use entirely computer-generated support for purchasing insurance. 78% would use entirely computer-generated support for investments. Source: Accenture Survey 2017

13 It s not just Google, Amazon, Apple. It s... Domino s Pizza.

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15 Banks, in general, don t have technology that s as good as the fintech companies and tech leaders.

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17 Banks will increasingly partner with fintech companies to offer better technology to their customers and to stay competitive. Fintech companies will increasingly partner with banks to gain access to customers, funding, capital, regulatory knowledge and resources.

18 Source: Capgemini 91.3% of banks and 75.3% of fintechs say they will partner with each other in the near future.

19 How Can Your Bank Benefit From The Technology Of Fintech Companies? Examples of bank partnerships with fintech companies: Bank of Nova Scotia, aka, Scotiabank + Sensibill

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21 Not all fintech is about offering something to the consumer. It might be software that simplifies the compliance and regulatory process. Or it might be vendor management software. It might be a back office or commercial lending platform. Built Technologies helped Frankly Synergy Bank in Nashville, Tennessee improve loan administration. PrecisionLender helped Woodforest National Bank in The Woodlands, Texas, grow commercial loans by 16 percent and gain almost 20 basis points in net interest margin. The platform improves loan pricing strategies.

22 Source: PrecisionLender

23 A lot of times we try to manage by anecdote. But what does the data tell you? Information is key. Terry Early, CFO, Yadkin Bank

24 Live Oak Bank in North Carolina sped up the small business loan application and approval process to about 10 days. The bank spun off its technology to a company called ncino, which helps other banks speed up their commercial lending process.

25 How Can You Partner? One way to partner is through your core provider. Cadence Bancorp uses FIS Open DCI platform to access best-of-breed products from third-party providers.

26 Another Way To Partner Is Through API. APIs have the potential to strategically deliver innovation and functionality to the business by making their systems and data widely available to outside third parties as well as creating new revenue streams for both organizations. Source: Capgemini

27 In computer programming, an application programming interface (API) is a set of subroutine definitions, protocols, and tools for building application software. In general terms, it is a set of clearly defined methods of communication between various software components. Source: Wikipedia

28 JPMorgan Chase & Co. and Wells Fargo partnered with Intuit, which owns Quicken, Mint and TurboTax.

29 In fact, the European Union has passed a rule that says all banks must provide customer data to third parties, if the consumer requests it. PSD2 in European Union and the Open Banking Standard in United Kingdom, go into effect by January 13, 2018.

30 If you don t have a program yourself, that won t limit your bank in terms of what you can offer: student loans accounting software personal financial management (budgeting)

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33 What Does The FUTURE Look Like? High speed data networks and more powerful computers mean information is more accessible and can be processed in real time. Technology enables the storage of much larger data sets. Customer expectations are changing about speed, convenience and cost. Source: ABA

34 What Does The FUTURE Look Like? APIs are showing the potential to change banking from a hightouch service model to a delivery model where other people s platforms run on your device, the bank. Source: ABA

35 FinTech and Consumer Protection Debbi Burrows, Senior Manager

36 Understanding the Current Landscape Community Banking Conference

37 Demographics are changing Community Banking Conference Demographics MILLENNIUMS HAVE PASSED BABY BOOMERS IN POPULATION NUMBERS* Tech Savvy Expect Their Banks to Offer and Support Electronic Services Readily Accept and Use Electronic Services Would Rather Not Visit the Branch BABY BOOMERS ARE AGEING Tech Challenged Skeptical About Using Electronic Services Comfortable with Visiting the Branch *Pew Research Center, Millennials overtake Baby Boomers as America s largest generation; Fry, Richard, 4/25/2016.

38 Community Banking Conference Competition Competition to Acquire and Retain Banking Customers is Becoming Fierce We Won t Mention Any Names

39 Community Banking Conference Our Current Banking Reality Realize and Accept That: Millennials Drive the Current Customer Services Area of the Banking Industry Millennials Expect the Fastest, Newest, Most Convenient Electronic Banking Services. Millennials Needs Are Pushing Banks To Use FinTech Remember: If you don t or won t someone else will!

40 Community Banking Conference RISKS RISKS RISKS Increasing is the Word The role of FinTech - Increasing The need to utilize FinTech - Increasing The reliance on FinTech Increasing The risk to Banks using FinTech Increasing The need for Banks to heighten due diligence of FinTech Companies - Increasing The regulatory oversight of Fintech and Fintech Companies - Increasing

41 Community Banking Conference FinTech Applications Current Uses BSA/AML software to identify suspicious activity Fair Lending software for plotting originated loans Delivery of Payments Systems Analyzing Customer Information to Develop New Consumer Products

42 Community Banking Conference FinTech Contract Basics Strong Contracts are a Must Have Protect Your Best Interests Include the Right to audit the FinTech Company Indemnification Errors and Omissions Rights to Proprietary Information and Developments Don t Give Away the Farm When Things Go Wrong What Then? Who is Responsible For What? Litigation

43 Community Banking Conference Consumer Protection Issues Rising Fair Lending UDAAP (Unfair, Deceptive and Abusive Acts and Practices)

44 Community Banking Conference Fair Lending New Loan Products Advertising Overt Discrimination Disparate Treatment Disparate Impact

45 Community Banking Conference UDAAP Analyzing Customer Information Developing New Consumer Products Loan Products Deposit Products Electronic Services Not offered to all customers Protected Classes (ECOA) Offering Are Unfair

46 Community Banking Conference Customer Information Used Samples How many addresses does a customer have? Where was the customer born? Where did the customer go to college? Did the customer go to college? What type of a car does the customer drive? What type of dog does the customer own? Often FinTech companies that complete customer analysis are reluctant to reveal their inside strategies. E.g. FICO s black box.

47 Community Banking Conference Inside Analysis Sorting and Using Your Own Data to Develop New Products and Services End Result May Be Embedded UDAAP Issues Ensure You Are Not Creating Fair Lending or UDAAP Issues

48 Community Banking Conference FinTech: The Tale of Two Sides Effective Tools for FIs Create Additional Risks for FIs

49 Community Banking Conference One last Comment 90% of Startups Fail * Includes of All Types of Startups Not Just FinTech Companies Does Not Bode Well for the Survival of FinTech Company Startups REMEMBER: Risks Embedded in a FinTech Company, Which a Bank Partners With, Can Transfer to Your Bank Heightened Due Diligence is a Must Is Your Internal Risk Management Program (policies, procedures and practices) Strong Enough? * Forbes Entrepreneurs, 90% Of Startups Fail, Patel, Neil; 1/26/2015

50 17th Annual Community Banking Conference The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.