Why community banks should partner with fintechs

Swashbuckling, nimble, well-funded and unapologetically entrepreneurial, fintechs are offering innovations that allow community bankers to dream big in a host of ways. “Ultimately, the only way for us to be able to compete with the larger banks—the Wells Fargos of the world who have seemingly unlimited IT budgets—is to find fintech partners that align with our strategic goals as a bank,” explains Matt Gallman, vice president and enterprise risk officer for $1 billion-asset Drummond Community Bank in Chiefland, Fla.

According to Gallman, there’s been a radical shift from the angst-ridden conversations bankers had when fintechs first arrived on the scene. Those conversations, he says, centered around whether community banks could compete against this brash group of newcomers. Now, however, the conversations have shifted to how community banks and fintechs can form partnerships.

“Fintechs help us address shortcomings that we don’t have the resources to address internally,” Gallman says.

Source: Cornerstone Advisors, “What’s Going on in Banking 2021: Rebounding from the Pandemic,” 2021.

Charles Potts, ICBA executive vice president and chief innovation officer, agrees. Over the past few years, he notes, community banks have become increasingly aware that fintechs have the capabilities “to solve real problems” that have long confounded community banks. What’s more, for community banks keen to differentiate themselves, fintech partnerships provide promising ways to stand out.

“You have to think of your app as one of your branches. And I’d argue that the digital branch is your most important branch.”

—Matt Gallman, Drummond Community Bank

The benefits of fintechs

A recent report by Cornerstone Advisors found that bankers are either strongly interested in or already working with fintechs in three main areas: digital account opening (71%), mobile wallets (41%) and fraud/risk management (47%).

Here’s how fintech collaborations can be beneficial in these three areas:

1. Digital account opening.

The pandemic forced community banks to develop digital account opening—fast. “As one banker told me, a five-year business plan got compressed into 18 months,” Potts says. “You start with this goal of, ‘I’m going to take some baby steps and move through this thoughtfully,’ and all of a sudden someone turns on the shower and you’ve got to move quickly.”

The addition of digital banking means that customers have begun to perceive their banks very differently. “You have to think of your app as one of your branches,” says Gallman. “And I’d argue that the digital branch is your most important branch.”

While community banks have a dazzling array of fintechs to choose from, it’s not always easy to find one that fits your business needs. Gallman says that for Drummond Community Bank, which has a large book of commercial accounts, the right fintech will focus on how business accounts, not just consumer ones, are opened digitally.

2. Mobile wallets.

Since the pandemic, contactless payments are on the rise and cash has become far less important. Because of that, Gallman says, “The adoption of mobile wallets is continuing to increase.”

He points out that the technology enabling mobile wallets is extremely complicated, making it “next to impossible for a bank to develop these wallets internally.” He finds that most fintechs white-label their mobile wallet offerings, which allows community banks to brand their own mobile wallets.

3. Fraud and risk management.

By quickly ushering in a new digital reality, banks have been forced to update their fraud and risk management practices, too. “Think about it this way,” Potts says. “If you walk into a physical branch to open a new account, your bank’s risk management practices may work one way. If I’m an anonymous person applying online through a digital account opening process, my risk management practices have to look remarkably different.”

Gallman agrees, pointing out that the speedy opening of digital accounts has risk management implications. “If you don’t have the controls in place to mitigate these risks, then you’re going to be in trouble,” he says. “At the end of the day, it’s our charter on the line and our funds we could lose if there’s fraud.”

Risk management can sometimes seem like a buzzkill, but there are alternative ways community bankers can look at it, Gallman says. “Risk management should let you take more risks but better manage the downsides or the uncertainty around these risks,” he says. “The question is: How can we take more risks but do it safely and in a calculated manner to maximize the return for our customers?”

For community banks, Gallman is convinced that the message is clear. Assuming some risk by partnering with fintechs and operating more frequently in digital spaces is a smarter bet than refusing to partner and ultimately facing irrelevancy. In the end, he says, “We have no choice but to take the necessary steps to build the right infrastructure, but we also have to take steps to implement the right controls as we’re developing these new relationships.”

Elizabeth Judd is a writer in Virginia.