Threats and Opportunities:Partnering With Fintech Companies

Naomi SnyderEditor, Bank Director magazine

Source: Merriam Webster

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.”

How is AI different from automation?

What Are Banks Doing With Artificial Intelligence?

• Bank of America is launching Erica in fourth quarter 2017.• Capital One lets you pay your credit card using Alexa.• U.S. Bank lets you pay your credit card using Alexa.

• Robo advisory is bringing artificial intelligence to the advisory space.

• Betterment and Wealthfront are startup fintechcompanies.

• Schwab, Fidelity and Vanguard have some $51 billion in assets under robo-advisory in 2016.

• Assets under robo-management will grow to $450 billion by 2021. – S&P Global Market Intelligence

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

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

Source: Capgemini

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

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.

What’s A Nontraditional Firm? • Fintech firms• Bigtech firms• Challenger banks

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

Source: Accenture Survey 2017

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.

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

Banks, in general, don’t have technology that’s as good as the fintech companies and tech leaders.

• Banks will increasingly partner with fintechcompanies 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.

Source: Capgemini

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

How Can Your Bank Benefit From The Technology Of Fintech Companies?

• Examples of bank partnerships with fintechcompanies:– Bank of Nova Scotia, aka, Scotiabank + Sensibill

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.

Source: PrecisionLender

“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

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.

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.

Source: Capgemini

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: Wikipedia

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.

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

• 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. 

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)

Source: ABA

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

What Does The FUTURE Look Like?APIs are showing the potential to change banking from a high-touch service model to a delivery model where other people’s platforms run on your device, the bank.

Debbi Burrows, Senior Manager

FinTech and Consumer Protection

Community Banking Conference

Understanding the Current Landscape

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Demographics are changing

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.

Demographics

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Competition to Acquire and Retain Banking Customers is Becoming Fierce

Competition

We Won’t Mention Any Names

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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!

Our Current Banking Reality

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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

RISKSRISKSRISKS

Increasing is the Word

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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

FinTech Applications

Current Uses

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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

FinTech Contract Basics

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Fair Lending

UDAAP (Unfair, Deceptive and Abusive Acts and Practices)

Consumer Protection

Issues Rising

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Overt Discrimination

Disparate Treatment

Disparate Impact

Fair Lending

New Loan Products

Advertising

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Ban

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Loan Products

Deposit Products

Electronic Services

Not offered to all customers

Protected Classes (ECOA)

Offering Are Unfair

UDAAP

Analyzing

Customer

Information

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How many email 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.

Customer Information Used

Samples

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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

Inside Analysis

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Effective Tools for FIs

Create Additional Risks for FIs

FinTech:The Tale of Two Sides

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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

One last Comment

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.

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