As financial institutions and fintechs size each other up, what should not go overlooked is the opportunity for fintechs to create efficiencies in some of banking’s most critical functions, say industry observers.
Not long ago, the conversation around fintech firms entering the financial services space positioned the newcomers as competitors and disruptors. But that narrative is tired and no longer reflective of reality. Financial institutions and fintech firms are realizing they need each other: fintechs can move quickly and innovate more freely, but banks have scale, customers and the expertise in regulatory compliance that it would take smaller tech startups years to match.
“We looked at it originally as fintech wanting to compete with financial institutions, but realized at the end of the day that we would actually partner with fintech,” David Araujo, vice president of technology at Digital Federal Credit Union, said of the credit union’s philosophy behind its fintech incubator. “We do firmly believe that fintech needs to have partners in financial institutions, and it seems like the fintechs that we work with want to be part of the relationships we have with our customers.”
“Fintech” might conjure up images of sleek apps designed to help consumers budget or chatbots that interact with visitors to a bank’s website. But there are just as many, if not more, applications for fintech to work in the background, say by smoothing out wrinkles in the mortgage loan origination process or alerting a lender when a borrower is at risk of defaulting.
For instance, the use of alternative data in helping financial institutions make credit scoring decisions is an especially ripe opportunity for fintech firms, said Christine Pratt, a senior analyst at Aite Group. She points to companies like eCredable and RevolutionCredit as examples in this space. The former provides a platform for consumers to manually or automatically record all of their recurring payments to construct a kind of proxy score that financial institutions can use for lending decisions.
Pratt also gives as example a company called Early Warning; that platform monitors a borrower’s liquid assets to help financial institutions get a better sense of who might be at risk of default.
Gerald R. Gagne, a partner with the firm Wolf & Co., likes transaction monitoring and enterprise risk analysis as examples of where fintech could create some efficiencies. And he pointed out that a few banks, including Eastern Bank in Boston, have rolled out their own technologies to mine big data for insights into lending decisions.
Blockchain, the distributed ledger technology born out of Bitcoin and other cryptocurrencies, is another area that shows potential for innovation, especially in the credit union world, Araujo said.
“I would say one of the pieces of technology that really hasn’t found a place yet, but there’s a lot of work going on, is within the blockchain space,” he said. “Generally speaking there are a lot of opportunities for back office efficiencies. It’s just a matter of how to make that happen with this technology.”
Araujo discussed the efforts of CULedger, a consortium of more than 60 credit unions, CUSOs and trade associations, all working together on blockchain solutions for the financial services space. One potential application of blockchain might be for identity verification and authentication or for creating efficiencies in the mortgage loan origination process.
Artificial intelligence also shows promise for mediating customer service calls into a financial institution, said Vasilios Roussos, managing director of the DCU Fintech Innovation Center.
Discussing an incubator graduate’s recent efforts, Roussos said that “one of the things that they’re seeing out in the marketplace is a lot of work in the AI space. How can you reduce and simplify the process? How can AI be used to get you most of the way toward a solution?”
But with a whole new host of fintech vendors comes a whole new dimension of vendor management, Gagne said.
“One of the things you have to worry about is the business model,” he said. “Model risk is a huge concern with the examiner.”
“There are a lot of new offerings out there through some of the fintechs that are pretty solid, and one of our challenges is that traditionally, there wasn’t an environment that was bringing ready-to-deliver solutions to companies and now there are,” he said. “We’ve had to adjust our vendor management program and our risk appetite because a lot of companies have only been around for a few years.”
