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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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Con
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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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