Why traditional community banks are partnering more and more with fintechs

Patrick Ryan.

Community bankers in the competitive, large-firm-dominated financial sector put it like this: They’re not looking to win based on technology.

They’re also very aware they’ll lose without it.

“You might win on the back of your relationships in community banking,” said First Bank‘s Pat Ryan, “but people aren’t going to be overly inconvenienced if you don’t have the right toolset.”

Securing that toolset for community banks in recent years has largely involved pacts made with fintech firms. Pairings with these firms have ballooned such that some regional banks have upward of a dozen fintech partners they do business with, according to local bank leaders.

Based on a 2022 report from banking consultant group Cornerstone Advisors, nearly two-thirds of banks nationally partnered with at least one fintech company in the three prior years. Many of these partnerships have been banks trying to speed up something like drawn-out application processes with high-tech platforms.

Rivalry for talent

Innovation hasn’t always been synonymous with banking. Stuart Cook, chief innovation officer at Valley Bank, is aware of that.

Stuart Cook. (Valley Bank)

Would-be tech talent in the banking industry — who have the option of working for fintech startups instead — are just as familiar with the banking sector’s former reputation.

“In New Jersey, as a young software engineer or developer, the prospect of working at a perceived-to-be-stale bank versus joining a fintech advancing the latest technology hasn’t been to our advantage,” Cook said. “It’s competitive for us to bring in that talent at a bank.”

While fintechs are coexisting with traditional banks through partnerships, they’re both sometimes going after the same pool of talent in a seriously competitive way.

Although Cook is a believer in the innovation banks are willing to embrace today, he said that talent battle is an uphill one on the banker’s side.

However, as the valuation multiples that fintech firms were seeing in years past have fallen — sometimes faster than the tech sector as a whole — there’s a potential for that to change.

“We’ve seen a compression of valuations in those markets,” he said. “That’s making the opportunity to join banks a little different compared to before.”

One of the newer, more involved forms those partnerships take is referred to as the banking as a service approach. Ryan, CEO and president at the Hamilton-based First Bank, explained that this is a white-label concept that has third-party fintech firms providing banking services through regulatorily approved banks, usually under revenue-sharing agreements.

“The benefits for community banks is that it can generate additional deposits and some non-interest fee income, which a lot of smaller banks don’t have,” he said. “It also helps diversify revenue streams and improve profitability.”

Ryan said the institution hasn’t decided if it’s going to end up doing a lot in that particular space.

Whether it’s a more involved Banking-as-a-Service partnership or a simple several-year agreement to utilize a firm’s software or platform, there are always important questions to answer from the bank perspective, he added. For him, that includes what the revenue opportunities might be, and whether that offsets added costs and, sometimes, added risks.

Protection of data from fraudsters can potentially get more complicated for a bank with a large number of third-party partners. And any new risk becomes a big deal for a highly regulated industry.

“Regulators aren’t going to step in and tell you can’t do (these partnerships),” Ryan said. “But, when they come in to do their annual exam, if they don’t think you’ve got the proper risk management policies and protections in place, they’ll end up making life difficult for you.”

Damiano Tulipani. (File photo)

Damiano Tulipani, senior vice president and chief information security officer at Provident Bank, said third-party risk management is one of the staples of protecting a modern organization.

“Companies have to ensure that the proper controls are in place and that there aren’t vulnerabilities in their infrastructure that make it susceptible to a breach,” he said. “All of that comes from having the right oversight and assessments done to vet your partner or vendor of choice.”