Pub. 6 2018 Issue 1

Issue 1. 2018 13 When to Partner with Fintechs Partnering with fintechs may make sense in some cases for banks. Particularly if the fintech offers access to a market segment difficult to tap or a patented or differentiated product. But before entering into negotiations, banks may want to get answers to the follow- ing questions at a minimum: • Does the fintech have a track record and has it been tested and survived credit, business, and/or economic cycles? • Is the company well-funded? Does funding depend heavily on sus- tained growth? • How reputable is the company and its management team? • Is the potential partner an existing market leader? • Is the potential partner (or its service) endorsed by well-known organizations (e.g., American Bankers Association or the Inde- pendent Community Bankers of America)? • Is the fintech provider recognized for customer service? • Does the company compete direct- ly with banks and, if not, might it do so in the future? • Does the organization make Ser- vice Organization Controls (SOC) reports available? • Is the organization regularly audited or examined, not only by accountants, but also by banks and/or regulatory agencies? • How well does the organization know banks—in particular, with respect to the regulations and secu- rity issues that may apply? What do the fintech’s bank clients say about their experiences? Still others are pursuing a once-unthink- able strategy—acquiring bank charters through ILC applications—in other words, becoming banks themselves. The overall situation remains murky. Are fintechs prepared to navigate the regulatory environment? Will doing so erode their cost advantages? Can tradi- tional banks fully rely on new fintech partners? When fintechs recover from their recent stumbles, will they resume their competition with the banking industry? A Better Path Forward In hindsight, these developments would seem predictable. Did any fintechs rec- ognize from the start that working close- ly with banks—not seeking to replace them—would be key to their success? In fact, a model of true collaboration with banks evolved more than 15 years ago, not in a hotbed of innovation such as California or Manhattan, but among veterans of the federal govern- ment in Washington DC, who built an innovative financial technology com- pany across the Potomac in Arlington, Virginia. The year was 2002, well before the financial crisis that gave rise to the recent growth in the fintech movement. Former executives of the Office of Comptroller of the Currency, the Federal Reserve Sys- tem, and the Federal Deposit Insurance Corporation founded a company with a strength in innovation that is reflected in the 20 issued patents that it holds to date. But from the beginning, working closely with banks was key, and the company understood its future was contingent on the success of its partner banks. From its inception, Promontory Inter- financial Network has been steadfastly committed to serving banks, not com- peting with them, and to a meticulous attention to detail that belies the disrup- tor stereotype, even when doing so leads to higher costs for itself. The company works closely with the in- dustry’s two major national trade associ- ations and has marketing alliances with nearly 40 national and state banking trade associations. Several of its services are endorsed by the American Bankers Association (ABA). The ABA publishes due diligence reports on the company’s services, and the company undergoes due diligence scrutiny by many of the banks that participate in its services. Standing behind the company’s services are a board and management team staffed with veterans of the Fed, the OCC, the FDIC, the SEC, and the Feder- al Home Loan Bank. This comprehensive grounding in the complexities of banking drives Promon- tory Network’s consistent growth. From just 10 clients at launch, the company has developed a network that has been chosen by more than 3,000 banks nationwide over the past fifteen years, and now encompasses 46 percent of all community banks in the United States. Fintech’s New Frontier A decade and a half since Promonto- ry Interfinancial Network opened its doors, the promise of fintech continues to inspire an industry. Its recent stum- bles notwithstanding, fintech continues to be funded at a dynamic pace. Equally certain, fintech is reinventing itself in ways the proponents of disrup- tion once considered inconceivable. Banking is now a partner, not a barrier, to fulfilling fintech’s promise. A compa- ny founded with little fanfare during the early stages of the fintech movement, and now at the center of banking’s on- going evolution, was among the first to show the way. And from the beginning, it has been a stable, collaborative friend to banks, not a competing influence— no ordinary fintech company. n Did any fintechs recognize from the start that working closely with banks—not seeking to replace them—would be key to their success?