As banks continue to lean on fintech vendors and partners to upgrade their internal technology and the products and services they offer customers — and as regulators continue to scrutinize these relationships — a cottage industry of sorts has sprung up. New companies like True Digital and Tech Passport help banks vet and conduct due diligence on fintechs.
True Digital lets banks provide detailed reviews of the fintechs they work with as vendors and partners. TechPassport was developed in collaboration with 15 global banks including Morgan Stanley, HSBC, Citi, and Fidelity, to create a set of "enterprise ready" questions start-ups must answer to work with the big banks. Alloy Labs has collaborated with banks to create guidelines and standards for fintech partnerships.
"Fintech partnerships are becoming increasingly more important for banks' innovation strategy," said Sean Manahan, global head of business development and partnerships at Morgan Stanley. "Giving fintechs a blueprint they can follow to prepare themselves and assess their readiness could streamline the onboarding process and save time, money and energy for partners on both sides."
Meanwhile, vetting fintechs properly has become more critical as the risks of working with them have become more apparent in recent months. FTX's collapse continues to have a devastating effect on the banks that worked with it. In January,
Bankers laud the idea
Among community bankers, interest in working with fintechs as vendors and partners runs strong. According to a survey of 204 community bank and credit union executives released Wednesday by Forrester Research and NovoPayment, 88% said outside vendors that can fill gaps in their digital efforts are important or very important.
FirstBank in Nashville, for one, has enthusiastically partnered with fintechs.
"Fintechs are really good at building out specific use platforms where banks just aren't that great at it," said Wade Peery, chief innovations officer, in an interview. "We're partnering where we don't have the talent to do certain things and it's just worked out really well for us."
The bank has been through six acquisitions since 2015 and has grown from $2 billion to $12 billion. In 2015, the decision was made to go to all cloud-based systems.
"We haven't run anything on premise since 2015," Peery said. "So we are happy to partner with fintechs. We are able to run a fairly lean IT shop because we've done that."
The OCC's consent order against Blue Ridge Bank came out just as FirstBank was ramping up its banking-as-a-service program.
"We saw the writing on the wall," Peery said. "Early on we felt it was a competitive advantage to have a really strong compliance function associated with banking as a service, because obviously if a fintech's bank gets in trouble, then they're in trouble also, and vice versa."
True Digital appeals to Peery because he wishes he had had something like it several years ago, when the bank outgrew its core system and rebuilt or replaced about 90% of its core and ancillary software, treasury management, online and mobile banking platforms and card issuance systems.
"I vividly remember going through all that thinking about, am I making the right decisions?" Peery said. "How do I know everything there is to know? Is this interface tested and tried? Have they done this before? How is software A going to work with software B? All that makes for a lot of sleepless nights. So to have a tool where you could pretty quickly go in and see who fintechs have worked with and have a resource to reach out and contact that is not a provided reference, would've been incredibly helpful."
True Digital provides information about all the major players in one portal, letting the bank's leaders spend more of their time on time planning and engineering, he said.
"It helps you shorten that cycle of identifying and due diligence work," Peery said. "The more banks that will participate, the better, and as banks are willing to share information and knowledge and experience, it should build in value as time goes along."
The Forrester research found that a lot of community banks and credit unions see larger banks as a threat and that they might be steamrolled over: 80% said they are concerned that their customers will move to a larger bank with more available digital services. They see fintech partnerships as necessary to compete.
"The good news is, technology helps small banks," said Josh Williams, executive vice president, chief banking officer and head of partnerships at Seattle Bank, in an interview. "The bad news is it helps big banks, too, and they have more resources. I do think it's very difficult to compete with Chase and BofA and Wells on their consumer digital offerings. They just have overwhelming resources to build really amazing solutions and to benefit from innovation."
Partnering with fintechs can be helpful, he said, but it also puts pressure on banks to have the right people who know how to handle fintech partnerships.
Seattle Bank hired a CIO five years ago who has a strong understanding of technology compliance and "was able to make sure our core infrastructure is as open as possible. Over time, what that's allowed us to do is now we can plug more and more things into that. So there's an architectural question there, but along the way, our vendor management process has to be really thoughtful to say, okay, now that we've added this other piece, how does that change our risk profile? Or how does that change what we're doing in terms of our own systems?"
How the platforms work
TechPassport was originally founded to ease the onboarding of new vendors for banks, according to Layla White, founder and CEO. She formerly had vendor management roles at Deutsche Bank, Lloyds Banking Group and HSBC, among other organizations.
"In my experience working in banks, I was the person negotiating against the supplier," White said in an interview. "I could see that there were a lot of challenges and frustrations for the business wanting the process to be faster, so that banks could innovate at a good pace. It stood out for me that if all of the banks were trying to engage with the same kinds of startups, in silo orientated fashion, then there needed to be a trusted party that sat in the middle that would bring the two parties together."
The idea for Tech Passport was to gather information about fintech startups so that when a bank wants to find a startup, they find the right one the first time.
The next step was making sure the startup is ready to work with that bank.
"As soon as I got onto the startup side and realized how difficult it was to work with banks, it became, how do we make it easier for the startups as well?" White said. "How do we help to make sure the startups are in a good position, that they understand what's required of them to work with an enterprise, so they're not wasting time and effort and money, maybe in the wrong sector, and killing potentially really good products, just because of the long sales cycles."
She set up a think tank of leaders at large banks who came up with a set of "enterprise ready questions" Tech Passport makes startups answer. Uptime, resilience, meeting service requirements, security, ESG, data privacy, encryption, exit planning, auditing, SOC 2 certification, breach notifications and diversity are all on the list. TechPassport also lets banks give endorsements to startups.
True Digital was founded by Patrick Sells, former chief innovation officer at Quontic Bank and American Banker's 2020 Digital Banker of the Year. Banks and credit unions subscribe for a fee to its database of information about fintechs. If a user wants to buy, say, new account opening software, they can look up that product category, see what vendors offer it, and see what kinds of experiences other banks on the platform have had with it. They can also search for vendors by goal, such as increasing deposits, increasing non-interest income or improving efficiency ratios. There are non-vendor-supplied references for each fintech.
"There's someone you can call and say, was it easy or was it duct taped together?" Sells said. "There's a known reference, only financial institutions can access the site, so no fintech or vendor can, and we're never paid by a vendor or fintech. We're only paid by the financial institutions and we never resell the data."
The platform also puts out alerts when vendors miss a service level agreement requirement, experience unexpected downtime or suffer a data breach.
"Any time you can get more visibility, that's certainly helpful," Williams said of the concept. "To the extent that you're able to get some sense of what's actually been in market versus sort of an idea, I think that's helpful."
Better information about fintech partners could help banks balance customer service and risk management, Williams said.
"Oftentimes, it's just getting that little bit of additional information," he said.
Williams also wonders with services like these if they gather all the information a bank like his needs and if bankers will be willing to share all this information or hold back what they love or dislike about vendors.
"If it's, hey, what's your experience with this vendor? I think there would be a pretty high willingness to share on that," he said. "If it helps get us 80% of what we need and then we just need 20% more, that's great."
The
"I think in general, along these same lines, it's been really good," Williams said. "We've definitely been interested in some of the things they're doing. We've certainly met people through Alloy who have solutions to things we're looking for."
Next week, the True Digital team will take an RV tour in which they will visit community banks in preparation for the official launch of the True Digital platform in April. Sells and his team will host talks about innovation, culture and digital transformation in Atlanta, Nashville, Little Rock, Dallas, Fort Worth, Houston, San Antonio and Austin, True Digital's headquarters.
