EPISODE 51: Adam Thomas, a partner with DHG’s Financial Services practice, discusses key considerations for banks as they develop a fintech strategy, including how fintech can impact customer acquisition and the dynamic of the board of directors.
[00:00:09] JL: Welcome to today’s edition of DHG’s GrowthCast. I’m your host, John Locke, and at DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG’s Growthcast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace.
Thanks for joining us as we discuss tomorrow’s need today.
[00:00:42] ANNOUNCER: Views and concepts expressed by today’s panelists are their own and not those of Dickson Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.
[00:00:58] JL: I'm happy to introduce Adam Thomas, who's with us today. Adam is a partner in DHG’s financial services practice. And today we're going to discuss why banks should be thinking about their FinTech strategy in 2021. Adam, thanks for being with us today.
[00:01:14] AT: Of course, John, thank you, and glad to be here as well.
[00:01:17] JL: So, Adam, I think it's best if we start by talking about what FinTech actually is, and how that fits into a larger conversation around the connection to banks.
[00:01:28] AT: That's a great question, John. I think in the most basic sense, FinTech is short for financial technology and it's an emerging industry that combines technology and innovation to improve activities within the delivery of financial services. If you talk to banks, you may get a dozen different answers on what FinTech means to them. For some, it is technology around their own internal systems to help drive efficiency or drive down their costs. It could be a new lending system. It could be a new ERP system, any kind of new technology for their own internal purposes.
For others, it's really technology around the customer experience, technology that provides more online and digital capabilities with the sleekest features that some of their customers, particularly millennials are looking for. For others, it could just be providing technology around new products for customers, or customer acquisition tools. And then more recently, we've seen efforts around building technology to provide more of a social impact for banking, when using FinTech, such as technology that helps people develop good financial habits, or technology that's built to provide access to lending products or other banking products as some of those that may not have had that same access previously.
[00:02:53] JL: Well, all of these seem to be great reasons for banks to just look for ways to partner with FinTech operations around the country. And I'm just curious, why would a bank even be hesitant to collaborate with a FinTech company?
[00:03:11] AT: Well, if you think of banks, they are a very traditional industry. And I think a lot of the board of directors at many banks, particularly community banks have more of a traditional minded mindset. It also comes down to risk appetite, where FinTech companies are often seen as the disruptors and introducing risk to the business. They don't have the same deposit insurance and regulatory oversight that banks have. And there's also the issue of regulatory approval for a lot of things banks do around acquisitions or new technologies. They do require some level of approval from their regulator, and some banks just may be hesitant to go and seek out that approval.
[00:03:58] JL: So, it sounds like these are solid strategies, Adam. Why is it that banks really should be paying attention to customer acquisition as a part of really investing in FinTech strategies?
[00:04:12] AT: Well, I think customer acquisition has been a priority for banks over the last several years, but I think it's even more important during the COVID-19 pandemic. A lot of branches have been closed, a lot of face to face interaction that banks may be looking forward to their customers just hasn't been there. And they haven't had the opportunity to target new customers, or even target cross-selling existing customers within their own portfolio.
So, having customer acquisition strategy, whether that's through technology or otherwise, is important to continue to find new customers to lend money to, new customers to accept deposits from, or just new products, whether that's in wealth management, whether that's in trust services or any other kind of financial services, products that they can be providing, really to increase that non-interest income, which is so critical for banks, as they continue to add to their net income each year.
[00:05:22] JL: Well, our COVID world has really accelerated moves in many industries, towards new products, new ways of doing business. And there's no question that this is having an impact on banks as it relates to their priorities, to move away from traditional methods and be more innovative. What are some of the considerations they should have, as they make this very important leap towards innovation?
[00:05:49] AT: I think the number one area that they should focus on is their board of directors. I think any kind of top-level strategy has to start with the board of directors. And I think banks should really be challenging. Do they have the right diversity of thought on their board? I have seen banks that have FinTech champions on their board, and the way those FinTech champions really drive strategy and ask questions on the way things are going or why do you do it this way or why can't you do it this way? Is so invaluable to the board.
In fact, I was speaking to CEO of a bank recently where they had added an entrepreneur tech guy to their board of directors, and just the level of questioning that this individual is able to bring to the to the board of directors. Yeah, not accepting, that’s just the way we've always done it, but wanting to know why. And really, what are the technology solutions that they could be bringing to the bank, whether it's helping them internally or helping their customers just made so much sense. And then I think also starting at the board of directors, they have to be driving that strategy of customer acquisition, thinking about, what are new technologies that our customers are looking for? And if we just had this technology, or just had that technology, what type of new customer could we be bringing into our bank with one product? And then obviously, we use that product to cross sell and other products.
I think also, thinking about where the risk appetite of those FinTech strategies lie within the bank, do you want to be cutting edge? Do you want to be bleeding edge? Do you want to be somewhere in between? Some banks may want to be the first out to market with a product while others may want to wait and be fifth or six out to the to the market.
[00:07:55] JL: Sure. And I know there's a lot of pressure to meet the needs of the millennial banking generation and with that comes this additional awareness that they have a real interest in the social impact of the organizations that they work with and invest with, right? So, when you think about social impact, what should banks be thinking about as it relates to their FinTech strategy?
[00:08:22] AT: I think most customers and investors of banks don't just want their banks to be focused on the social impact of their technology and their products, but they really expect it. There are many parts of our community that don't have the same access to banking products, that others do. And providing that access to the underbanked and underserved communities is very important. There's a ton of new technology that we participated in the FinTech South Conference, back in the in the fall, and that was a big part of that whole conference was around what are the solutions to help solve this problem. One of the companies that we had a chance to talk to was new technology that was built around disrupting the the payday lending space, and being able to provide immediate funding to some of the blue-collar workers that only get paid on a weekly basis. And if they're on their way to work and have a flat tire or their battery goes dead in their car, it can really put them behind.
So, being able to provide them more access to money that they will be getting at the end of the week, but need it right now, is a great technology that we've seen out there.
[00:09:45] JL: Yeah, that's a great example of how an institution that's focused on really meeting the needs of the underserved can make a huge difference and really have a greater appeal to a lot of people by telling those stories. So, that’s a great example.
So, when we talk about these strategies, you can't really talk about strategies without tactics. And can you speak to some of the considerations regarding how to implement FinTech strategy with the tactics?
[00:10:15] AT: Sure, there are a few different ways to go about this. I think the easiest and quickest way is just for banks to find someone to partner with that fits into what their strategy should be, and bring them in as a vendor. Yeah, it goes through their vendor management process. So, there is a little bit of back and forth on the front end there to bring them in. But it's a very quick and easy way. Probably the more difficult way is by creating your own internal development team, hiring engineers on your staff to help develop technology. I will say this is rare, particularly in the community bank space, because it is costly, and it can be more of a long-term strategy, if you will.
The most effective way and probably the most meaningful way to participate in the FinTech ecosystem is by investing in companies directly that are furthering whatever your strategy that you determine would be, that could be doing a non-controlling investment in companies. Often when you do that type of investment, you're partnering with them as well, in some way. There could be creating a joint venture with a FinTech company, or even buying or acquiring the entire company, or at least a controlling interest in that company.
When talking to FinTech companies, particularly startup and tech companies, one of the key issues they have is that access to capital. So, by doing any of these methods here, you're helping them to get access to that capital so they can continue to develop new and innovative solutions. And it also helps your bank to be a part of the the FinTech ecosystem, and also continue to execute on that strategy.
[00:12:10] JL: Well, Adam, I'm sure we have quite a few banking executives listening to today's podcast, and I sure as they're trying to process all this information today, they're thinking, “Well, where's my point of entry? Where can I get started?” So, if you had to give some advice as to what are the first couple of steps that you could take to be really important and to launch your true FinTech strategy for your banking institution? What would that be?
[00:12:37] AT: Well, I think we talked about it just a bit ago, but I really think it boils down to the Board of Directors. It's got to start there. You've got to have a strategy that the board agrees with. And then you have to have a method of implementing on that strategy. I think that is somewhere we're a firm lady, she could help by helping you draft that strategy. And think about that and then as you go through your vendor management process, or you go through the acquisition process, someone like our firm could really help you think through what those controls and processes need to be. And certainly, on the accounting side, if you get into participating in the FinTech ecosystem, we would be well suited to help think how that will impact your financial statements.
[00:13:30] JL: So, get that unique perspective from a new board member, reach out to folks like DHG, and others who can give you additional perspective and help you develop your strategy. Adam, great information. Thanks for sharing your thoughts and perspectives on FinTechs and the banking industry today. We really appreciate it.
[00:13:51] AT: Absolutely, John. I was happy to be here.
End of Interview
[00:13:55] JL: And thank you for joining us on DHG’s GrowthCast today with our guest, Adam Thomas, a partner in DHG's financial services practice. We hope that you have a better understanding of FinTechs and their strategies and how they're being implemented such that they're having impact on banks and other financial service providers. I'm your host, John Locke and I look forward to reconnecting with you soon. On another episode of DHG GrowthCast.
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