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For banks, customer relationships and capital are key to fintech future

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For banks, customer relationships and capital are key to fintech future

Thoughthey face real challenges from financial technology disruption, industryobservers say banks boast strengths that will help them remain key players in afinancial world gone digital.  

Andwhile the rise of digital startups and fintech poses risks for banks, they arealso well positioned to benefit from — and perhaps buy into — the innovationstaking hold in the financial world, according to panelists and attendees atS&P Global Market Intelligence's Bank M&A Symposium.

Therewas little doubt at the conference that much of what is happening in thefintech space represents an important part of the future of the bankingindustry. They pointed to the major investments that Citigroup Inc., JPMorgan Chase & Co. and other major global banksare making to improve their digital customer experience and overall techcapabilities.  

AlliancePartnersCEO Brian Graham said the speed at which customer preferences are changing andthe incorporation of other technology into banking present an existentialcrossroads for many banks. AlliancePartners works with banks on middle-marketlending and manages loan portfolios on their behalf.

"It'sa threat to the extent that if you do not respond to those trends, yourcustomers will demand things you're not able to provide," Graham said.Banks face cultural and technical challenges if they are looking to build outtheir tech capabilities internally, he argued.

"Banksare not good at technology and are saddled with legacy core processingsystems," Graham said bluntly during a panel.

Heargued, though, that the growth of the fintech industry has"democratized" access to rising technologies as banks increasinglylook to partner or establish vendor relationships with startups that bring theexpertise and development speed that most commercial banks lack as theyundertake tech projects. "You don't need to be JPMorgan Chase or RegionsBank to get access to these capabilities," he said. "You can be a$100 million bank and get access to capabilities that are probably better thanwhat JPMorgan Chase and Regions can deploy."

Attendeeshighlighted one recent and headline-grabbing example of a bank making astrategic splash in the fintech space — Fifth Third Bancorp's partnership with and $50 millioninvestment inGreenSky LLC, which gave GreenSky one of the biggest valuations ever in thefintech space and which Fifth Third said will add an additional $100 million inloan originations per quarter to its books.

Butthe bank could also see a major payoff if GreenSky, which sources homeimprovement loans and boasts some of Fifth Third's regional banking competitorsas its largest partners, continues to ascend in the home finance space. It's a demonstration of theway in which banks are looking to come out ahead in the digital revolution,which panelists said they are well-positioned to do because of their strongbrands and balance sheets.

"Banksare in a pole position to win this trend … because I think at the end of theday customers do have a lot of trust in their bank relationships and valuetheir bank relationships," Sam Graziano, CEO of small business-focuseddigital lender Fundation, said during the event.

Grahamagreed and argued that although banks won't be able to innovate at the samespeed as fintech startups, they bring their own advantages — including customerrelationships — to the table when they negotiate potential partnerships withfinancial technology companies. "They've got a relationship with customersthat goes back often decades … and they've got low-cost capital that anynonbank would kill for. And those two things put banks in a remarkably powerfulposition," Graziano told attendees.

"It'sa pretty target-rich environment if you're a bank in the sense that a lot ofthese firms have come to the conclusion that what banks bring to the table iscentral to their future success," Graham said.