As the nation's largest banks embrace partnerships with financial technology companies, many community banks are still testing the waters and grappling with when to take the plunge.
To stay current on the latest digital features, community banks are feeling more pressure to embrace fintech offerings, executives said. They often do not have the personnel expertise or the money to develop their own technology, making fintech partnerships increasingly attractive.
Speaking at the FIG Partners conference, Walnut Creek, Calif.-based BayCom Corp. President and CEO George Guarini said the evolution of fintech partnerships will be slower for community banks. But since big banks have largely embraced the technology, especially peer-to-peer payment systems, he said it is only a matter of time before community banks will be expected to offer the services.
"We'll find the opportunities, and once they're proven a little bit, you take a little deeper dive," the CEO of the $1.19 billion-asset banking company added. "No one wants to jump in on day one."
Carter Bank & Trust, a $4.11 billion community bank based in Martinsville, Va., does not offer online or mobile banking — but does have a partnership with LendingClub Corp.
Carter Bank & Trust's CEO, Litz Van Dyke, called LendingClub a "tried-and-true" delivery model, and said the partnership is a "revenue play."
At the FIG Partners conference, he said the bank currently has about $50 million in loans outstanding purchased from the digital lender. Its next step will be to enter into a joint marketing agreement with LendingClub.
Carter Bank & Trust has traditionally retained customers by offering free checking, Van Dyke said. After noticing a large number of its clients were already using the LendingClub platform, the bank launched a partnership.
On Feb. 14, Congress took a step in support of these partnerships. The U.S. House of Representatives passed the "Madden Fix," a bill that attempts to resolve legal ambiguity around the rights of a digital lender when entering bank partnerships.
Fintech companies have "freedom and flexibility" that banks do not have, Susan Boyd, managing partner at S. Boyd Holdings LLC, said at the conference. But Andrew Smith, partner at Covington & Burling LLP, said there is a lot of regulatory certainty in a bank program, which might be more valuable to the fintech company.
Boyd said the partnership model is "really the way to go," because banks often lack the expertise to build their own technology, and acquisitions are usually too expensive.
"The secret sauce is picking the right partners — the ones that are going to reflect your culture and understand your strategy and help you differentiate," she said.
Smith said partnerships, too, may be expensive, both for the fintech company and the bank.
"There's no free lunch," he said in an interview. "If this was such a panacea, everybody would be doing it, but they're not."
Partnerships are just one way to get a product to market, and Smith said companies have a variety of strategies at their disposal. They are hard, he added, noting that the community bank would likely need expertise in managing third-party relationships.
"My sense is that this isn't going to be a big bonanza for anybody," he said, adding that he expects it to continue to be a specialized market.
There are a couple banks that have figured out how to manage these third-party relationships, and the lawyer said they probably will continue to expand their partnerships.
These community banks are following examples set by some of the banking giants. On Deck Capital Inc. already partners with JPMorgan Chase & Co. and plans to announce its second major bank partnership later this year.
On Deck Chairman and CEO Noah Breslow said the recent trend is for banks and fintechs to partner more, adding that he believes banks are "warming up to and accelerating toward" the idea.
"Banks are increasingly looking to digitize their originations processes to remain competitive," Breslow said on a call to discuss quarterly earnings, according to the transcript.
Breslow views partnerships as complementary to the fintech's overall business, allowing the company to reach customers at lower prices that it may not be able to offer on its own.
"Banks are understanding that building [digital offerings] themselves could be a multiyear time-to-market," he said, and it could be very expensive. However, partnering with a fintech could get the product to market faster, at a lower cost and possibly with a better customer experience.
Even still, Breslow said that in many cases, his company is competing against larger banks deciding to build out technology offerings themselves.