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The Community Bank of Fintech?

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The Community Bank of Fintech?

Nancy Bush is a veteran bankanalyst. The following does not constitute investment advice, and the views andopinions expressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.

Wow— just when I thought I had this whole banking thing figured out, I have foundto my utter surprise that it's time to go back to the drawing board on my wholeset of long-held beliefs. That revelation came to me as I was attending the "Crossroads:Banking and Fintech" conference (co-sponsored by law firm Bryan Cave,investment bankers Banks StreetPartners and venture capital firm TTV Capital) in Atlanta recently,and I must say that it was an eye-opening day indeed. While I had longconsidered financial technology (a.k.a. fintech) to be largely the domain ofthe major banks, with their large pots of investment dollars, it quickly becameapparent that technology is fast evolving into a tool that has massivepotential to profoundly alter the face of community banking as well.

Ihave tended — like many others of my age and relative degree of technologicalignorance — to consider financial technology more in terms of consumer depositgathering (ATMs, online banking, mobile banking, remote deposit capture) andpayments processing (PayPaland Square mostnotably, which seem to me to be the greatest things since sliced bread). And ofcourse, any bank analyst focuses on the various back-office processes that makebanks run, especially when the compatibility of back-office systems is ofutmost importance in making an acquisition work, or conversely takes longer togel than it should. On the asset-gathering side, online consumer lenders havelong existed — Lending Club,Avant and Prosper areonly the most recent and ubiquitous in a landscape of dozens — but I have tendedto think about lending of either the consumer or the commercial variety asbeing predominantly the domain of banks.

Oneof the conference speakers used a great term, and it crystallized for me theneed to begin to think about fintech in a new way. Jeff Adams of Banks StreetPartners described a "fintech ecosystem" that already encompassespayments, lending, retail banking, financial management, insurance, and marketsand exchanges, all of whose boundaries are rapidly blurring into one largemega-financial landscape. And while community banking encompasses aspects ofmany of these sectors already, I think that it is still hard for most bankanalysts and observers — and regulators as well, I suspect — to begin to thinkabout community banks that are transformed by technology into entities thatlook very different from the historical model of the George Bailey bank.

Itwas also clear from the roster of conference speakers that there are communitybanks out there that are not waiting for the approval of any particularconstituency before going ahead with transformative moves. Chris Nichols, thechief strategy officer of the correspondent division of (a communitybank with $4.97 billion in assets headquartered in Davenport, Fla.) gave akeynote address in which he examined the drivers behind bank profitability(hint — it's not NIM that is the major determinant) and highlighted the ways inwhich technology would be essential in determining future community bankreturns.

Mr.Nichols (a noted industry blogger whose writings are featured on CenterState'swebsite) presented some intriguing and sometimes counterintuitive thoughtsabout the ways that community banks can compete against the megabanks and howthey must interact with customers in the future. One of his most interestingdeclarations was: "We cannot hope to compete against a mega-bank's branchfootprint, but we can compete against their innovation," and I must saythat it suddenly struck me — in a major "duh" moment — that financialtechnology has the potential to render moot the differences between large andsmall banks pretty much across the board.

Anearlier speaker — Sean Banks of TTV Capital — had introduced the topic of thoseubiquitous millennials and how they are upending banking, pointing out thatthese young folks are "tech dependent versus tech savvy" and by anoverwhelming majority would rather deal with Google, Apple Pay or Square thanwith a bank. It would seem to me that the wonders of fintech might allow thosecommunity banks with more a more creative and forward-looking bent to eitherpartner with fintech companies — or to craft their own products using bolt-onapplications — to appeal to this younger cohort. (Chris Nichols of CenterStatehad said in his commentary that he saw technology as not only an enabler ofscale, but as of one of customer engagement as well.) As much as my baby boomerself may hate to admit it, the millennial generation is ascendant, and theyneed to see banks in a way more positive light than they do now, whatever ittakes.

Ihad a conversation at the conference with one community banker (who shallremain nameless to keep him out of the regulatory crosshairs) after he hadparticipated in a panel discussion, and our impromptu chat gave me ample foodfor thought. He is the CFO of a small bank (located in a particularly hotSoutheastern market) and he sees fintech as a way for community banks like histo completely reimagine themselves. He mentioned that his company alreadypartners with one consumer marketplace lender, and that it wishes to do thesame on the commercial side. As he described it, this would enable his bank tobuild a conduit for different commercial products — coming from within theregion but also originated nationwide — and allow them to achieve greatergeographic and risk diversification than they can presently as captives of thelocal market.

OK —here's where the rubber hits the road, and I must admit that my head has beenspinning with questions in the intervening days. I get what this gentleman wassaying — that the tools now exist to do lending in a very different way than ithas been done historically — and in theory that should be a big positive forcommunity banks. But the question will inevitably arise — when is a communitybank not a community bank? Does it forfeit community banking status — and thegenerally more accommodative regulatory stance that comes with this designation— if it becomes a lender on a nationwide basis? Should such lending be allowedbut be restricted to a certain percentage of the loan portfolio? Will the wholesubject of the transformative possibilities of fintech — and the possiblesafety and soundness implications that come with it — drive the regulators absolutelystark raving mad?

Mr.Curry of the OCC has already put down a marker on the subject of fintech andhis regulated banks with his "whitepaper" of a couple of weeks ago, and I must admit that I foundthat document to be one of the more passive-aggressive regulatory issuances ofrecent months. Yes, the OCC recognizes the positive implications of fintech forfinancial services, but they want to make sure that bank-fintech partnershipsdo not endanger safety and soundness. While the OCC may be early to put forthits thoughts on this matter — and a cynic might say that the Comptroller doesnot want his agency be late to the game again, as it was in 2008 — it isinevitable that the other regulatory agencies will quickly follow suit, and Iexpect a whole raft of pronouncements on the subject in coming months.

Ithought that life would get simpler as I got older, but the events of 2016 arebeginning to show me how wrong that assumption may have been. I now have to worrynot only about getting the grass cut and whether to buy a new car (as along-time Saab owner, I'm going through an existential crisis on that one), butI also have to worry about Donald Trump becoming president, the Fed neverraising interest rates and whether I'm going to have to learn to bank in awhole different way and with a whole bunch of apps. The future of banking isclearly here, and it is going to be different — and I hope that there's sometech-savvy neighborhood kid who can show me what to do.

Nancy Bush and NAB ResearchLLC have a consultingagreement with Banks Street Partners, an Atlanta-based investment bank,under which NAB distributes research focused on Southeastern banks to BSP'sclient base.