Fintech Poses No. 1 Threat to Community Banks, Execs Tell FDIC

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By Gregory Roberts

July 21 — The emergence of new technology in financial services poses a serious danger for community banks, and they are scrambling to meet the challenge, a group of community bankers told the Federal Deposit Insurance Corp.

“I think these nonbanks, fintech-type opportunities, are going to be the biggest threat to, especially, community banks, going forward,” David Seleski, president of Stonegate Bank, in Fort Lauderdale, Fla., said at a July 20 meeting of the FDIC's Advisory Committee on Community Banking.

“Just one of the things that we have been monitoring and seeing is that some of the nonbanks, fintech companies, are really looking for that opportunity where they see there's a particular aspect of a banking process that they can try to disrupt,” he said. “There are so many services we offer our clients, but there's also a threat from nonbanks eating into our traditional profit areas.”

High-speed payment programs and online platforms that offer consumer and mortgage loans are two areas where fintech companies are cutting into the business of community banks, he said.

“It's the payment systems that I think are the scariest,” said Mary Ann Scully, president of Howard Bank, in Ellicott City, Md.

Derek Williams, president and CEO of Century Bank & Trust in Milledgeville, Ga., said his daughters send money back and forth using the Venmo mobile application. “How can my customer get money to someone that quickly who is not a customer of the bank?” he asked. “Those are the hurdles we're trying to get by.”

Williams also said he worries about competition from online marketplace lenders.

Marketplace Models Improving

“They're going to get better at what they do,” he said. “The models are going to improve, and we're going to lose some business on that end.”

Banks increasingly have formed partnerships with online marketplace lenders in response to the fintech challenge. The FDIC has warned the banks against relaxing their underwriting standards as they enter the partnerships.

“We're bankers, and we have a much different risk profile than someone that has started an online lending company,” said Leonel Castillo, president of American Bank of Commerce, in Provo, Utah. “You have a risk appetite from a potential partner that potentially is much, much greater than what you and the financial institution are willing to take on.”

“Generally, with technology, the biggest question is just risk versus reward,” said Cynthia Blankenship, vice chairman of Bank of the West in Grapevine, Texas. “Where is our risk tolerance? And how much of that are we going to be forced into taking to stay relevant in the market?”

The FDIC has formed a fintech steering committee comprising agency managers who oversee bank supervision, compliance, consumer protection, insurance, research and risk analysis, James Watkins, the FDIC senior deputy director for risk management, told the bankers.

“It’s basically to gain an understanding and assess — monitor, if you will — fintech activities, developments and trends, understand in greater detail what is occurring in the market: evaluate the impact to our organization and stakeholders,” he said.

FDIC Working Groups

The FDIC also has formed two working groups, split between the wholesale and retail applications of fintech, Jonathan Miller, deputy director for depositor and consumer protection, told the advisory committee.

The wholesale group focuses on the repo market, derivatives, transaction clearing, credit, distributed-ledger technology, virtual currencies and smart contracts, he said. The retail group’s portfolio takes in consumer and small-business activity, including marketplace lending, mobile deposits and person-to-person payments.

“Our little bank has explored how we might be able to take advantage of some of the efficiencies the technology provides,” Castillo said. “It's a lot easier said than done.”

“There's that whole point of there's so much stuff coming and you don't want to miss the one that is going to be the death knell to the banking industry you're afraid that will slip by,” Williams said. “You're looking at so many which will be gone in six months as a fad. It's hard to keep up with it.”

“What's particularly concerning about it for us is the pace of change and the fact that it's coming so quickly,” said Christopher Emmons, president of Gorham Savings Bank, in Gorham, Maine. “It constantly feels like we're addressing another payment system, another model that's in the market that our customers are interested in, and that obligation of feeling like you have to get it.”

The biggest threat of a next new thing, he said, would come from a fintech disruption of business-to-business payments similar to the earthquake in person-to-person payments, he said.

“Our job is to make sure that we're on top of all of the changes that are coming, and looking at ourselves to look forward with the technology and move with it,” Emmons said.

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