Rose Oswald PoelsBy Rose Oswald Poels

Last week for the first time in two years, I was back in Washington D.C. with a small group of nine bankers from Wisconsin for meetings with banking regulators and a few members of Congress. Joining WBA was a delegation of six bankers and two staff from the Illinois Bankers Association. While our meetings with regulators were still virtual, all meetings were productive affording the smaller group of bankers ample time to ask questions and hear directly from senior officials about a wide variety of issues.

We began the first day in the afternoon with briefings from the FDIC and OCC. FDIC Board Director Martin Gruenberg led the conversation highlighting the fact that while the FDIC anticipated stress in the banking system heading into the pandemic that did not materialize and notably, there have not been any bank failures in 2021. Areas of focus for the FDIC remain on commercial real estate, tailoring climate change risk concerns based on the impact to different markets and/or the size of the institution, and on the impact of non-bank companies to the financial system. OCC Acting Director Michael Hsu led the discussion with bankers emphasizing his support for community banks, his understanding of the need to tailor regulation to the size and complexity of each institution, and robust discussions around both FinTechs and climate change.

The next day featured conversations with FinCEN and CFPB. Naturally, the discussion with FinCEN was largely around the status of their development of a beneficial ownership registry which remains in process. Until one is finally launched, banks will still have to follow the current beneficial ownership rules. A representative from FinCEN’s Financial Intelligence Division indicated that they have seen an increase in all types of crime notably COVID-19 fraud, work at home scams, cyberthreats of all types (e.g. ransomware and account takeovers), and illicit use of cryptocurrency. The primary focus of our conversation and questions with the CFPB was around the upcoming Section 1071, small business data collection proposal. The bankers took turns stressing the hardships of the current proposal and asking for an extension of the comment period deadline so that the industry had adequate time to respond to the many issues raised in the over 900-page document. CFPB staff indicated that they have been in meetings with the core providers on this proposal already to help prep them ahead of time so that data collection would be easier once the proposal is finalized.

These meetings are impactful largely due to the proactive engagement of the bankers in the room. I encourage you to take advantage of these opportunities as they arise and be involved because each regulator we met with unequivocally stated they want to hear directly from bankers about the impact proposals have on their operations. While WBA certainly represents the industry’s concerns, bankers truly make the best advocates in sharing specific examples about the impact on the operations of individual banks.

By WBA Legal

In late August, the Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) issued a new resource titled, Conducting Due Diligence on Financial Technology Companies, A Guide for Community Banks (Guide), which was intended to help community banks in conducting due diligence when considering relationships with fintech companies.

Use of the Guide is voluntary, and it does not anticipate all types of third-party relationships and risks. Therefore, a community bank can tailor how it uses relevant information in the Guide, based on its specific circumstances, the risks posed by each third-party relationship, and the related product, service, or activity (herein, activities) offered by the fintech company.

While the Guide is written from a community bank perspective, the fundamental concepts may be useful for banks of varying size and for other types of third-party relationships. Due diligence is an important component of an effective third-party risk management process, as highlighted in the federal banking agencies’ respective guidance; which, for FRB-regulated banks is SR Letter 13-19, for FDIC-regulated banks is FIL-44-2008, and for OCC banks is Bulletin-2013-29.

During due diligence, a community bank collects and analyzes information to determine whether third-party relationships would support its strategic and financial goals and whether the relationship can be implemented in a safe and sound manner, consistent with applicable legal and regulatory requirements. The scope and depth of due diligence performed by a community bank will depend on the risk to the bank from the nature and criticality of the prospective activity. Banks may also choose to supplement or augment their due diligence efforts with other resources as appropriate, such as use of industry utilities or consortiums that focus on third-party oversight.

The Guide focuses on six key due diligence topics, including relevant considerations and a list of potential sources of information. The following is a summary of the key due diligence topics within the Guide.

Business Experience and Qualifications

The agencies have identified that by evaluating a fintech company’s business experience, strategic goals, and overall qualifications, a community bank can better consider a fintech company’s experience in conducting the activity and its ability to meet the bank’s needs. Review of operational history will provide insight into a fintech company’s ability to meet a community bank’s needs, including, for example, the ability to adequately provide the activities being considered in a manner that enables a community bank to comply with regulatory requirements and meet customer needs.

Review of client references and complaints about a fintech company may provide useful information when considering, among other things, whether a fintech company has adequate experience and expertise to meet a community bank’s needs and resolve issues, including experience with other community banking clients. Review of legal or regulatory actions against a fintech company can be indicators of the company’s track record in providing activities.

When a community bank is considering a third-party relationship, discussing a fintech company’s strategic plans can provide insight on key decisions it is considering, such as plans to launch new products or pursue new arrangements (such as acquisitions, joint ventures, or joint marketing initiatives). A community bank may subsequently consider whether the fintech company’s strategies or any planned initiatives would affect the prospective activity. Further, inquiring about a fintech company’s strategies and management style may help a community bank assess whether a fintech company’s culture, values, and business style fit those of the community bank.

The agencies further instruct that understanding the background and expertise of a fintech company’s directors and executive leadership may provide a community bank useful information on the fintech company’s board and management knowledge and experience related to the activity sought by the community bank. A community bank may also consider whether the company has sufficient management and staff with appropriate expertise to handle the prospective activity.

For example, imagine that a fintech company, its directors, or its management have varying levels of expertise conducting activities similar to what a community bank is seeking. A fintech company’s historical experience also may not include engaging in relationships with community banks. As part of due diligence, a community bank may therefore consider how a fintech company’s particular experiences could affect the success of the proposed activity and overall relationship. Understanding a fintech company’s qualifications and strategic direction will help a community bank assess the fintech company’s ability to meet the community bank’s expectations and support a community bank’s objectives. When evaluating the potential relationship, a community bank may consider a fintech company’s willingness and ability to align the proposed activity with the community bank’s needs, its plans to adapt activities for the community bank’s regulatory environment, and whether there is a need to address any integration challenges with community bank systems and operations.

Financial Condition

Another step the agencies identified is for a bank to evaluate a fintech company’s financial condition to help the bank assess the company’s ability to remain in business and fulfill any obligations created by the relationship. Review of financial reports provide useful information when evaluating a fintech company’s capacity to provide the activity under consideration, remain a going concern, and fulfill any of its obligations, including its obligations to the community bank. Understanding funding sources provide useful information in assessing a fintech company’s financial condition. A fintech company may be able to fund operations and growth through cash flow and profitability or it may rely on other sources, such as loans, capital injections, venture capital, or planned public offerings.

Additionally, information about a fintech company’s competitive environment may provide additional insight on the company’s viability. Review of information on a fintech company’s client base can shed insight into any reliance a fintech company may have on a few significant clients. A few critical clients may provide key sources of operating cash flow and support growth but may also demand much of a fintech company’s resources. Loss of a critical client may negatively affect revenue and hinder a fintech company’s ability to fulfill its obligations with a community bank. A community bank may also consider a fintech company’s susceptibility to external risks, such as geopolitical events that may affect the company’s financial condition.

For example, some fintech companies, such as those in an early or expansion stage, have yet to achieve profitability or may not possess financial stability comparable to more established companies. Some newer fintech companies may also be unable to provide several years of financial reporting, which may impact a community bank’s ability to apply its traditional financial analysis processes. When audited financial statements are not available, a community bank may want to seek other financial information to gain confidence that a fintech company can continue to operate, provide the activity satisfactorily, and fulfill its obligations. For example, a community bank may consider a fintech company’s access to funds, its funding sources, earnings, net cash flow, expected growth, projected borrowing capacity, and other factors that may affect a fintech company’s overall financial performance.

Legal and Regulatory Compliance

The Guide further outlines how in evaluating a fintech company’s legal standing, its knowledge about legal and regulatory requirements applicable to the proposed activity, and its experience working within the legal and regulatory framework, better enables a community bank to verify a fintech company’s ability to comply with applicable laws and regulations.

A bank may want to consider reviewing organizational documents and business licenses, charters, and registrations as such documentation provides information on where a fintech company is domiciled and authorized to operate (for example, domestically or internationally) and legally permissible activities under governing laws and regulations. Reviewing the nature of the proposed relationship, including roles and responsibilities of each party involved, may also help a community bank identify legal considerations. Assessing any outstanding legal or regulatory issues may provide insight into a fintech company’s management, its operating environment, and its ability to provide certain activities.

A bank could also consider reviewing a fintech company’s risk and compliance processes to help assess the fintech company’s ability to support the community bank’s legal and regulatory requirements, including privacy, consumer protection, fair lending, anti-money-laundering, and other matters. A fintech company’s experience working with other community banks may provide insight into the fintech company’s familiarity with the community bank’s regulatory environment. Reviewing information surrounding any consumer-facing applications, delivery channels, disclosures, and marketing materials for community bank customers can assist a community bank to anticipate and address potential consumer compliance issues. Considering industry ratings (for example, Better Business Bureau) and the nature of any complaints against a fintech company may provide insight into potential customer service and compliance issues or other consumer protection matters.

For example, some fintech companies may have limited experience working within the legal and regulatory framework in which a community bank operates. To protect its interests, community banks may consider including contract terms requiring (a) compliance with relevant legal and regulatory requirements, including federal consumer protection laws and regulations, as applicable; (b) authorization for a community bank and the bank’s primary supervisory agency to access a fintech company’s records; or (c) authorization for a community bank to monitor and periodically review or audit a fintech company for compliance with the agreed-upon terms. Other approaches could include (1) instituting approval mechanisms (for example, community bank signs off on any changes to marketing materials related to the activity), or (2) periodically reviewing customer complaints, if available, related to the activity.

Risk Management and Controls

The agencies have also identified that by banks evaluating the effectiveness of a fintech company’s risk management policies, processes, and controls, such review helps a community bank to assess the company’s ability to conduct the activity in a safe and sound manner, consistent with the community bank’s risk appetite and in compliance with relevant legal and regulatory requirements.

Banks should consider reviewing a fintech company’s policies and procedures governing the applicable activity as it will provide insight into how the fintech company outlines risk management responsibilities and reporting processes, and how the fintech company’s employees are responsible for complying with policies and procedures. A community bank may also use the information to assess whether a fintech company’s processes are in line with its own risk appetite, policies, and procedures. Information about the nature, scope, and frequency of control reviews, especially those related to the prospective activity, provides a community bank with insight into the quality of the fintech company’s risk management and control environment. A community bank may also want to consider the relative independence and qualifications of those involved in testing. A fintech company may employ an audit function (either in-house or outsourced). In these cases, evaluating the scope and results of relevant audit work may help a community bank determine how a fintech company ensures that its risk management and internal control processes are effective.

Banks should also consider the findings, conclusions, and any related action plans from recent control reviews and audits as the information may provide insight into the effectiveness of a fintech company’s program and the appropriateness and timeliness of any related action plans. Evaluating a fintech company’s reporting helps a community bank to consider how the fintech company monitors key risk, performance, and control indicators; how those indicators relate to the community bank’s desired service-level agreements; and how the fintech company’s reporting processes identify and escalate risk issues and control testing results. A community bank may also consider how it would incorporate such reporting into the bank’s own issue management processes. Review of information on a fintech company’s staffing and expertise, including for risk and compliance, provide a means to assess the overall adequacy of the fintech company’s risk and control processes for the proposed activity.

Information on a fintech company’s training program also assists in considering how the fintech company ensures that its staff remains knowledgeable about regulatory requirements, risks, technology, and other factors that may affect the quality of the activities provided to a community bank.

For example, a fintech company’s audit, risk, and compliance functions will vary with the maturity of the company and the nature and complexity of activities offered. As a result, a fintech company may not have supporting information that responds in full to a community bank’s typical due diligence questionnaires. In other cases, a fintech company may be hesitant to provide certain information that is considered proprietary or a trade secret (for example, their development methodology or model components). In these situations, a community bank may take other steps to identify and manage risks in the third-party relationship and gain confidence that the fintech company can provide the activity satisfactorily.

For example, a community bank may consider on-site visits to help evaluate a fintech company’s operations and control environment, or a community bank’s auditors (or another independent party) may evaluate a fintech company’s operations as part of due diligence. Other approaches could include (a) accepting due diligence limitations, with any necessary approvals and/or exception reporting, compared to the community bank’s normal processes, commensurate with the criticality of the arrangement and in line with the bank’s risk appetite and applicable third-party risk management procedures; (b) incorporating contract provisions that establish the right to audit, conduct on-site visits, monitor performance, and require remediation when issues are identified; (c) establishing a community bank’s right to terminate a third-party relationship, based on a fintech company’s failure to meet specified technical and operational requirements or performance standards. Contract provisions may also provide for a smooth transition to another party (for example, ownership of records and data by the community bank and reasonable termination fees); or (d) outlining risk and performance expectations and related metrics within the contract to address a community bank’s requirements

Information Security

In understanding a fintech company’s operations infrastructure and the security measures for managing operational risk, a community bank may better evaluate whether the measures are appropriate for the prospective activity. A community bank may evaluate whether the proposed activity can be performed using existing systems, or if additional IT investment would be needed at the community bank or at the fintech company to successfully perform the activity. For example, a community bank may evaluate whether the fintech company’s systems can support the bank’s business, customers, and transaction volumes (current and projected). A fintech company’s procedures for deploying new hardware or software, and its policy toward patching and using unsupported (end-of-life) hardware or software, will provide a community bank with information on the prospective third party’s potential security and business impacts to the community bank.

For example, fintech companies’ information security processes may vary, particularly for fintech companies in an early or expansion stage. Community banks may evaluate whether a fintech company’s information security processes are appropriate and commensurate with the risk of the proposed activity. Depending on the activity provided, community banks may also seek to understand a fintech company’s oversight of its subcontractors, including data and information security risks and controls.

For a fintech company that provides transaction processing or that accesses customer data, for example, community banks may request information about how the fintech company restricts access to its systems and data, identifies and corrects vulnerabilities, and updates and replaces hardware or software. The bank may also consider risks and related controls pertaining to its customers’ data, in the event of the fintech company’s security failure. Also, contractual terms that authorize a community bank to access fintech company records can better enable the bank to validate compliance with the laws and regulations related to information security and customer privacy.

Operational Resilience

A community bank may evaluate a fintech company’s ability to continue operations through a disruption. Depending on the activity, a community bank may look to the fintech company’s processes to identify, respond to, and protect itself and customers from threats and potential failures, as well as recover and learn from disruptive events. It is important that third-party continuity and resilience planning be commensurate with the nature and criticality of activities performed for the bank.

Evaluating a fintech company’s business continuity plan, incident response plan, disaster recovery plan and related testing can help a community bank determine the fintech company’s ability to continue operations in the event of a disruption. Also, evaluating a fintech company’s recovery objectives, such as any established recovery time objectives and recovery point objectives, helps to ascertain whether the company’s tolerances for downtime and data loss align with a community bank’s expectations. A community bank that contemplates how a fintech company considers changing operational resilience processes to account for changing conditions, threats, or incidents, as well as how the company handles threat detection (both in-house and outsourced) may provide a community bank with additional information on incident preparation. Discussions with a fintech company, as well as online research, could provide insights into how the company responded to any actual cyber events or operational outages and any impact they had on other clients or customers.

Understanding where a fintech company’s data centers are or will reside, domestically or internationally, helps a community bank to consider which laws or regulations would apply to the community bank’s business and customer data. Another matter for a community bank to consider is whether a fintech company has appropriate insurance policies (for example, hazard insurance or cyber insurance) and whether the fintech company has the financial ability to make the community bank whole in the event of loss.

Service level agreements between a community bank and a fintech company set forth the rights and responsibilities of each party with regard to expected activities and functions. A community bank may consider the reasonableness of the proposed service level agreement and incorporate performance standards to ensure key obligations are met, including activity uptime. A community bank may also consider whether to define default triggers and recourse in the event that a fintech company fails to meet performance standards.

A fintech company’s monitoring of its subcontractors (if used) may offer insight into the company’s own operational resilience. For example, a community bank may inquire as to whether the fintech company depends on a small number of subcontractors for operations, what activities they provide, and how the fintech company will address a subcontractors’ inability to perform. A community bank may assess a fintech company’s processes for conducting background checks on subcontractors, particularly if subcontractors have access to critical systems related to the proposed activity.

For example, as with previous due diligence scenarios, fintech companies may exhibit a range of resiliency and continuity processes, depending on the activities offered. Community banks may evaluate whether a fintech company’s planning and related processes are commensurate with the nature and criticality of activities performed for the bank. For example, community banks may evaluate a fintech company’s ability to meet the community bank’s recovery expectations and identify any subcontractors the fintech company relies upon for recovery operations. A fintech company may have recovery time objectives for the proposed activity that exceed the desired recovery time objectives of a community bank. If a fintech company can meet the community bank’s desired recovery time objectives, the bank may consider including related contractual terms, such as a contract stipulation that the community bank can participate in business continuity testing exercises and that provides appropriate recourse if the recovery time objective is missed in the event of an actual service disruption.

A community bank may also consider appropriate contingency plans, such as the availability of substitutable service providers, in case the fintech company experiences a business interruption, fails, or declares bankruptcy and is unable to perform the agreed-upon activities. In addition to potential contractual clauses and requirements, a community bank’s management may also consider how it would wind down or transfer the activity in the event the fintech company fails to recover in a timely manner.


The agencies have outlined a number of relevant considerations, non-exhaustive lists of potential sources of information, and illustrative examples to assist community banks with identifying strengths and potential risks when considering relationships with fintech companies. The voluntary Guide helps provide a starting point for banks with their due diligence efforts. The Guide may be viewed here.

Highlighted Special Focus From the October 2021 Compliance Journal

As if there weren’t enough unwanted new realities prompted by the Covid-19 pandemic, bankers and borrowers will have another one to deal with starting Dec. 1 – the Adverse Market Refinance Fee. 

Originally set to begin in September but delayed after backlash from mortgage lenders when it was announced in August, the new 0.50% fee will be assessed on refinanced mortgages of more than $125,000 that are bought by Fannie Mae and Freddie Mac. 

That means an additional $500 in costs for every $100,000 borrowed, with the money going toward what the Federal Housing Finance Agency says is an estimated $6 billion in projected losses to Fannie Mae and Freddie Mac from pandemic protection programs offered to borrowers. 

While it makes sense that Fannie Mae and Freddie Mac would want to recoup some of what they expect to lose from forbearance defaults, foreclosure moratoriums and emergency measures to keep people in their homes, the timing and the amount of the fee are a concern, some bankers say. Homeowners who refinance their mortgage are looking to cut expenses in a tough economy, and the fee could make redoing the loan less advantageous. 

“I just think the timing of the whole thing is challenging for a lot of families that are hurting right now,” said Jimmy Kauffman, chief executive officer of Bank of Sun Prairie.  

“It’s an unfortunate thing at an unfortunate time,” Kauffman said. 

Some banks may try to absorb all or part of the fee. But some already are making plans to pass it along to the borrower, perhaps via a small increase in the interest rate – about one-eighth of a point – for the refinanced mortgage. 

With today’s super-low mortgage rates, the fee shouldn’t price a lot of borrowers out of the refinance market, said Eric Witczak, executive vice president of Green Bay-based Nicolet National Bank. 

Weekly mortgage rates hit another all-time low as of Oct. 15, at 2.81% with 0.6 points for a 30-year fixed rate term, according to Freddie Mac. 

“Rates are still so incredibly low,” Witczak said, noting the new fee already is being built into Nicolet’s pricing. “I don’t think it’s going to have a big effect at all.” 

But Witczak also said he thinks the fee should have been 0.12% or 0.13% instead of 0.50%, which would have made it less controversial and probably would have let Fannie Mae and Freddie Mac start collecting it more quickly.  

Both Fannie Mae and Freddie Mac, which are government-sponsored enterprises, have been in conservatorship under the Federal Housing Finance Agency since the Great Recession in 2008.   

“They’re seeing banks make so much money and, ‘Hey, how do we get a little something?’ I just think 50 bps (basis points) was kind of foolish because it was such a large splash,” Witczak said. “They haven’t made a nickel on it because they’re making it effective December 1.” 

Chris Boland, vice president-consumer lending manager for Brookfield-based North Shore Bank, said the Adverse Market Refinance Fee could make mortgage refinancing a little less desirable, but not enough to slow down the refi boom. 

“I think given where rates are – they’re pretty attractive right now – I don’t think it’s going to have a direct adverse effect on production at this point.” Boland said. 

Boland said each bank is considering for itself what to do, but it’s likely most will pass the fee along to the borrower. 

Kauffman said Bank of Sun Prairie hopes to “absorb the fee as much as we can,” but he’s also waiting to see how the industry in general handles it. He said it’s a shame the fee has come along at a time when some homeowners could really use a lower monthly payment but might struggle with the addition of a new fee. 

“Right now is a good opportunity where you have families where money is a little tighter than it’s been, and there’s an opportunity for them to refinance and get a lower rate,” he said. “And now you’ve got a $1,000 to $1,400 fee that’s kind of hitting them at a time where it’s tough.” 

The Federal Housing Finance Agency stressed that Fannie Mae and Freddie Mac will exempt refinance loans with balances below $125,000, nearly half of which are comprised of lower income borrowers at or below 80% of area median income. Affordable refinance products, Home Ready and Home Possible, are also exempt, the FHFA said. 

Heather MacKinnon, vice president – legal of the Wisconsin Bankers Association said bankers know the fee is coming and have had internal discussions about whether to absorb it or pass all or part of it on to borrowers. 

“Lenders would also be discussing how the fee will impact their low- and moderate-income borrowers and making plans to ensure they still serve those areas of their marketplace,” she said. 

Nicolet’s Witczak said he thinks the fee will continue through all of next year, and maybe longer. 

“There is talk of rates that are going to stay in this ridiculously low environment for three-plus years,” he said. “There’ll come a time where the fee most likely would go away just from a competitive standpoint when it does affect the amount of business – or maybe it’s reduced to 25 bps. But I would plan on this for the next couple of years probably.” 





Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at

By, Eric Skrum

Wisconsin banker Tom Pamperin says the most-welcoming method for a bank to connect with customers seems to have flipped. 

“It used to be technology was the cold and impersonal interaction,” said Pamperin, president and chief executive officer of Premier Community Bank in Marion. 

But today, amid a pandemic in which bank customers – if the bank lobby is even open – must wear a mask, remain separated from employees by plastic barriers, stand at a distance and likely are leery of touching anything, using a mobile app or a video teller has become a lot more appealing. 

“Now which service has become cold and impersonal?” Pamperin rhetorically asked. 

The invasion of the novel coronavirus early this year has changed a lot of business and consumer behaviors, ranging from how we shop to how we’re entertained to how we meet. How we bank also is on that list. 

The need for social distancing to avoid catching or spreading the virus has increased consumer acceptance of technology that some might have continued to shun as long as they could fearlessly walk into a branch and make their transactions. And it appears probable – now that more consumers and businesses have engaged with technology – many of them will keep using it even after the pandemic subsides. 

A report this summer by the accounting and consulting firm Deloitte and the Institute of International Finance said COVID-19 has been a catalyst for adoption of bank technology.  

“Looking ahead, it is abundantly clear digital transformation will not only accelerate, but financial institutions that do not fully embrace digital transformation – and adapt to new ways of working – risk being left behind,” the report stated. 

At a recent meeting of the Federal Reserve Bank of Chicago’s Community Depository Institutions Advisory Council, the consensus among a dozen Midwest bank executives on the panel was that COVID-19 has significantly boosted the use of financial technology, said Douglas Gordon, CEO of Waterstone Financial Inc., the Wauwatosa parent company of WaterStone Bank. 

“The pandemic has really accelerated the digital platform probably by three to five years,” Gordon said. 

Among new adopters of bank technology are people opening accounts, businesses and “even senior citizens who have historically been more averse to it,” he said. 

“They (bankers on the council) think people are getting comfortable with the digital platforms,” Gordon said. “It’s probably a more profitable way to do it. Everybody is looking for cost cutting because net interest margins are slim, being in a zero-interest rate environment.” 

Brookfield-based North Shore Bank installed its first video teller unit in a Kenosha grocery store in late 2014. Today it has almost 30 at 18 locations, mostly in drive-through lanes at branches. At the video teller sites, consumers make transactions while chatting, similar to a Zoom encounter, with a specially trained banker who might be miles away.  

When the pandemic hit and people couldn’t go inside bank lobbies, use of the video tellers quickly grew. 

“All drive-up transactions, but specifically our video teller transactions, just surged,” said Sue Doyle, senior vice president and head of retail banking for North Shore Bank. 

Doyle said all electronic forms of banking, such as mobile banking and person-to-person payments, had been increasing even prior to the arrival of the new virus.  

“COVID just took that trajectory and accelerated it,” she said. 

Ergo Bank in Markesan also uses interactive teller machines, or ITMs, in its market. 

“We were seeing a steady increase month over month prior to COVID, and then when COVID hit and the lobbies got closed down, that technology just took off,” said Kyle Witt, president and CEO of Ergo Bank. 

Even though lobbies have reopened, the use of the ITM video units is up. 

“So people said, “OK, this is nicer than walking in and talking with someone. I can actually talk to someone on the screen. Everything is happening in front of me,’” Witt said. 

Video teller capability also helps the bank cope with staffing issues if one or more employees can’t come to work, Witt said. 

Pamperin said at Premier Community Bank, the mobile app has seen the most growth since the virus appeared. 

“The walking-into-the-lobby experience of a bank – I think that has permanently changed,” he said, noting that having an existing app immediately met the need of customers and didn’t require much marketing. 

“It was a coming together nicely for us to have this product that we’ve had out there for a number of years now and many people were using it,” he said. “But we had kind of plateaued in acceptance of it or new application of it by our customer base. And now it’s just exploded.” 

Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at

By, Ally Bates

“The new normal is here to stay. Technology is the new normal in banking!”
Marcia (“Marci”) Malzahn, president & founder of Malzahn Strategic

Banks that had been consistently working to improve and update their online systems and platforms were more prepared for the sudden onslaught of customers, both business clients and consumers, who needed to utilize those tools in order to conduct their banking business during the height of the COVID-19 pandemic. 

There are a variety of methodologies to use for innovation, but Malzahn boils it down to three main action steps: 

  1. Adopt an open mindset – “If you’re not open to new ideas and ways of doing things, you won’t be able to move forward and will remain stagnant,” Malzahn explained. “Be open to new ideas from everyone, employees, customers, the community, regulators, and competitors such as fintechs.”
  2. Form an Innovation Strategic Committee – Malzahn recommends establishing a formal Innovation Strategic Committee charged with sorting through all new ideas and systematically determining which are a good fit for your institution. The Committee may also be responsible for creating the action plan for implementing new ideas. 
  3. Assess each initiative’s risk before committing – For each new potential project, banks should conduct a thorough risk assessment, including implementation timeline and costs, vendors to partner with, and the new risks and opportunities the idea brings. 

Of the three, Malzahn says #1 is the most important for banks to be successful at innovation. 

With that three-step framework in mind, banks can begin looking for areas of the institution ripe for innovation. Malzahn suggests two possibilities: Enterprise Risk Management (ERM) and Treasury Management. 

The pandemic triggered all risk categories into high alert, especially credit, technology (with increased cyber risk), operations, compliance, liquidity, interest rate risk, and human resource risk, according to Malzahn. “Now is the time to complete your ERM program and automate all the processes you can to ensure you stay on top of managing all the risk categories at the same time,” she said. 

Banks should integrate ERM into their strategic plan, and Malzahn suggests doing so by including the responses to two questions in the plan: 

  1. What are the new risks coming to our organization because of our new strategic objectives? – This question should be asked when the bank defines its top strategic goals during the planning phase. 
  2. What are our strategies to mitigate the top risks that can impact our bank? – This question should be asked after the bank conducts an ERM Risk Assessment and prioritizes its top risks. 

When integrating ERM into the strategic plan, Malzahn advises bankers keep a broad view of their risks, since all risks are connected. “Your reputation, capital, and earnings risk, in the end, are affected by all the other risks,” she said. 

Treasury Management is another key area of opportunity for innovation, according to Malzahn. “Treasury Management is one of the most important tools you can use to respond to the increased pressure to grow non-interest fee income and to increase core deposits,” she explained. Another reason to invest in innovative treasury management solutions is to deepen (or build) client relationships with the next generation of business leaders. “The new generation may be more open to utilizing the technology banking products you offer,” Malzahn said. In addition, banks should be prepared to offer at least one digital payment solution via treasury management to their clients as that sector continues to grow. 

Malzahn offered one major caveat to innovation. Before launching any new change initiative, bank leadership should pause to assess their staff’s current ability to navigate the challenges of the endeavor. Community banks across the country just underwent a period of massive change and innovation in order to process Paycheck Protection Program (PPP) loans for their customers, stepping up to innovate in operations and systems to accommodate continual changes. 

Many bankers worked nights and weekends to ensure their clients would have access to PPP funds while simultaneously adjusting to the pandemic’s disruptions to their personal lives. “I encourage bank leaders to keep an eye on their employees to ensure there is balance between serving the bank clients with excellence and taking care of your most precious assets, your employees,” Malzahn said.

By, Ally Bates

P2P payment apps, mobile deposit, digital account opening, APIs… 

Since the advent of the ATM, it seems banks have been caught in a constant battle of technology one-upmanship, with community banks struggling to keep up with larger firms (and nonbanks like Amazon and Google) as they sprint ahead. For community banks, “winning” the tech battle requires building a vision of the future, not inventing something brand new. 

“Community bankers hear ‘innovation’ and think they need to invent something completely new,” said Trent Fleming, principal of Trent Fleming Consulting. “But their core competency is not invention, it’s personalized service.” Truly knowing and understanding their customers and their communities is the foundation community banks have built on for nearly two centuries. With the pace of technological change increasing at an exponential rate, what knowing and understanding the customer looks like has changed as well. Fortunately, community banks don’t need to be on the bleeding edge in order to deliver quality customer service. “The tendency is to look for the next really cool product, but the next really cool product is better delivery of the customer’s financial information,” Fleming explained. “Focus on improving your customers’ access to their own information so their quality of life improves.” 

To hear more from Fleming about creating a vision for your bank’s technology future, including the latest on emerging products and trends, attend the upcoming WBA Secur-I.T. Conference! Now fully virtual (it’s a tech conference, after all!), the conference will span two days and feature seven hours of presentations, networking opportunities, a vendor showroom, and more. Join your peers at the only Wisconsin technology event by and for bankers on Sept. 22-23! Visit to learn more and register. 

If they don't have one already, bank leadership should begin creating their vision today, but with the customer at the center. The best question to start with, according to Fleming, is Are we preparing for our next customer-base? 

Bank leaders should closely examine demographic and commercial trends in their geographic footprint. In five years, what will the neighborhood around the branch look like? Will it still be retail and suburban, or will there be a shift to industrial? What’s happening with the population regarding age, race, and level of education? “It’s not just who your customers are, but what lines of business they’re in, the footprint, and what kinds of products and services they’ll need,” Fleming explained. “That helps you plan for what kind of institution you’ll be and how you’ll serve today’s and tomorrow’s customers.” 

Tactics for Post-Pandemic Banking 

With their strategic vision to guide them, bank leaders should build their bank’s future with the following best practices in mind: 

1: Implement Fast 

The biggest difference between banks with more than $15 billion in assets and those with less, according to Fleming, is the speed at which they can roll out new technology. Fortunately, community banks don’t need to develop and implement with lightning speed. “Most banks have access to what they need, they just haven’t implemented it,” said Fleming. By working with the third-party vendors they already have, many banks will find they can better leverage the tools they have available to them. “You need to aggressively embrace technology, because that’s what your customers are doing,” said Fleming. 

2: Keep Momentum Going 

The COVID-19 pandemic has caused massive disruption in nearly every area of life, but Fleming says the behavior changes it forced upon consumers should be encouraged if they are beneficial. “Going forward, banks should make sure they capture the value of changed customer behavior,” he said. “Slipping back into business-as-usual is the single biggest mistake banks could make.” One area ripe with opportunity for improving customer experience and bank efficiency is scheduling. “Smaller banks will innovate in offering appointment scheduling,” Fleming predicted. “Whether it’s online or in-person, scheduling driven by the customer is a huge opportunity.” 

3: Fill in Gaps 

In the pandemic’s wake, banks should reassess their branch strategy and where they have opportunities to meet new customer needs. “It’s important banks identify where they have gaps between what they offer and what customers want,” Fleming advised. Especially for the next generation of bank customers, face-to-face interaction isn’t the first choice. Fleming suggests cultivating more “invisible loyalty.” “A customer who only uses the bank’s remote channels can be as loyal and more profitable than a customer who you see all the time,” he explained. “The customer you see often isn’t taking advantage of your offerings.” 

4: Prioritize CX 

Banks should fiercely prioritize customer experience (CX). “The core of banking hasn’t changed,” Fleming said. “What will change is the quality of the delivery of information, giving customers what’s relevant for their current situation.” By knowing and delivering exactly what each customer is looking for, banks can grow satisfaction and loyalty. “The less time a customer spends successfully completing their banking business, the more satisfied and loyal they will be,” said Fleming. “Banks need to embrace and prepare for that concept.” 

5: Engage Employees 

To get ROI on investments in technology products, banks need to achieve high adoption and usage rates among customers. Fleming says knowledgeable, enthusiastic employees are the best way to achieve that. “Have employees use and adopt the new technology themselves, because that’s how they become knowledgeable about it,” he said. “It takes some training effort, but you’ll see customer adoption go up by a quarter to a third.” Another method is to empower an employee who shows great aptitude by naming him or her the Virtual Branch Manager—a position Fleming says shows current and potential customers that the bank isn’t looking at digital as an afterthought. 

Seitz is WBA operations manager and senior writer.

By, Amber Seitz

Bank-Fintech Partnerships Enter Uncharted Territory

On Feb. 18, fintech LendingClub announced it had signed a definitive agreement to acquire Radius Bancorp and its wholly owned subsidiary Radius Bank. If approved, LendingClub will become the first company in the online lending sector’s history to purchase a traditional bank. The seminal deal has the potential to be a harbinger for the U.S. banking system, signaling the beginning of a new trend; LendingClub and Radius may be forging the path to insured deposits that fintechs have historically sought via national charter applications.

Opposites Attract
Customer service cultures and complementary products brought LendingClub and Radius together

LendingClub President Steve Allocca told American Banker the company spent the past year “scouring the earth” for a merger or acquisition partner in addition to applying for a national bank charter with the OCC. So, what made Radius an attractive target?

In several press interviews, Allocca mentioned seeking “stability.” Launched in 2007, LendingClub offers peer-to-peer lending, allowing borrowers to create unsecured personal loans between $1,000 and $40,000 with a standard period of three years. Investors search or browse loan listings on the LendingClub website and select the loans they want to invest in based on information supplied about the borrower, amount of the loan, and loan purpose (investors make money from interest). LendingClub’s income is derived from origination fees (for borrowers) and service fees (for investors). LendingClub is the number one provider of personal loans in the country, facilitating more than $12.3 billion in loans in 2019.

Buying Radius gives LendingClub a stable source of funding (insured deposits) for future loan growth, as well as expanding its product and service offerings. In 2014, LendingClub began partnering with banks to offer direct-to-consumer loans, including auto loans and mortgages. With direct access to funding, LendingClub will no longer need to share revenue with a partner bank. Radius was also an attractive target because the bank has a national online presence but no overhead from a physical branch network (one of only 13 such banks in the country, according to Sanborn).

From the bank’s perspective, LendingClub’s acquisition offer presented an opportunity to provide the bank’s deposit customers with consumer loan products. Radius CEO Mike Butler told American Banker the two companies were a good fit because they had zero overlap—LendingClub didn’t offer savings or checking accounts and Radius didn’t offer consumer loans. Both companies’ leaders cited customer service and experience as a motivating factor, as well. According to LendingClub’s press release, “combining Radius and LendingClub will create a digitally native marketplace bank at scale with the power to deliver an integrated customer experience, enabling consumers to both pay less when borrowing and earn more when saving.”

Leading Indicators
It’s a new M&A marketplace… Are banks the buyers or the product?

Could more fintech purchases of banks be on the horizon? It’s possible, though the fields of potential buyers and sellers are both small. Likely acquirers include fintech companies that have applied for bank charters, such as Square and Robinhood. The “Big 5” tech companies (Amazon, Apple, Facebook, Google, Microsoft) are more likely to continue partnering with the largest financial institutions, (e.g. Apple’s partnership with Goldman Sachs to provide the AppleCard) simply due to the challenge of scaling a smaller institution to meet their needs.

Another potential fintech buyer is Varo Money, which offers fee-free online savings and checking accounts and peer-to-peer payments. In early February, the FDIC approved Varo's application for deposit insurance, and Varo had previously received conditional approval from the OCC for a national bank charter, but then withdrew its application. Once the Federal Reserve and OCC sign off on Varo’s application, it will be the first fintech provider among several similar applicants to get the go-ahead from federal banking regulators. Purchasing a bank would be an expedient scaling strategy for the startup.

Target banks, like Radius, will have wide online footprints with little (or no) physical locations, and will also have robust technology platforms ready to integrate with the purchasing fintech’s systems. Radius’s platform offered not only online check deposit, bill pay, and card management, but also a personal financial management dashboard and open APIs to offer BaaS (banking-as-a-service) functionality. More importantly, those banks will need to be interested in selling, rather than growing through acquisitions of their own.

Though it has the potential to show fintechs a path to “bank hood” via acquisition, the LendingClub-Radius merger is—most likely—not the first pebble in a landslide of fintech-bank deals. Instead, it is a powerful reminder to banks that seamless technology and customer experience are critical for success in today’s financial services marketplace, and that partnering with fintech companies can be the best way for an institution to obtain them.

Seitz is WBA operations manager and senior writer.

Further reading:

By, Amber Seitz

To date, while some federal agencies have made public statements, Congress has not exercised its constitutional power under the commerce clause to regulate cryptocurrencies and blockchain technology to the exclusion of the states. This means that the states remain free to enforce their own legislation. Sixteen states have enacted legislation related to virtual currency or cryptocurrencies and nine states have enacted or adopted laws that reference blockchain technology. 

To help assist lawmakers (and the general public), the State of Wisconsin Legislative Reference Bureau (LRB) created a summary that highlights the responses of major economic players as well as innovative practices on cryptocurrency and blockchain technologies. The report is designed to help gain a broad perspective of the current global regulatory market and the breadth of proposals for further policy and legislative guidance. Cryptocurrency, a subset of digital currency, is held up by some as the "currency of the future," and the technology that allows its existence could revolutionize business and government. 

As cryptocurrency becomes more mainstream, governments around the world have taken the first steps toward regulation; however, advances in technology frequently outpace legislation. The LRB report describes the principal characteristics of cryptocurrencies and the underlying technology that enables its existence-decentralized, distributed ledgers based on blockchains. The report then details recent developments in regulations in the United States by various federal regulatory and enforcement agencies and the most relevant case law. Finally, the report explores developments at the state level and summarizes the global regulatory landscape of international responses to the regulation of cryptocurrency. 

How Blockchains Work: A Sample Case Study

  1. Charlotte and Susie download digital wallets, providing the encryption keys necessary for the transaction. 
  2. Charlotte creates a message requesting a $15 transaction to repay Susie for dinner. The message is encrypted using Susie's public key, ensuring that only Susie can decrypt the message using her private key. The message also includes Charlotte's private key to validate her status as the initiating entity.
  3. The message is broadcast to a peer-to-peer (P2P) network consisting of private computers, or nodes. 
  4. The network validates the transaction and Charlotte's user status, then records and time-stamps it to verify that the cryptocurrency has changed possession. 
  5. The transaction is combined with other transactions to create a new block of data for the ledger.
  6. The new block of data is added to the existing blockchain in a way that is permanent and unalterable.

If you'd like to read the full LRB report please visit

By, Amber Seitz

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”

-Bill Gates

“Disruption” is one of the biggest buzzwords in banking today. Many within the industry associate it with various technological developments and the fintech companies selling them. True disruption, however, goes much deeper. Even more importantly: traditional banks are not doomed to watch helplessly as the industry they know disappears. In fact, by focusing on their customers’ wants and needs—something Wisconsin’s banks have always excelled at—community banks can continue to thrive in a disruptive world.

Defining “Disruption”

According to JP Nicols, managing director of FinTech Forge, disruption in banking occurs on three layers. The first is the experiential layer, which includes everything that directly impacts consumers, such as mobile banking and P2P payments. Second is the tactical layer, which is the digital connective tissue between customer experience and the bank’s core operations. Disruption in this layer includes technologies like open API and process reengineering. Finally, the strategic layer of disruption is home to developments such as artificial intelligence and blockchain. “Most of the disruption we have experienced so far has been in the experience layer,” Nicols said, but noted that the other layers will have more impact in the future.

Despite its pervasiveness, disruption can be difficult to define. “It doesn’t mean something new is launched and all the current players disappear,” Nicols explained. “In this day and age, no industry is invulnerable to disruption,” he continued. “Our customers’ expectations are being reshaped by technology.” Ultimately, disruption can be defined as change driven by customer expectations.

Setting New Standards

Perhaps the biggest challenge disruption presents to the banking industry is that banks are no longer only competing against other financial institutions. Instead, non-bank retailers and fintech companies are transforming their customers’ expectations, particularly in mobile banking. “The digital products are the most discussed disruptors in the banking industry,” said Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. “Consumers are demanding well-developed mobile banking applications as a qualification for who they’re going to bank with.” Fintech companies have been quick to develop mobile applications to meet that demand, but while they are attractive to consumers, haven’t been able to achieve scale on their own in many cases. “Fintech companies are reimagining how banking should work in a mobile world,” said David DeFazio, partner at StrategyCorps. “When you pull back the curtain, among the most successful are the ones who have partnered with banks.” DeFazio will demonstrate some of that during his presentation at the upcoming WBA Bank Executives Conference.

Even more disruptive than the fintech companies that tend to attract the most attention from the industry, giant non-bank retailers are the true impetus behind rising standards for digital services. “Where we haven’t paid enough attention is to well-funded players from other industries, such as Amazon, Walmart, and Facebook,” said Nicols. “Financial services used to exist in a unique middle zone where all competitors looked the same, and we only competed with one another. Every single line on the balance sheet now has one or more non-bank competitors.” Again, this is particularly noticeable within consumers’ expectations for the mobile experience. “Companies like Facebook, Apple, Amazon, and Starbucks are changing the way that customers expect things to work in the mobile world,” DeFazio explained. “Looking outside of our industry to see how these non-bank retailers are setting new standards for mobile payments is very important.”

Disintermediation—another buzzword—is the ultimate side-effect of this non-bank disruption. “Banks have been a trusted third party in the middle of a value network for a long time, and if we don’t need that third party anymore, for example because Amazon now offers its own financing, that’s true disintermediation,” Nicols explained. In the days before mobile wallets, PayPal, Venmo, and other digital payments disruptors, banks could count on the fact that with every purchase, their customers would reach into their wallets and pull out a debit or credit card (or checkbook) with the bank’s name and logo on it. “We were always there,” said DeFazio. “Today, that is disappearing. Sometimes consumers even forget which credit cards are attached to their mobile wallets. These companies that are outside of banking are stealing the experience from banks.”

In today’s highly digital, interconnected world, consumers also cause disruption directly. “Customers these days are far more researched than they’ve ever been before,” Manny explained. “Even within small communities, they’re walking into a business having already done research. Many have made their purchase decision before they walk in.” That includes for financial products and services, such as mortgage loans, which reduces the banking industry’s monopoly on customer relationships. For example, rather than automatically going with the bank and product recommended by their realtor, a potential customer may shop around and get a lower rate with Rocket Mortgage from QuickenLoans.

Finally, today’s regulatory environment is also capable of disrupting bank operations. “People don’t think of the regulatory environment as being a disruptor,” said Manny, explaining that some banks have chosen to exit small lines of business because of the perception of the regulatory compliance risks they present. “People who specialize in compliance and consumer protection are very difficult to attract or retain,” he said. “Companies may need to invest significant resources in employees or consultants to ensure they remain compliant, and it might not be cost-beneficial to do it.”

Keeping Up

So, what can Wisconsin banks do to keep up with today’s rapid pace of change and adapt to disruption? The first thing is to shift your mindset; see disruption as an opportunity, rather than a threat. “The natural reaction is to see disruption as a problem,” said Manny. However, he pointed out that banks have more data on their customers’ purchase habits than any vendor out there, enabling them to hyper-personalize opportunities and options for their customers. “Even if the customer gets a loan through another entity, typically the bank can see those payment transactions,” Manny explained. “If banks can find ways to better target new products and services to their customers, they can take away some of the market share that’s going to nontraditional competitors whereby they can ensure consumers understand their value proposition that is likely very different.”

Creating and communicating value within the customer experience is key. “Be the keeper of the experience,” DeFazio advised. “Try to understand and exceed the expectations of your customers.” Bank staff also need to know how to communicate that value to current and potential customers. “You have customers who are more well-versed in the competitive landscape than your front-line employees,” said Manny. “That can be a challenge if your front-line employees don’t know how to effectively differentiate your products to your customers. Make sure you understand your service model so you can empower your front-line employees to be able to react to those issues.”

It is also important for bank management to understand that, for most community institutions, they will not be able to keep up on their own. “Be willing to partner,” Nicols advised. “Banks are used to building things in-house and testing them for years before releasing them. That’s not going to be sustainable.” For many institutions, the solution will be to rely on the bank’s core provider or current technology vendor. “Form strong relationships with your core providers and other vendors,” said DeFazio. “In some cases, you’ll need to challenge your vendors to close the gap.” Some banks may also find value in partnering with a non-bank company to offer digital products/services. “Identify partners and consider joint ventures or other arrangements where you can dip your toe in the water to provide products or services in new ways,” Manny suggested. “I would encourage banks to listen and be open to those opportunities as they arise.”

Finally, the key to successful adaptation in a disruptive world is for bank leaders to become more aware of the new reality. “Our biggest challenge is that bankers understand there are disruptions happening around us, but they’re not studying them,” said DeFazio. “I challenge bank leaders to be more aware.” Attending this year’s Bank Executives Conference is one way for bank management to expand their knowledge of industry disruptors. Another is to experiment with various mobile applications and products as a consumer. “Community bank leaders need a better understanding of the competitive landscape outside of their communities,” Manny advised. “Know who your competitors are.”

The one thing banks must not do if they are to survive: nothing. “The default is to keep doing what you’ve always done, since you’re good at it,” said Nicols. “But, your plan only works well until it doesn’t. Pay attention to what’s relevant to your customers so you can continue to deliver value. The way your customers perceive value is the most important thing that’s changing.” 

Seitz is WBA operations manager – senior writer.

Plante Moran is a WBA Silver Associate Member.

By, Ally Bates

"Coopetition" with fintechs may be the key to thriving in tomorrow's financial services industry

For several years now, the banking industry has been inundated with warnings about how financial technology (fintech) startup companies will disrupt the industry to the point where traditional depository banks—especially smaller community banks—become irrelevant. As it turns out, the rumors of banking's imminent demise were greatly exaggerated, according to Lee Wetherington, director of strategic insight at Jack Henry & Associates. "We're beyond the point where everyone thinks fintechs will destroy banks," he said, explaining that fintechs discovered they couldn't establish user bases large enough and quickly enough to sustain their business models and compete directly with banks. In addition, efforts by some of the nation's largest banks to emulate fintechs (or outright acquire them) helped to neutralize the competitive threat. 

According to an August 2017 World Economic Forum report, banks shouldn't fear fintechs; they should fear other financial institutions who leverage fintechs in the right way.

Rather than direct competition, banks and fintechs find themselves in a competitive, yet co-dependent standoff; each has something the other needs, but since the other is a competitor, partnerships between the two are far from routine. A recent Forbes article described this dynamic as "coopetition," "a term used to describe unconventional collaboration and cooperation within an otherwise competitive field of players." Stacy Grafenauer, vice president/director of deposit operations and electronic solutions at First Bank Financial Centre, Oconomowoc and a member of the 2017-2018 WBA Technology and Operations Committee described the process of banks partnering with fintechs as "building an alliance without compromising sound practices."

Establishing a partnership in order to access technology solutions provided by fintech companies can be a powerful strategy for delivering top-notch products and services to customers. Determining whether partnering is the correct strategy, choosing the most appropriate type of partnership structure, and identifying potential obstacles are three critical steps bank leadership must take when considering fintech solutions. 

Strategic Alignment 

The determination of whether partnering with a fintech is a good tactic for keeping up with the pace of technological growth will be different at every institution. "It depends on the bank's strategy," said Fiserv Chief Operating Officer Mark Ernst. "Having clarity about where technology-enabled delivery fits in the overall strategy of the institution is the earliest question that needs to be answered." The key for bank management is to maintain alignment with the bank's strategic goals, particularly goals related to how the bank wants to differentiate itself from the competition for its specific market and customer base. "Banks choose a fintech because it offers a feature or function that will help them differentiate their bank from the competition," said Wetherington. "The key is figuring out how to leverage fintechs of choice in ways that matter strategically." Of course, size is also a factor that management must consider. A bank's ability to keep up with technology is dependent on its infrastructure, which is driven by asset size, according to Grafenauer. "If you have the infrastructure and the budget to support building those integrations, it is a good strategy because it's a differentiator," she said. Institutions that find ways to blend the community bank feel with a great digital experience will set themselves apart, Grafenauer predicts. "I think this will be the differentiator between community banks," she said. "Fintech companies will play an important role in that." 

Types of Partnership Structures

Banks of all sizes have several options for partnership structures when it comes to fintechs, so each institution should determine the most appropriate strategy for its size and capabilities as well as its current and future needs. One option is a one-to-one partnership with—or outright acquisition of—a fintech, though for most institutions, forming a one-to-one partnership is "practically difficult," Wetherington explained. "Most mid-tier and smaller banks don't have the capacity or resources to negotiate one-to-one partnerships with major fintechs," he said. The majority of fintechs need to scale as quickly as possible (before they exhaust their venture capital) so they are looking for the largest financial institution partner they can find. However, there are some fintechs seeking to capitalize on the power of local partnerships. "There are some local fintechs who look to partner with local financial institutions, but that can also be challenging because smaller fintechs may not have an appreciation for the regulatory compliance concerns of banks and the difficulty of connecting with all the other areas the bank needs them to," said Ernst. 

Another type of partnership is the one-to-many relationship, that is, bank access via a platform or industry consortium. "The rise of platforms [such as Akouba, Avoka, and LendKey] could be the technological way in which smaller institutions connect to fintechs of choice," said Wetherington. According to Ernst, most banks' current technology providers will seek out new technology as it becomes available and tailor it to local financial institutions. "Another way this happens is through large industry consortiums," he explained. 

Similarly, shared services companies offer smaller banks the benefits of a platform or consortium partnership with the added advantage of more control. "It's a viable way for smaller banks to get enough scale to be able to partner with a particular fintech of choice at a better price," said Wetherington, pointing out that a shared services company could also potentially acquire a fintech. "Those are the kinds of options you have when you pool resources," he said. However, this smaller-scale many-to-one partnership structure requires the participating banks to overcome their own technological challenges, particularly relating to sharing data. "You'd have a lot of hurdles to get around," said Grafenauer. "If you had other banks on the same core and your processes were generally the same, it could work," she continued. "But I'd look to your core for a viable solution first." 

Perhaps the most efficient and effective way for smaller institutions to access fintech products is via their legacy vendors/core providers. "Most core providers are aware of what the fintechs are doing and are buying what they have to offer and selling it to banks," Grafenauer explained. This arrangement smooths out many of the wrinkles banks experience when establishing partnerships individually or on a smaller scale. "The reason it's more effective is we've done the pre-integration of all the fintech's capabilities," Ernst explained. "By the time we're bringing it to market, the fintech has proven to some degree to be viable for market." For example, Fiserv developed the INV Accelerator in early 2016 as a way to connect high-potential startups to the real world in which financial institutions operate, assist with compliance concerns, and integrate with core processing technology. "From our perspective, that's the way you can take an interesting idea and make it available to a number of smaller institutions in a way that integrates with what they're already doing," said Ernst. For those institutions who would like more control over their fintech solutions, Wetherington recommends engaging with legacy providers in order to amplify your voice, for example by sitting on an advisory board. "Be the squeakiest wheel," he said. "Develop relationships with decision-makers inside your existing vendors." 

Potential Obstacles 

The two primary components to a bank's integration with a fintech are regulatory compliance and technology. Thorough understanding of the risks inherent in each is critical in order for bank management to mitigate that risk. 

With compliance, one of the biggest risk factors is simple ignorance on the part of the fintech. "As a banker, you have regulatory compliance top-of-mind," said Grafenauer. "The fintech is trying to help you meet the customer where they want to be, but they typically have no idea what the regulations are that bankers are faced with when they're creating solutions." One example is data security. Fintechs tend to be smaller and younger companies, so regulators are likely to focus on how sensitive information is transferred and stored in terms of security and compliance. "You have to do really diligent vetting up front of how the fintech vendor stores and secures its data," said Wetherington. Another regulatory concern is the fintech company's sustainability. "Regulators are very concerned about the stability of anyone's technology provider," said Ernst. "Before you introduce your customers to someone else's capabilities, you want to know that entity will be around and viable. While there's a lot of talk about fintech startups, the reality is that very few of them ever make it." 

On the technology side, the largest hurdle is the sheer complexity of integrating the data necessary to deliver the fintech's product or service to the bank's customers. "Most banks think about the compliance side first, but the technical side is far more complicated than most people realize, both with scale and with how the data flows," Ernst explained. 

The solution to these challenges is to treat a partnership with a fintech company with the same care and due diligence as any other third-party provider. "Fintechs are just another third-party vendor, so all of those checkboxes still apply," said Wetherington. As with so many other external relationships, selecting the most appropriate partner is essential for success. "Picking the right partner is the most important step in this process," said Grafenauer. "Invest time in doing a really thorough job of reviewing your contracts and agreements."

Ultimately, the biggest obstacle getting in the way of lucrative partnerships between banks and fintechs may be the lingering perception of fintech companies as threats. However, the reality is that banks have firmly maintained secure relationships with their customers. "You'll always be able to find someone to talk about how fintech is putting banking at risk, but what we see is fintechs trying to tap into the trust that exists between banks and their customers," said Ernst. That trust is the secret ingredient to traditional banking's persistence in the face of disruptors. "Our customers aren't going to trust whoever developed the latest and greatest app with their financial security; they look to us," said Grafenauer. "Fintechs are not competitors. They're solution-providers." 

Fiserv is a WBA Associate Member.
Jack Henry & Associates is a WBA Associate Member.

By, Amber Seitz


Fintech companies are dramatically changing the financial services industry. Many community banks are entering into business relationships with fintech companies to provide innovative products to enhance customer satisfaction, increase the bank’s efficiency, and reduce costs. Due diligence and risk evaluation have always been important components in a bank’s third-party risk management process, and this is especially important when “partnering” with fintech companies. This webinar will detail the specific items that bank regulators require you to consider when conducting due diligence and evaluating a fintech company. You’ll also learn the practical business issues to address when entering into such a relationship.

Attendance certificate provided to self-report CE credits.

Understand the regulatory and legal requirements of partnering with a fintech company
Explain both the bank and the fintech company’s roles and responsibilities in their relationship
Conduct the required regulatory due diligence
Properly evaluate the risks and benefits before entering into a relationship
Create the best relationship structure with a fintech company
Negotiate with a fintech company to obtain favorable contract terms

This informative session will benefit bank management, loan and deposit operations personnel, technology staff, new product staff, vendor management personnel, compliance officers, auditors, attorneys, and others involved in the strategic planning, due diligence, and evaluation processes.

Guide for community banks (published by the FDIC, OCC, and Federal Reserve) titled Conducting Due Diligence on Financial Technology Companies – A Guide for Community Banks
Due diligence checklist specifically designed to evaluate fintech companies
Employee training log
Interactive quiz

NOTE: All materials are subject to copyright. Transmission, retransmission, or republishing of any webinar to other institutions or those not employed by your financial institution is prohibited. Print materials may be copied for eligible participants only.

Elizabeth Fast, JD & CPA, Spencer Fane LLP

Elizabeth Fast is a partner with Spencer Fane Britt & Browne LLP where she specializes in the representation of financial institutions. Elizabeth is the head of the firm’s training division. She received her law degree from the University of Kansas and her undergraduate degree from Pittsburg State University. In addition, she has a Master of Business Administration degree and she is a Certified Public Accountant. Before joining Spencer Fane, she was General Counsel, Senior Vice President, and Corporate Secretary of a $9 billion bank with more than 130 branches, where she managed all legal, regulatory, and compliance functions.


Live Webinar Access – $245
On-Demand Access + Digital Download _ $245
Both Live & On-Demand Access + Digital Download – $350