Community banks embrace fintech to meet technology demands

Cliff Thompson, payments business development officer at Avidia Bank, helped get Avidia Pay, the bank's new payment platform for businesses, off the ground.

Cliff Thompson of Avidia Bank demonstrates the electronic check deposit capability of Avidia Pay, the bank’s new cloud-based payment platform for businesses.

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By Laura Finaldi

Banks have traditionally been perceived as infallible ivory towers entrusted with protecting the money and assets of their customers – arguably one of the world's most stable and untouchable industries. But today's world, no business is untouchable – at least not by technology. As a result of technological advances, the financial technology, or “fintech” industry, has emerged, and it has changed the way banks do business, according to local bankers and experts. This shift in the banking industry presents a new set of challenges for smaller, community banks, which often lack the funds and reach to stay on top of the latest technologies by themselves.

“The pace of change in the financial services segment is much more rapid than it ever used to be,” said James Lively, chair of the Massachusetts Bankers Association and president and CEO of Bridgewater Savings Bank.

This has led to local banks partnering with fintech providers – from established core processors to smaller startup firms – that can propel financial institutions into cutting edge technologies that the modern business and consumer requires, such as mobile banking. Hudson-based Avidia Bank has teamed with a California tech company to develop a cloud-based payment system for its business customers while Whitinsville-based UniBank has adopted Apple Pay.

“The bank as a whole is trying to embrace technology and see how that can work with our existing processes, with the availability of financial products that we offer – basically to improve the way we can deliver products to commercial clientele and merchants,” said Cliff Thompson, payments business development officer at Avidia.

Make way for fintech

The path to a booming fintech industry started at the beginning of the financial crisis, when people started trusting their banks less, according to a December 2015 report from business consultant McKinsey & Co. After that, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed, and banks large and small were faced with the challenge of complying with its regulations.

At the same time, technology started running the world, and the smartphone became a necessity. Suddenly, consumers had ways to pay for things by just touching their iPhone screens, and everything – from ordering food to checking email to banking – became an intensely personalized experience.

Enter fintech companies, which were able to tap into a customer's desire for an easy, personal financial planning experience in a tech-savvy way. Well-funded fintech startups are popping up in Silicon Valley and Boston, to name a few places, and many of them have created apps that eliminate the bank as the middleman towards, say, getting a small business loan.

McKinsey estimated the number of fintech startups around the world to be 2,000 as of December 2015, a figure that more than doubled in just nine months. Venture capital investments in fintech have also increased – investors poured an estimated $12.2 billion into fintech startups in 2014, a 205-percent increase over the year before.

While fintech startups offer many innovative financial services products, what they're lacking is the security banks are required by law to provide, and access to consumer information, said Robert Morgan, vice president for emerging technologies at the American Bankers Association. As a result, it makes a lot of sense for fintech startups and banks to work together.

“This story that's been built up is that there's a tension between banks and non-bank fintech startups, where really the focus has been on partnering, so startups can offer services through a secure bank channel,” Morgan said. “A lot of banks big and small are investing really heavily in developing these technologies.”

When it comes to technology, Morgan said, he is seeing banks be innovative in three key areas: how they make payments, how they interact with customers, and how they lend money.

“A lot of innovations we're seeing are really just new delivery channels for products that have been around for centuries,” Morgan said. “We're changing the delivery platform and how customers interact with it.”

Community bank involvement

For some small local banks, their involvement in the fintech space depends on the services offered by their core processors – companies that provide backend software to banks. Core processors such as FiServ, John Henry Banking Solutions and Fidelity Information Systems develop and host tech services for banks to provide to their customers and use internally.

For example, Whitinsville-based UniBank recently adopted Apple Pay as a payment option for its customers after one of its core processors made it an option. Apple Pay was developed with security in mind, said Sheryl Shinn, chief information officer at UniBank.

“Apple Pay is one of the fastest and easiest payment methods that currently exist, and we have seen tremendous adoption. We also like the security Apple Pay offers, which will help combat fraud, a big benefit,” Shinn said.

UniBank hasn't worked with any startups on its technologies, because it can be a challenge to find startup innovations compatible with the core processor's internal tech structure, she said, though she has seen startups partner with core processors. Small banks also have access to user communities of other banks that use the same core processor, which is helpful because it gives banks across the country the chance to share knowledge and in some cases, band together to ask the core processor to offer a tech service customers want.

“They face the same challenges we do. They understand the regulatory burden and limitations of what we can and can't do,” Shinn said.

Hudson-based Avidia Bank took a different approach. The bank partnered with Oxnard, Calif.-based tech company linked2pay to launch Avidia Pay, a cloud-based payment system that is a one-stop-shop for payment processing, billing and order management. Avidia Pay is available on mobile and can be white labeled, meaning businesses are allowed to put their names on it as they see fit.

Linked2pay's platform is a multi-level platform that includes administrative tools and serves as a low-cost delivery system for credit card, electronic check and ACH payments. Thompson said it seemed like a good fit.

“The benefit with linked2pay is we can make edits on the fly with them, it's quick and nimble to make any changes that we want to make,” said Thompson.

Threats and long-term solutions

Most customer demand for banking technology comes, unsurprisingly, from mobile, Lively said, and in terms of customer experience, he said fintech startups are ahead of the game.

For example, an app called OnDeck allows small businesses to apply for quickly processed loans, as well as lines of credit up to $100,000. Another app, called Banking Up, focuses on the working poor and allows users to be part of the financial services sector without joining a bank.

Community banks have to figure out ways to work with companies that create apps like these, Lively said.

“Having the financial resources to be able to compete with these apps, but more importantly, figuring out ways we can partner with them, that's the ultimate goal,” he said.