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6 min read

The Bank Legacy Is Dead: Long Live the Fintech Collision

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While AOBA 2022 had its share of execs wanting to “fake it until they make it” with future innovation, credit is due to the bankers who are pouring real financial investment into new fintech experiments.


It’s been a long two years since bankers and investment bankers nationwide made their annual pilgrimage to the Arizona desert for the Acquire or Be Acquired conference – and ohhh man, a completely different world has emerged since the January 2020 get-together!

Let’s put COVID aside for a minute. COVID may have accelerated things, but talk of booster shots and workplace policies wasn’t the most striking contrast at AOBA 2022. Rather, the difference could be seen in just how significantly technology disruption has slammed its way into bankers’ discussions regarding shareholder value.

“Maybe instead of Acquire or Be Acquired, this conference should be called Evolve or Be Acquired,” observed Eric Sprink, CEO of Coastal Community Bank in Everett, Wash., and a trailblazer in the world of banking as a service (BaaS).

The difference could be seen in what alpha bankers bragged about. Very absent were discussions about having the “finest relationship bankers” or “next generation branches” or “it’s all about execution.” Instead, stories and conversations were salted with examples of fintech investments, BaaS opportunities, customer experience transformation, crypto integration, and even blockchain experiments and the potential of DeFi.

While the term “accretive to book value” is still the best bet for buzzword bingo at AOBA, the real talk centered around digital transformation and fintech disruption. Tom Michaud, president and CEO at Keefe, Bruyette & Woods, helped kick off the conference with some bright expectations about bank earnings in a rising rate environment. At the same time, Michaud shared compelling data concerning just how big players like PayPal and Square have become relative to the market caps of traditional banks.

What does this mean? With the “digital deniers” all but gone, bankers are scrambling to feel safe that their story of strategic evolution is strong enough and fast enough for this decade. Bankers can sense a new world emerging that’s going to take a reset on strategy to stay in the shareholder value game. As Bank Director CEO Al Dominick summarized, “It strikes me that Walmart is making major fintech investments, Facebook is selling crypto assets to banks, and it’s just like the world is crazy.”

Just think of these figures: in 2021, banks spent $80 billion on technology (source: Cornerstone Advisors) but at the same time fintech raised an incredible $140 billion to reimagine and disrupt the industry (source: Financial Times Financials). Maybe that’s why the special FinXTech presentations running alongside more traditional financial, legal, and risk sessions were jam packed with executives furiously scribbling notes.

In some respects, AOBA 2022 felt a bit like bank executives wanted to “fake it until they make it” with their future innovation and fintech. Yet, credit must be given to bankers who are finally pouring real financial investment and attention into these new experiments. Many fintech venture funds are gaining steam in the industry, and AOBA was a fertile ground to attract new investor commitments.

Will this strategic shift go well? From Cornerstone’s viewpoint, we see the collision of banking and fintech resulting in four key mandates for bank executives:

1. An arms race in marketing and digital cannot be ignored

COVID revealed most regional banks and community banks to be woefully behind in this arena, and now these institutions are struggling with speed-to-market and finding their right vendors and fintech partners to keep their promises on transformation. Importantly, bank execs realize they are missing their share of potential revenue in areas like small business, consumer lending, credit cards, and mortgage because gaps in customer experience and marketing mean their at-bats at acquiring leads risk a dangerous decline.

Fintech investor Anton Schutz, president of Mendon Capital, observed that banks will need to do more than “spray and pray” with fintech investments, but instead really work through the partnerships that can help drive revenue from an improved customer experience.

2. Only the niched will survive

The winners in this next decade will press their advantages going deep with specialized expertise and niches – customer experience and strong talent will be table stakes. Think about the wild ride that Silvergate Bank has taken with its crypto strategy. Imagine how non-traditional it must feel at Larry Mazza’s MVB Financial talking about banking services to the online gaming industry. Think how many bankers wish they had Chip Mahan and Live Oak’s SBA niche as the institution enjoys a 3.5 price/book multiple.

The grassroots of community and regional banking will no longer be vanilla operations geographically focused. Rather, the new entrepreneurial institutions will represent a kaleidoscope of differentiated business lines and product solutions. Western Alliance Bancorp CEO Kenneth Vecchione illustrated this trend as he spoke of his institution’s portfolio of national specialty lending businesses and emerging pilots in blockchain payments and even crypto lending.

3. A new frontier of efficiency will arrive

Banks have done a good job driving their efficiency ratios down into the 50s range, but a new wave of efficiency will be expected as digital, data, blockchain, and open banking technologies take root. Remember the famous quote from Jeff Bezos, “Your margin is my mission.” In the next decade new players and business models will take aim at what they view as largesse in traditional banking: oversized revenue margins with high credit card rates, fat card interchange, legacy overdraft fees, low-cost deposits paying nothing. On the expense side, disrupters will work to deliver a customer experience that doesn’t need expensive branches, big corporate office space, top-heavy management, and legacy technology.

Banks need to up their game in redirecting these legacy expenses to investments that will stand up better in the fintech world. Reaching even stronger levels of efficiency will require major work on banks tech stacks and operations. As Castle Creek founder John Eggemeyer noted at AOBA, “The next five years will be about changing out the plumbing in banking.”

4. ESG will broaden the scoreboard

Bankers will have to navigate a new world of strategy and execution just as the U.S. experiments with a more visible move from shareholder capitalism to stakeholder capitalism. This is a terrifying change for bankers who grew up in the EPS accretion, tangible book, and stock multiple world. Adding a shifting scoreboard that at times grows political to a standardized set of irrefutable measures will force a great deal of reflection and dialogue within and outside their organizations.

Jennifer Docherty from Bank on Women led a panel discussion with two top banking lawyers on this nascent part of governance that poses both opportunity and risk. Importantly, bankers need to feel comfortable trying to influence the ultimate Environmental, Social, and Governance (ESG) scorecard from a regulatory and investor relations standpoint, else they risk navigating a demanding, un-winnable, and bureaucratic mess in the future.

These four mandates will require different types of strategic discussions in the C-suites and different types of partnerships to executive effectively. Make no mistake, there is no going back to traditional banking.

Congrats to the entire team at Bank Director for an important revived gathering regarding the future of banking. Consolidation in our industry is certain to happen, but evolution may be an outcome only achieved by the most creative and entrepreneurial next generation of banks

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