Why banks need to leverage fintech disruption...need to leverage fintech disruption It is time for...

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Why banks need to leverage fintech disruption

It is time for community banks, commercial banks and credit unions to move from passive observers to active innovators in the fintech revolution.In this paper we will look more closely at the FinTech opportunity for

community banks, outline a framework for evaluating options and

areas of innovation, and provide a roadmap for fast execution. We

conclude with details about next steps and suggest how banks can

begin the journey to fintech innovation.

Why Banks Need To Leverage FinTech Disruption

2© 2019, Q2 Software, Inc. All rights reserved.

The Innovation Center tackles the top 3 industry challenges for banks and credit unions head on:

• Omnichannel borrower experience

• Profitable small business and SBA lending

• Next generation underwriting

Executive Summary

Banks have many advantages that FinTechs lack

- established customer relationships, vast capital

holdings and a working knowledge of today’s

complex regulatory climate. However, it has been

difficult for many banks to determine how to use the

latest technology to innovate new product offerings

in a meaningful way. Thanks to highly accessible and

versatile cloud models, those business dynamics

are changing fast. What if your bank could define its

strategy and deliver functional innovation in

four months?

Cloud Lending Solutions (CLS) is the market-leading

technology platform that powers the FinTechs. We

can bring meaningful, competitive innovation with

measurable results to your bank in 4 months or less.

For example, Wells Fargo recently launched their

“FastFlex” small business lending platform to increase

their marketshare in SMB loans We are sure that it

took significant investments and tens of engineers

worth of effort over several months to make FastFlex

a reality. The CLS Innovation Center was founded

to partner with banks and credit unions to utilize the

latest in Fintech, new lending models and products

and embrace a new wave of opportunities in months,

not years.

The CLS Innovation Center has established a

proactive model: we help you explore what is possible

by actually doing it. Remember, the greatest strength

of FinTech is being able to move fast and adopt a

targeted, laser-like focus. That, combined with the

banks’ strength of customer relationships, low cost

of capital and market experience, the CLS Innovation

Center enables banks and credit unions to not just

match the strengths of FinTech, but to combine with

their own strengths to thrive.

Regardless of the odds of success for individual FinTech attackers, banks must seek important signals amid the FinTech noise in order to reposition their business models and cultures for success. There is no time to lose.

— McKinsey, December 2015



Participating in the CLS Innovation Center will deliver the following benefits to your lending line of business:

Build a superior borrowing

experience via an omni-channel

approach utilizing web, mobile, call

center and in-branch

Big data analytics for

product recommendation

Leverage new and innovative data

for underwriting

Frameworks for strategy and

execution for immediate use

Online channel for originating deals Delivery of new and innovative

products in 4 months

Support for multiple asset types



Industry Background

New financial services models are transforming banking and lending practices. After 2008, financial services

underwent a major disruption. Banks were constrained in their ability to lend, yet borrower demand remained

steady. A whole new industry sprang up of non-bank lenders who utilized the latest in technology to create

superior borrower experiences, innovative underwriting models based on big data and alternative data, and

efficiently delivered loans in a day. This new category of technology-enabled financial services companies filled

borrower demand and grew rapidly. Banks began to experiment and evaluate the results of the early FinTech

lenders. Partnerships and innovations began:

• Wells Fargo built an in-house lending platform, FastFlex, which delivers funded loans in a day to

small business1

• JP Morgan partnered with OnDeck2 to originate, underwrite and distribute loans targeted to

small businesses

• Santander UK has partnered with Kabbage to deliver SMB loans in hours, not weeks3

• Payment processors, PayPal and Square, in addition to Lending Club, have delivered loans to small

businesses in a day.

Many experiments are underway and interesting models are emerging. Some of these models will thrive

and some will wither. As banks observe the FinTech disruption, astute business leaders understand that their

technology investments, customer relationships, and the most profitable parts of their business are at risk.

Different banks have adopted different strategies and the first generation of experiments is over. How have the

various strategies fared?

Morgan Stanley estimates the global marketplace lending can reach $290 billion by 2020 (base case).



are delivering the digital experience that

customers are demanding.

2. Superior Analytics in Underwriting: They

reach beyond traditional sources of credit

data, leveraging “soft” data that used to be

available to community banks like cash flow

and payments, new data like shipping data

and “big” data to develop a complete picture

of each customer. This enhanced degree of

insight enables more innovative underwriting

and credit risk models.

3. Financial Inclusion: With innovative

underwriting models, FinTechs have expanded

the availability of capital to markets not served

by traditional banks. Sofi is an example of a

lender that opened a new market of student

loan financing. Their ability to react quickly

to market changes and their ability to wield a

broader base of knowledge and experience

from their innovative underwriting position

companies like these to threaten the most

profitable areas of banking for

community banks.

These engagements have not been particularly

successful. They represent valiant attempts at

evolution, but most of these approaches either went

too shallow or too deep. What was missing was

the laser focus of the FinTech disruptors with their

relentless focus on the customer experience.

So after Round 1, banks are left asking key questions:

How can I leverage the best ideas of FinTech for my

business? What are the game-changing technologies

to embrace? How can I leverage these for my

existing and new lending products? How much do

I have to invest in new technology? And how do we

launch in three to six months?

At the same time, FinTech companies are

transforming the lending industry in three

key ways:

1. Relentless focus on the user experience:

FinTechs deliver on the “mobile first”, omni-

channel promise, leveraging a fully digital

customer experience that ensures fast

loan approvals and seamless interactions

throughout the lending lifecycle. FinTechs

Strategy Result

Fund Established financial services providing funding to FinTech

Higher returns on capital for banks, but at the cost of losing customer relationships and reducing profit through the cross-sell of other products.

Partner Established outsourcing lending to FinTech

While partnerships have mitigated operational risk, they have not built solidified customer experiences or loyalty.

Experiment Established creating accelerators, investments, etc.

The result has been a lot of activity, but the prediction is “In five years, most corporate accelerators and incubators will have disappeared. They aren't focused enough on customer problems and business objectives to deliver returns on their investments.”

Build Established lenders building their own platforms

The results here have been slow and painful: Schwab Intelligent Portfolios was a $50 million development effort, Deutsche Bank set aside €400 to €500 million for digital bank technology and it will take two to three years to replicate what the FinTech disruptors have built.4



In light of these transformative trends, banks and

other established lenders need a cohesive strategy

and a profitable path forward. Astute institutions

study FinTechs to learn from their success and better

understand the innovations that can help them

protect customer relationships and outperform

today’s market disruptors.

The CLS Innovation Center was founded to bridge

the gaps between FinTech disruption, existing

banks and lenders, and big data and analytics. The

goal is to help banks learn from and appropriate

the best of FinTech, to successfully develop new

lines of business that expand their revenues while

keeping existing businesses intact.

The Innovation Center makes use of FinTech’s

greatest strength—the ability to move fast with

laser focus—to deliver innovations that can

transform the status quo. By exploring possibilities

through action, banks can match the strengths of

FinTech as they transform their businesses to not

only compete, but to thrive.

They need to co-opt the challenge by selectively adopting Fintech as their own and marrying the disruptors’ innovative business models to their own strengths and considerable assets..

— The Economist Intelligence Unit, 2015



ground that focuses on separating the signals that

are truly important from the noise. Specifically, this

means that banks should be less preoccupied with

individual FinTech attackers and more focused on

what these attackers represent—and build or buy

the capabilities that matter for a digital future.”5

The Innovation Center comprises three key phases:

1. Evaluate your strategies to identify areas where

FinTech innovation can have maximum impact.

2. Understand your current situation, strengths

and weaknesses. Take an honest look at the

people, processes, and technologies you need

to transform your bank in a meaningful way.

Innovation must be driven from the outside in,

and be grounded in customer experience.

3. Adopt FinTech’s agile development cycles with

the market leading FinTech platform to deliver

a meaningful innovation in 4 months.

What is the CLS Innovation Center?

Banks and credit unions have many advantages that

FinTechs lack, established customer relationships,

vast capital holdings, and a working knowledge of

today’s complex regulatory climate. However, it has

been difficult for many banks to determine how to

use the latest technology to innovate in a meaningful

way. Thanks to highly accessible and versatile cloud

models, those business dynamics are changing

fast. What if your bank could define its strategy and

deliver functional innovation in four months?

Cloud Lending Solutions (CLS) is the market-leading

technology platform that is powering the FinTech

disruption. We started the CLS Innovation Center

to help banks and credit unions breakthrough the

FinTech noise and take the best of the innovation.

The CLS Innovation Center has a bias for action: we

help you explore what is possible by actually doing

it. If the greatest strength of FinTech is being able to

move fast and adopt a targeted, laser-like focus, we

have built the CLS Innovation Center to move at the

speed of innovation. We believe that community

banks and credit unions are ready to take the

next step – to fully adopt the new ways of

business and the technologies of FinTech,

just as the larger banks have.

A recent study by McKinsey & Company

details the imperative: “Banks are

subject to a lot of noise about FinTechs

today. Optimism regarding technology is

at a high, mobility is widely regarded as a

game changer, and vast amounts of capital

are being deployed in FinTechs. Banks may be

tempted to dismiss the noise entirely, or they may

panic and overreact. We recommend a middle

Innovation isn’t as far away as you

may think.



Members of the Innovation Center examine business models and utilize frameworks that can be deployed

today. Unlike consulting approaches, in which strategies are discussed but never executed, the goal of the

CLS Innovation Center is to apply strategy to execution in an agile, real world way.

The first area of strategic focus involves how community banks can internalize FinTech strategies into highly

valuable operations. How can banks beat the FinTechs at their own game while maintaining market share

with the big bank competitors?

For example, banks have an advantage over Fintech lenders with long-time customer relationships and

a local community presence. The CLS Innovation Center can help you strengthen customer relationships

across the omnichannel – from mobile and web to in-branch.

The game changers aren’t just in strategy, but in their execution. Finding the most valuable path requires

a combination of strategic planning and solid execution. McKinsey has provided a strategic framework of

digital capabilities that banks can build on. The CLS Innovation Center helps you build these execution

frameworks as we help our banking partners move from strategy to execution.

Banks should be focused on building an extensive set of distinct digital capabiliteis

Evaluate Your Strategies

Digital outcomes

+

Data-driven digital insights

Integrated customer experience

Digital marketing

Digital enabled operations

Next-gentechnology

Digital enablers

Comprehensive data ecosystem, including 3rd-party API’s

Customercentric experience design

Targeted digital media

Digitized sales and service interactions

Scalable application architecture

Robust analytics and data infrastructure

Omnichannel experience delivery

Content marketing

Streamlined and automated fulfillment

Cyber security

360-degree single customer view

Customer-decision-journeyexperience

Digital customer-life-cycle management

Operational-excellence enablers

Agile delivery to market

Targeted product and service decisioning

Source: McKinsey & Company

Flexible IT infrastructure

Digital talent management

Organization and governance

Innovative test-and-learn culture



Innovate

The fastest path with the highest probability

of success is to partner with an industry leader

that understands the business innovations that

differentiate the FinTechs and the technology

innovations that enable market disruption. An

Innovation Center partnership will allow you to get

to market fast, and maintain control over

your business.

Many areas of innovation are available for banks.

To successfully choose an innovation area, banks

should ask:

• Can we isolate this area so our current

operations don’t subsume it?

• Do we have the right team to work on these

agile business processes?

• Do we have the right skills to deliver an MVP in

partnership with the CLS Innovation Center?

• Do we have the right executive sponsorship to

complete the project?

Once these questions are answered, the

innovation will be clear and it is time to move

to execution.

Understand Your Current Situation

Each banking partner needs to answer key questions to focus their execution priorities:

Are we leveraging technology to provide a

world-class omnichannel experience? Have

we eliminated operational silos that fracture

the customer experience?

Are we using data-driven analytics to drive

better decisions informed by customer,

credit risk, and marketing? Are we

integrating big data effectively with our

internal data to increase loan volumes and

mitigate risk? Have we operationalized our

hands-on knowledge into our technology?

Can we digitally market to our customers

efficiently and effectively? Can we leverage

digital processes to guide customers

through clear and concise lending processes

with easy to understand offers? Can we

compete with online lenders that can sign

up new borrowers in minutes?

In short, can we mitigate the FinTech

attacks on the most profitable parts of

our business? Can we make use of new

technology and operational efficiencies to

defend the highest margin areas of

our business?



The CLS Innovation Center applies the agile development process to business and technology. Minimum viable products (MVPs) include minimum viable business processes as well. Only through this method will community banks be able to think and act like their challengers, but with stronger assets and the wisdom that comes from decades of experience.

Guiding Principle – Test and Learn

What We Can Do TogetherExample Innovation for Community Banks

The CLS Innovation Center’s first goal is to enable

community banks to take back the small business

lending market. This area is under disruption by

Alternative Finance (AltFi), and community banks

have witnessed steadily decreasing market share. The

largest banks and AltFi lenders have stepped in to take

small business lending from community banks. Wells

Fargo’s latest foray into SMB lending, FastFlex will only

increase WFB’s growth in the market. From January

2014 to March 2016, Wells Fargo has provided $40.7

billion in new loans to small businesses against their

5-year stated goal of $100 billion.

It is clear the threat to community banks is from within

the banking world and from without by FinTechs.

However, with the right technology, this market sector

can become as efficient and profitable for community

banks and credit unions, as it is for the FinTech

disruptors. And the right technology need not be an

overwhelming investment.

Small business lending needs to return to community

banks. The intimate customer and local knowledge of

community banks has been usurped by the FinTechs

and their unconventional sources of data.

The efficiency of AltFi technology has been

usurped by the large banks through partnership

and massive investment.

But there is another path. Community banks can

combine their local knowledge and affordable AltFi

technology into a game changing strategy. The rise

of commercially available, non-proprietary lending

platforms has opened up new opportunities to regain

the SMB lending market.

The CLS Innovation Center is focused on all types of

small business lending:

• Commercial Real Estate (CRE)

• Commercial and Industrial (C&I)

• Unsecured Small Business (SBA) loans

These three areas cover a vast opportunity that has

been the sweet spot of most community banks’

overall lending expertise.

To deliver market innovation, the CLS Innovation

Center combines people, process, and technology

to transform the lending market. It starts with your

bank’s industry experts and our AltFi technology.

It is guided by a strategic focus so you can get to

market as fast as our AltFi clients. It finishes with a

complete lending system that addresses a tangible

area of FinTech attack through innovation.



Create a small business flexible lending solution for Community BankAt the CLS Innovation Center we define from

the outside in. We start with a blank slate as we

build an innovation targeted to your needs. Key

questions help guide the process:

• What is the best-in-class customer experience

we want to deliver?

• What area of lending represents an

opportunity to maximize a return or displace

a competitor?

• What is the business model and processes that

we intend to define?

• How do we turn concepts into live systems that

deliver on the customer promise?

For example, our SMB loan systems are cohesive,

flexible, and include the features that define

today’s winners:

• Fully automated online, multi-

channel origination

• Innovative underwriting

• Loan approvals in minutes

• Defined closing process and tasks

• Complete compliance checklists

• Loan funding in a day

• Ongoing covenant tracking

• A four-month deployment

The end result is a new solution that improves productivity, accelerates time to market, strengthen customer relationships, enables an AltFi borrower experience, reduces costs and operational risks, and provides single-click auditing capabilities.



In the past two years community banks,

commercial banks and credit unions have been

able to watch and learn from the disruptors as

new FinTech companies and large banks tried

various ideas and options to see what works and

what doesn’t. But it is not wise to sit on the sidelines

for too long. The CLS Innovation Center enables

community banks and credit unions to seize today’s

most exciting innovation opportunities:

• Next generation borrower experience

• Small business lending

• Marketplace lending

If partnering with like-minded institutions to create new industry

standards sounds interesting, we would love to include you in our

early access program and give you a chance to influence these rapidly

emerging, industry-wide innovations.

Find your path to innovation

Conclusion


Foot note

1 https://www.wellsfargo.com/about/press/2016/fastflex-smallbusiness-loan_0510/

2 http://techcrunch.com/2015/12/14/j-p-morgan-ondeck-and-the-future-of-alternative-lending/

3 http://www.ft.com/intl/cms/s/0/9925cc9e-f9a4-11e5-8f41-df5bda8beb40.html#axzz48s56UIAE

4 Forrester: Financial Services Firms Flirt With Startups, Digital Executives Must Choose to Build, Partner, or

Buy, 2016

5 McKinsey & Company: Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks,

December 2015

83-31-0419 © 2019, Q2 Software, Inc. All rights reserved.

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