DECEMBER - 20198Banks have always bought from technology companies. For many areas of banking, the products are identical or at least highly similar, the rules and regulations the same, and the systems complex and expensive to build and maintain. It just makes sense for banks to share systems. For example, one company provides the core servicing system for more than half of the mortgages in the United States. So, what's all the fuss about fintechs? So much so that it's fair to put fintechs into an entirely separate category from traditional technology vendors, for these key reasons:· Faster evolution. Very rapid technology change enables new capabilities at a furious pace. That includes mobility, cloud, fast networks, AI, and more. · Lower cost of integration. Tearing out and replacing existing systems is daunting, but the ability to tack on new capabilities is easier than ever.· Larger investment. With huge pools of money available for early-stage firms to build, sell, and develop products, they have the ability to lose money for years, unlike incumbent firms.· Aggressive leaders -- who are able to mobilize talent, money and partners in repeatable patterns.· Competitive position. Perhaps most threatening, some fintechs are direct competitors, using new technology capabilities to try to pick off some of our most profitable businesses and ultimately replace us.Opportunity or Threat?Consider the mortgage origination system market. There are several high-quality, established vendors with capable systems. These vendors are judged by their investors on the traditional measures -- profitability, return on investment, and risks. But as new technology opportunities emerge, these companies need to bring along their existing base of technology and customers while remaining profitable. Moonshot investment, especially in niches, is rare. Starting to compete with their existing customers is even rarer. With only modest investment from the traditional vendors, a new batch of fintechs stepped in. These have been able to raise substantial capital from investors, endure largely, sustained large financial losses, and focus sharply where new technology provides high opportunities. They can hire talent from inside and beyond the mortgage technology industry, and make big investments (and take big risks) in areas where the traditional vendors can't or just haven't yet. They integrate to the multiple incumbent systems in place, which removes the daunting prospect of replacing those systems. Some are going beyond building technology -- and taking on the business processes themselves. For a bank, these events create both opportunities and threats. If your competitors adopt and partner with fintechs effectively and you do not, you risk being left behind. Which raises some serious questions banks should ask themselves: MY OPINIONINWhen Banks Partner with Fintechs: 6 Keys for SuccessBy Michael K. Levine, SVP, Retail Banking Technology Group, U.S. Bank [NYSE: USB]Michael K. Levine
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