A tale of two small banks in the US exposes the growing divide in banking services – not between big banks and smaller ones, but between big banks and fintech firms.
Large institutions investing billions in technology are in many cases crushing traditional community banks, but some of the latter are giving the giants a run for their money by partnering with fintech firms that enable them to compete on technology.
When in 2012 National Bank of Delaware County snapped up a branch in Monticello, New York, that Bank of America was abandoning in pursuit of its big-city strategy, depositors lined up for hours to move their accounts to another big bank that could offer them digital deposits and other high-tech services they had grown accustomed to.
But recently another community bank, Cross River Bank, raised $100 million in a funding round ledOpens a new window by KKR to invest in compliance infrastructure as it expands its business. The New Jersey-chartered bank partners with fintech startups like online lender Affirm, payment company TransferWise and cryptocurrency exchange Coinbase, bringing its FDIC membership and bank infrastructure to provide banking services to fintech clients.
New breed
This is different from open bankingOpens a new window , where fintech firms can obtain authorization to offer services to clients of banks of every size. This new type of community bank has little direct interaction with the public and does no brand marketing. With names like Celtic, Sutton Bank and Evolve, they are often startups content to let the fintech firms market in their niche and hand over a share of the cash.
The approach leaves fintech firms free to target however large or narrow a market they want. Silicon Valley startup Step, for instance, is relying on Evolve Bank and Trust to underpin the all-in-one mobile banking appOpens a new window it’s launching this spring for transactions that enable parents to fund teen activities while maintaining supervision.
Step says there are 75 million underserved children and young adults currently obliged to rely primarily on cash.
Evolve Bank isn’t a startup – it was founded in 1925 as First State Bank in Cross County, Arkansas. New owners renamed the bank in 2005 and decided to embark on a strategy of fintech cooperationOpens a new window .
The obligation to interface with banking regulators and demonstrate compliance with anti-money laundering and other rules makes community banks selective about who they partner with. Cross River, for instance, signed non-disclosure agreements to look at 250 multipurpose loans but accepted only 14 of them for compliance reasons.
Disappearing small banks
National Bank of Delaware County, by contrast, eventually sold itself to Wayne Bank at a bargain-basement price. It could not satisfy the customers in Monticello or anywhere else and became one of the 11,000 small banks in the US that have disappeared over the past three decades.
Their numbers have fallen to 4,600 and their share of the nation’s bank assets has declined from 31.5% to 6.6%.
Meanwhile, banking has developed into a high-tech business requiring constant investment to keep up. Bank of America has spent $20 billion on new technology since it sold the Monticello branch seven years ago. JPMorgan Chase committed $10.8 billion to tech spending in 2018; tech investment was the main driver of the recently-announced merger between BB&T and SunTrust.
Bank customers now want cutting-edge technology and have no need of a local branch. They can deposit checks via their phone, pay bills electronically, get cash from ATMs everywhere, and use apps from big banks or fintech firms for everything else.
Meanwhile, in urban areas, legacy banks are turning branches into cafes and installing electronic kiosks for customers to conduct banking business.
There is little place in this world for community banks,Opens a new window especially when the communities in question have been devastated by factory closures, empty retail units and out-migration to trendy urban centers.
Specialized businesses
Evolve, on the other hand, true to its name, has adapted to this new world. It still has retail branches in Cross County and neighboring areas, but has moved its headquarters to nearby Memphis, from where it runs 30 mortgage production centers around the country, as well as specialized units for physicians’ credits and small business loans.
But the fintech business is Evolve’s fastest-growing, accounting for more than 200% deposit growth month-on-month, even without advertising. Evolve saves money by not building a brand, while its fintech partners save by not needing a bank license or to build up payments and compliance infrastructure.
Some fintech firms don’t want to be dependent on a banking relationship, however. Varo Money, a mobile-only banking app, has received preliminary approval from the Office of the Comptroller of the Currency for a national bank license, but still needs final approval and FDIC sign-off before it can jettison its bank relationship with The Bancorp Bank.
That’s sooner said than done, since US regulators in general have been sluggishOpens a new window in responding to the fintech challenge.