Hudson-based Avidia Bank made a bold move last month, becoming the first community bank in the country to join The Clearing House’s real-time payments network and in the process showing how the relationship between fintechs and banks may soon start to shift.
The move gives the bank’s customers the ability to send, clear and settle payments immediately and at all times – 24 hours a day, seven days a week and 365 days of the year.
Joining The Clearing House’s system is important for a few different reasons: Not only will it help Avidia become a leader in the payments space and solve customers cash flow problems, but it will also make the bank an attractive place for fintechs to launch out of.
And it is this second reason that small financial institutions all across the country need to pay attention to.
The days of banks holding most of the power in relationships with fintechs are numbered. Eventually, every bank in the country is going to need lots of fintech partnerships to grow and survive in the long run.
That is why community banks and credit unions need to start making it easier for fintechs to work with them and start pulling the trigger on fintech partnerships much more quickly than they have been.
Why Banks Hold the Upper Hand – For Now
Community financial institutions currently hold the upper hand in their relationship with fintechs.
That’s because many of these fintech companies develop their technology with the intention of selling it to banks under a B2B model, and then allowing banks to deploy it through their core systems, the back end of the bank that makes daily loan, deposit and credit transactions.
However, this is difficult to do, considering most fintechs develop their technology in real time, while most banks have core systems developed in the 1970s and 1980s that sometimes can’t support modern technology.
This has made most community banks very reluctant to work with fintechs because of the complex integration process, not to mention other concerns regarding data privacy, limited resources and trying to keep expenses down.
This reluctance has in turn resulted in very long sale cycles, creating difficulties for fintech companies. Because many are backed by venture capital and private equity, they need to grow and generate revenue quickly in order to keep their investors happy.
But there is no denying the ever-growing demand for fintech products.
Online lenders are already seriously competing with community banks, especially in terms of personal loans, and a report from accounting firm PWC shows that over 90 percent of banks expect growth in the usage of mobile applications, much higher than any other financial sector.
So, why put off the inevitable? Wouldn’t a bank rather be a leader in fintech opposed to a follower?
The integration process isn’t likely to get any easier unless banks switch to an open core, which would be a huge undertaking in and of itself. Also, there are fintechs dedicated to making integrating certain tools with a bank’s core easier through a plug-in-like adapter.For example, Avidia Bank didn’t transition to TCH’s real-time payments system through its core provider, but instead went though an existing fintech.
Fintechs Will Take Notice of Innovative Banks
There have already been numerous success stories of community banks opening their doors to fintechs.
Eastern Bank incubated a company called Numerated, which developed a real-time lending platform that helped the bank grow its business banking loan book and now stands out as an innovator in the industry.
Numerated was so successful that it spun out from Eastern and is now being used by 11 banks and counting.
Avidia Bank’s Vice President of Business Development Cliff Thompson said ever since the bank announced it was joining The Clearing House, his phone has been ringing off the hook from fintechs interested in working with and potentially developing their products within the bank.
A main reason for this is that Avidia’s upgrade to a real-time payments system makes the integration process for fintech companies a lot easier.
“Fintech guys, come on in, develop your products, we’ll take all the mysteries out of payments and try to make it easy for them,” Avidia COO Bob Conery told me.
Whether you believe it or not, fintechs are taking notice of which banks want to innovate.
One particular CEO of a fintech told me previously that it is not hard to tell which banks are serious about fintech. That particular CEO also said he prioritizes the banks that are serious because there are only so many resources available.
Now, think about what happens once all of the country’s roughly 5,000 banks start to demand fintech. The demand will put fintechs at a premium and the power dynamics will have shifted.