Banks have been utilizing fintech since at least the creation of the abacus, but until recently, community banks have not been investing in it in the traditional sense.
While big banks and venture capital arms of financial institutions have been backing the early stages of promising fintech solutions for a while, it didn’t trickle down to community banks until the last four or five years, according to Carey Ransom, managing partner of BankTech Ventures.
“I think the catalyst for this was covid and [the Paycheck Protection Program],” he said. “Digital transformation of even the smallest banks advanced by several years during covid.”
The idea behind the BankTech strategic investment fund is to bring community bankers and industry groups together to invest in fintech companies that will provide solutions for banks and fast-track the products to market. “Our LPs [limited partners], our banks, really look at us as part of their R&D, transformation, innovation team,” Ransom said.
“With 25,000 fintechs in the world, it’s very hard for [bankers] to get their hands around what is most relevant and well-vetted and what problems they are solving,” said Wayne Miller, another BTV general partner. “We look at ourselves more as a strategic fund than venture capital; we’re interested in more than the return.”
The fund looks at a variety of fintech products, including areas of priority for the bankers like deposit gathering, retention solutions, security, or anything that will “drive meaningful improvement in revenue, efficiency, competitiveness, and future relevance,” Ransom said.
BTV also has annual summits to which all investing banks are invited to gather in person to learn from one another, share best practices, and get updates on what BTV is seeing in the market. “Since transformation and change isn’t slowing down, we gather once per year, and supplement those with regular virtual events and other opportunities for our banks to engage, learn, and continue on their digitalization journeys,” Ransom said.
While there are at least two other funds out there — Alloy Labs and JAM Fintop — with similar investment strategies, Ransom said the biggest advantage BTV has over others is “actual bankers involved in the day-to-day of figuring out the priorities and determining if companies are great solutions to banks.”
More than 100 banks have joined and all partners have pledged commitments totaling $115 million. So far, 17 investments have been made in companies in the early growth stage, companies that may have a few customers who can validate the product as viable.
Testing the waters
The $191 million First Community Bank and Trust in Beecher, Ill., was one of the first LPs with the BTV fund. First Community has been “an early tech adopter for decades,” said Greg Ohlendorf, president and CEO. The bank had the first ATM within 30 miles and led in cash management. But then “we went through a period where there wasn’t anything new to deploy. Then, all of a sudden, fintech disrupters came along,” and the bank hoped it could find ways to compete.
Ohlendorf has been part of the Independent Community Bankers of America’s ThinkTech Accelerator for a long time, and his bank has benefited from that connection. “I believe that community banks should take advantage of these kinds of resources to help them begin a journey to see what fintech can do for their banks,” he said.
Often, his bank has been a proving ground for new ideas and technology as well as a sounding board for tweaking the product and helping the tech founders understand rules, regulations and processes. “Fintechs are extremely talented in coding, tech stack — but most are not former bankers,” Ohlendorf said. “We think the blending of their tech expertise with what we believe is our banking expertise is valuable.”
In providing his input for ThinkTech, Ohlendorf mentioned to Miller, who also oversees ICBA’s ThinkTech Accelerator, that the bankers bring a lot to the ThinkTech table, but don’t have any skin in the game. “Wayne and I, as well as a number of other innovative community bankers, had been talking about ways to monetize what we were doing in the fintech space,” he said. Miller’s work with BTV is a personal investment separate from his work at ThinkTech.
Ohlendorf and Miller worked to create a “laundry list” of what problems bankers wanted solved. Miller then worked with Ransom and the other BTV general partners to create a safe space where banks and fintechs could share information about what banks needed and how fintechs could more finely tune their products to meet those needs.
“The bankers feel they can ask what they feel might be stupid questions sometimes, and the fintechs can get into the bankers’ heads,” Miller said. “It’s amazing the magic that can occur in 30 minutes between a banker and a fintech.”
Before First Community’s holding company invested in BTV, Ohlendorf did explore other fintech venture funds. “I’m aware of some of the others that came along, [and I] didn’t feel like it was community-bank focused. I’m the little kid on the block, so we didn’t think that was the right fit,” he said. Meanwhile, Miller had been working with Ransom and the other general partners, and Ohlendorf felt that might be a better fit for his bank. So he took it to the holding company board. “They loved the idea,” he said. “Why wouldn’t we want to potentially have a piece of the return?”
Expanded reach, resources
Being part of the BTV cohort has greatly broadened the resources Ohlendorf has access to in the form of other bankers. “We talk very detailed strategies and plans with our fintech partners because we don’t compete with those partners,” he said. With the other limited partners, it’s “like having your own development shop. I can call at any time because they’re doing some of the same things we’re doing. My world is massively larger with wonderfully smart people.”
And Ohlendorf’s figurative door is open to the LPs as well: “We get calls from banks of all sizes because of what we’re doing. We’re further down the road than most.”
The bank has already seen tremendous advantages from its involvement with the fund and the companies in which it invests. The bank has been able to offer new products and services, improve internal processes significantly, and address cyber threats. “We compete with institutions of all sizes, so we’ve got to be able to do things that the larger competitors do,” he said. “We have to compete bigger than we are. It makes us nimble, which is good.”
While First Community is one of the smaller-sized banks investing, Nicolet National Bank in Green Bay, Wis., is one of the larger with nearly $8.4 billion in assets. While Nicolet had done some of its own direct investment in fintechs prior, the bank still chose to invest in the BTV fund.
“The BankTech group has been good for us as we have been introduced to a large group of these new companies that have already been vetted and are ready to hit the ground running for us,” said Kelly Fischer, senior vice president and chief innovation officer. The bank has three areas on which it focuses for innovation: Internal efficiency, internal product offerings and new products its customers don’t even realize they need.
“I think it’s very important for every community bank to have a strategy around innovation,” she said. “Doing nothing with fintech is a strategy but certainly one that will leave you in a vulnerable position of being left behind as your customers leave for the latest technology and non-bank financial offerings.”
Ohlendorf mirrored those thoughts. “I am concerned that if community banks don’t innovate and keep up with what customers demand today, they will stop being relevant,” he said. “If community banks disappear, it’s going to be an ugly world out there; I don’t want to see that happen.”