Community banks bet big on emerging tech as crypto fades

A newly released survey of community bankers shows a few interesting trends developing in fintech. For one, a good number of community banks are investing heavily in emerging technologies and research.

In fact, they’re taking a lead role in funding fintech startups, according to Cornerstone Advisors’ What’s Going On in Banking 2023 study. Hundreds of community banks are making direct investments into fintech startups, according to the study’s author, Ron Shevlin, Cornerstone’s chief research officer. Among community banks investing in fintech startups, the average investment was nearly $3 million per bank in 2022. That figure is expected to have grown by a third to $4 million in 2023. Much of the investment is going to core technologies, but the most visible digital tools being investigated by community banks are designed to bring in new customers. 

“Sales-oriented systems (origination and CRM) continue to be where most of the system replacement action is and it’s consistent with what we continue to hear in mid-size banks and credit unions that continue to be challenged at systematically growing organically,” said Sam Kilmer, who leads Cornerstone’s fintech advisory practice. “Organic growth is where the action is for the vast majority in the industry — and organic growth doesn’t saunter into a branch anymore.”

Another technical development that pops out is the growth of banking-as-a-service, which is “a partnership model in which a financial institution leverages its bank charter to enable non-bank financial services companies to offer financial services to consumers on a white label or affinity basis.” (The study, if you care to read it, is peppered with classic rock jokes. This section is titled ‘But It’s All Right Now, In Fact, It’s a BaaS.’ Ouch!)

Seven percent of financial institutions surveyed in the study are already providing BaaS services and 4 percent more are in the process of developing a BaaS strategy. Another 13 percent are considering the possibility of launching BaaS services. 

It’s an interesting strategy based on “if you can’t beat ’em, join ’em.” With a flood of tech startups blurring the lines between traditional banking services, banks and these firms are learning the way forward may be partnerships, not a battle to stifle competition and innovation. Tech firms still need to lean on a bank’s charter and expertise, and community banks are looking for a competitive leg up. 

An internet search for BaaS firms is a little bewildering. I myself hadn’t looked into these firms much, but if online chatter is any indication, they are having something of a moment. On the surface, BaaS looks like the very close cousin of software-as-a-service. For bankers, who are growing more interested in these partnerships, are BaaS companies just a different way of offering underlying technical wizardry?  Either way, where does one begin to find the right fit? This is the age-old tech problem in the community banking world. In a sea of services that all seem very similar, what makes the better firms stand out, especially when they are all fairly untested? Banks are starting to find out. 

The survey found bankers are still showing an interest in real-time payments, or those that clear a bank account within seconds, but aren’t yet offering them. Last year’s study found that 31 percent of banks planned on implementing real-time payments. This new study suggests that didn’t happen, but about the same percentage of banks remain interested. Currently, 18 percent of the banks surveyed offer these payments. With third-party services like Venmo becoming more popular by the minute, keeping an eye on this makes sense.  

One more nugget from the survey has this columnist finally eating cryptocurrency crow. About a year ago I reported on the emerging network of crypto-trading kiosks popping up all over the country. One even showed up in the bodega in my neighborhood. I thought if there was revenue to be captured here, why shouldn’t community banks consider it? I wasn’t totally crazy. The 2022 version of the study found that 10 percent of financial institutions were planning to offer cryptocurrency trading and investment services in 2022, with another 13 percent expecting to offer these services in 2023 or later.

In the new study, just 1 percent of banks said they’re offering crypto investing services, and just 1 percent said they will offer it in 2023. Are we truly seeing the beginning of the end of the decentralized currency craze? As long as banks stay away, I can’t see it ever taking a real hold.