While a current group of experts is loudly touting the importance of financial technology, or fintech, community institutions must evaluate for themselves whether it is really the end-all, be-all to running their organizations. They also should ask whether fintech is vital to competing with large FIs and, if so, whether any data processing company in the marketplace is looking out for the small community FI.
Fintech describes new technology that utilizes specialized software and algorithms to improve and automate the delivery of financial services. Fintech is used on computers and, increasingly, smartphones, with hundreds of fintech providers in the current marketplace.
Henry Watkins, director of processing solutions of Profit Resources Inc., says that there are solid ways for community FIs to make money with or without fintech, and they must focus on these foundational principles first.
“Making money is simply hard work,” Watkins said. “Fintech is just the current innovation that attempts to structure and refine the manufacturing floor, but everybody who wants to make money has a set of challenges.”
There are several fundamental core truths about running a financial institution:
- All quality core processing solutions manage to add, remove and change customers
- All quality core processing solutions manage debits and credits (in whatever form they take) to balance to accounts and to the general ledger
- All current core processing solutions are secure repositories, warehouses and keepers of live data
Anything outside of these functions can be handled by ancillary processes, and all ancillary solutions carry an expense burden, not just for community FIs but for big institutions as well. In addition, all aspects of developing flexible technology, acquiring new deposits and creating margin for quality loans is hard work, Watkins said. This hard work is not solely a burden on community Fis, but on the big banks too.
“Core processing is not a problem in the top 10 things community financial institutions need to resolve to be competitive with larger banks,” Watkins said. “Fintech does not offer a comprehensive, ‘does everything’ solution. It’s not a bank’s magic savior.”
Any financial institution, large or small, must focus on making money, which is done in a few ways:
- Capture and retain deposits
- Lend money utilizing the least expensive costs of funds (generate a larger margin)
- Deliver quality services for a fee and compete hard in areas in which the institution excels
- Ensure ALCO meets regularly and often to react to the financial position and the market
- Be nimble and opportunistic capitalists, using technology where it fits best
- Treat all customers/members and employees with the dignity, respect and gratitude they deserve
“Core providers may be your stumbling point and folks like PRI can help you through that morass, but core processing systems do their fundamental work very well,” Watkins said. “Take care of fundamental business first. This is an approach that fintech only makes more effective.”
As to whether data processing companies are looking out for community FIs, Watkins says the answer is “Who cares?” Community institutions must look out for themselves. Data processors are also capitalists doing what they can to make money, and while looking out for the best interest of their customers is part of that, it is not the primary motivation. This truth holds for large banks as well.
“My message is that there are plenty of examples of community institutions that have found a way to level playing fields where it makes sense to them,” Watkins said. “They can play the game by capturing their share of the big bank customers with those old core processing systems. It seems to me the loudest voices are coming from fintech folks decrying the cores are not ‘open,’ therefore not allowing their services to flourish, which makes me like the term ‘balderdash.’ It’s just not so.”
Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to strategic planning to propel growth and improve profitability.