Understanding the role of fintech: Experiences from ALM First’s 2021 Financial Forum
The ALM First Financial Forum brings the brightest leaders in the industry together with exceptionally unique networking opportunities. This year’s Forum was held at the Silverado Resort in Napa Valley, a quaint but bold resort in the wine country. Unlike your typical all-inclusive resort, the rooms were disparate and paid homage to its history, built originally in the 1860s as a southern style mansion. The resort is situated in the rolling hills of Napa Valley with diverse fauna and regal oak trees dropping acorns like rain. It was the site of the Fortinet Championship, a professional golf tournament and part of the PGA Tour, just a week prior to the conference.
In his keynote speech, which kicked off ALM First’s 2021 Financial Forum on September 27, Rodney Hood, former NCUA Chairman and current Board Member, enthusiastically described himself as a believer that regulation should be effective but not overbearing. His stance extended itself to the world of “Fintech”, a term used to describe financial technology seeking to improve delivery and consumption of financial services. While Fintech can be seen as scary to some, due to the paradigm shifts that may occur as a result, Hood, and hence the NCUA, are embracing Fintech “with alacrity.”
Amongst other topics, including the modernization of the NCUA’s derivatives rule and capital adequacy framework, Hood laid out the NCUA’s plan as it pertains to investments and partnerships in Fintech companies. According to him, all federal agencies recognize its importance and are pursuing some form of policy around it currently.
As such, he informed conference attendees of the newly formed Office of Innovation and Access and the active pursuit of a Director of Fintech. The NCUA’s expanded efforts in the Fintech space have included the hiring of ex-Fintech veterans, an increase in educational efforts around trends in technology, and consideration of regulatory needs to support continued innovation for credit unions. In addition, the NCUA has learned about and visited several Fintech companies to understand what’s out there.
Hood’s efforts and passion towards the subject showed as he discussed his commitment to ensure credit unions have the framework needed to continue to evolve with the times. At times, it almost appeared as a moral imperative: “financial inclusion is a matter of civil rights”, Rodney expressed, highlighting the purpose of supporting and accelerating greater opportunities for economic inclusion.
While the Fintech umbrella is large and encompasses many different value propositions, “financial technology” is really nothing new; banks taking advantage of ATMs at their onset, for example, could have gained significant ground on their competitors through efficiency and service quality. The real question is to understand what solution is provided to what problem. To that end, Hood referenced a recently published Federal Reserve piece titled “Community Bank Access to Innovation through Partnerships”, which discusses the different forms of Fintech partnerships and the risks therein.
The paper outlines three broad types of Fintech partnerships: operational, customer-oriented, and front-end. Operational fintech partnerships typically can be thought of as process automation. For example, expedited underwriting or tools to aid in regulatory compliance. Customer-oriented fintech partnerships include services that customers use and interact with but remain within the relationship of the bank or credit union. This includes payment transfer services or web app-based features such as remote deposit capture. Front-end partnerships entail a direct relationship between the Fintech provider and the customer. For example, lending platforms that offer financial services that are channeled back to the credit union’s balance sheet.
Each come with their own set of preferences and pros/cons. For example, some institutions have elected to only consider customer-oriented partnerships that can directly integrate within their existing ecosystem. For front-channel partnerships, additional risks may result from disjointed service quality levels or, at-worst, having to reverse customer relationships due to the partnership not working out.
Interestingly, the NCUA lacks statutory authority to examine third-party service providers. Vendor authority, Hood explained, allows a prudential regulator to examine a service provider. The NCUA is the only federal banking regulator lacking this authority; the Federal Housing Finance Agency (FHFA) also lacks this authority. While there is an increasing need for third-party due diligence in today’s operating environment, it would require an act of congress to change these statutory limitations.
So, how should credit unions explore digital trends and Fintech opportunities? Keeping up with what’s out there is a great place to start. For example, referencing the Fed piece on Fintech partnerships to understand the different styles of innovation and reflecting internally on specific outcomes that are needed for continued leadership in lending and banking. Lastly, participating in industry events and staying in touch with other leaders to learn how they have achieved their goals.
The ALM First Financial Forum helped accomplish just that, with a whirlwind of content ranging from digital assets to financial hedging and multiple networking opportunities with leaders from like-minded institutions. ALM First’s experienced advisors also assist hundreds of institutions with identifying, evaluating, and executing on opportunities including harnessing the power of slack availability in their balance sheets via digital finance, participations and securitizations.
More information about ALM First’s 2022 Financial Forum, other educational events and advisory partnerships may be found at www.almfirst.com.
