It’s frustrating to be in negotiations with a bank, have everything moving along and then suddenly all the forward momentum disappears. The explanations the banker gives you about the status of the project can be equally frustrating and vague. What are they thinking and why is this off the rails?
While there are many reasons this happens, there are three broad categories that can slow or stop the process: The bank has reevaluated its risk tolerances, the bank is changing strategy, or there is a shift in the team members making the decision.
How Banks Think About Risk
The risk issues are real these days. While technology can help manage risk it also can contribute to it. Banking is a risk management business, and any risk must be weighed with the reward. In the banking industry, it’s common to delay a potential project while re-evaluating a new environment or consideration.
An example where technology increases risk is online account opening. These days, consumers want a quick digital deposit account opening process. But the rate of fraud is far higher when an account is opened online than if is traditionally opened at a branch.
“If you are truly going to enter the digital [demand deposit account] opening game,” says the CEO of the online Grasshopper Bank, Mike Butler, “you have to be prepared to manage fraud. It’s not just banking; fraudsters are attacking all e-commerce sites. You just need to fight fraud with new tools.” So digital account opening must include fraud mitigation processes and tools that may create a bigger expenditure than originally thought and slow down other planned fintech contracts.
There is also regulatory risk. The Office of the Comptroller of the Currency is changing its approach to fintech regulation and emphasizing due diligence for banks before partnering with a fintech. The Consumer Financial Protection Bureau has increased its staffing and funding levels to enforce consumer protection laws for banks above $10 billion in assets. There are political risks. Some banks are waiting to see how the effects of mid-term Congressional elections pan out, particularly how Republicans assign financial committee chairs and how bank-friendly the committees will be. The regulatory winds are currently shifting, and it is not clear if that creates tailwinds or headwinds for bank-fintech partnerships.
But fintechs may ask a valid question: What about the risk of not staying competitive? In this unusual economic environment with people speculating on the rate of inflation and a possible recession, bankers have other, larger concerns. Some fintechs are struggling financially, so that may raise the risk profile of doing business with them. After all, if an important technology partner goes out of business, banks will have a crisis on their hands.
Changes to Strategy
Despite the risk environment, the larger priorities remain the same, and they mostly have to do with profitably growing the bank. Right now, that may mean a change in strategy. With depressed stock prices, even some traditionally acquisitive banks are taking mergers and acquisitions off the table and focusing solely on organic growth, which could be good for some fintechs that align with a bank’s specific strategy but bad for others.
In general, banks are monitoring asset quality closely right now. The Federal Reserve’s Senior Loan Officer Survey for October 2022 shows that banks are tightening standards for loans and reporting weaker demand for commercial and industrial lending, as well as commercial real estate loans. There is weaker demand for mortgages and some type of consumer loans. Regulators have asked more pointed questions about asset quality as well. Your bank client is thinking about growing high quality assets and if your solution isn’t directly contributing to that effort, it may be less important right now.
Banks, on the other hand, are always interested in reducing costs. Any technology that facilitates faster, more transparent, more automated internal operations are cost savers. So those fintechs may still see their projects moving along well. But if your project is not cost saving or revenue-generating, it is likely getting less attention these days. It might have gotten labeled, “Nice to have.”
Changes in Staffing
Your project is dependent on people. You need people inside the bank championing your solution. There is turnover in all businesses right now and reorganization is a given in larger institutions. There are a wide variety of reasons banks have a tough time attracting and keeping tech talent specifically. The “return to the office” policies of some banks have driven some tech talent to seek out other opportunities with more flexibility. The cost of tech talent is also a hard pill for banks to swallow. One bright spot for banks is that fintech companies are laying off talent and this might be a chance for a bank to pick up a key tech leader.
If your client has gone quiet, it is good to ask questions. Hopefully you have built up a good relationship with your counterparts. Hopefully, you are tracking their press releases and analysts calls. If you have, you can ask if the newly announced hire changes the bank’s strategy, or if the quarterly earnings miss is tightening the budget. A thoughtful question that shows you are thinking of the bank, not just the sale, will possibly give you the information you need to get a good partnership restarted.
Joan Susie is chairman of Bank Director.