WHITE PAPER
Why banks need to leverage fintech disruption
It is time for community banks, commercial banks and credit unions to move from passive observers to active innovators in the fintech revolution.In this paper we will look more closely at the FinTech opportunity for
community banks, outline a framework for evaluating options and
areas of innovation, and provide a roadmap for fast execution. We
conclude with details about next steps and suggest how banks can
begin the journey to fintech innovation.
Why Banks Need To Leverage FinTech Disruption
2© 2019, Q2 Software, Inc. All rights reserved.
The Innovation Center tackles the top 3 industry challenges for banks and credit unions head on:
• Omnichannel borrower experience
• Profitable small business and SBA lending
• Next generation underwriting
Executive Summary
Banks have many advantages that FinTechs lack
- established customer relationships, vast capital
holdings and a working knowledge of today’s
complex regulatory climate. However, it has been
difficult for many banks to determine how to use the
latest technology to innovate new product offerings
in a meaningful way. Thanks to highly accessible and
versatile cloud models, those business dynamics
are changing fast. What if your bank could define its
strategy and deliver functional innovation in
four months?
Cloud Lending Solutions (CLS) is the market-leading
technology platform that powers the FinTechs. We
can bring meaningful, competitive innovation with
measurable results to your bank in 4 months or less.
For example, Wells Fargo recently launched their
“FastFlex” small business lending platform to increase
their marketshare in SMB loans We are sure that it
took significant investments and tens of engineers
worth of effort over several months to make FastFlex
a reality. The CLS Innovation Center was founded
to partner with banks and credit unions to utilize the
latest in Fintech, new lending models and products
and embrace a new wave of opportunities in months,
not years.
The CLS Innovation Center has established a
proactive model: we help you explore what is possible
by actually doing it. Remember, the greatest strength
of FinTech is being able to move fast and adopt a
targeted, laser-like focus. That, combined with the
banks’ strength of customer relationships, low cost
of capital and market experience, the CLS Innovation
Center enables banks and credit unions to not just
match the strengths of FinTech, but to combine with
their own strengths to thrive.
Regardless of the odds of success for individual FinTech attackers, banks must seek important signals amid the FinTech noise in order to reposition their business models and cultures for success. There is no time to lose.
— McKinsey, December 2015
Why Banks Need To Leverage FinTech Disruption
3© 2019, Q2 Software, Inc. All rights reserved.
Participating in the CLS Innovation Center will deliver the following benefits to your lending line of business:
Build a superior borrowing
experience via an omni-channel
approach utilizing web, mobile, call
center and in-branch
Big data analytics for
product recommendation
Leverage new and innovative data
for underwriting
Frameworks for strategy and
execution for immediate use
Online channel for originating deals Delivery of new and innovative
products in 4 months
Support for multiple asset types
Why Banks Need To Leverage FinTech Disruption
4© 2019, Q2 Software, Inc. All rights reserved.
Industry Background
New financial services models are transforming banking and lending practices. After 2008, financial services
underwent a major disruption. Banks were constrained in their ability to lend, yet borrower demand remained
steady. A whole new industry sprang up of non-bank lenders who utilized the latest in technology to create
superior borrower experiences, innovative underwriting models based on big data and alternative data, and
efficiently delivered loans in a day. This new category of technology-enabled financial services companies filled
borrower demand and grew rapidly. Banks began to experiment and evaluate the results of the early FinTech
lenders. Partnerships and innovations began:
• Wells Fargo built an in-house lending platform, FastFlex, which delivers funded loans in a day to
small business1
• JP Morgan partnered with OnDeck2 to originate, underwrite and distribute loans targeted to
small businesses
• Santander UK has partnered with Kabbage to deliver SMB loans in hours, not weeks3
• Payment processors, PayPal and Square, in addition to Lending Club, have delivered loans to small
businesses in a day.
Many experiments are underway and interesting models are emerging. Some of these models will thrive
and some will wither. As banks observe the FinTech disruption, astute business leaders understand that their
technology investments, customer relationships, and the most profitable parts of their business are at risk.
Different banks have adopted different strategies and the first generation of experiments is over. How have the
various strategies fared?
Morgan Stanley estimates the global marketplace lending can reach $290 billion by 2020 (base case).
Why Banks Need To Leverage FinTech Disruption
5© 2019, Q2 Software, Inc. All rights reserved.
are delivering the digital experience that
customers are demanding.
2. Superior Analytics in Underwriting: They
reach beyond traditional sources of credit
data, leveraging “soft” data that used to be
available to community banks like cash flow
and payments, new data like shipping data
and “big” data to develop a complete picture
of each customer. This enhanced degree of
insight enables more innovative underwriting
and credit risk models.
3. Financial Inclusion: With innovative
underwriting models, FinTechs have expanded
the availability of capital to markets not served
by traditional banks. Sofi is an example of a
lender that opened a new market of student
loan financing. Their ability to react quickly
to market changes and their ability to wield a
broader base of knowledge and experience
from their innovative underwriting position
companies like these to threaten the most
profitable areas of banking for
community banks.
These engagements have not been particularly
successful. They represent valiant attempts at
evolution, but most of these approaches either went
too shallow or too deep. What was missing was
the laser focus of the FinTech disruptors with their
relentless focus on the customer experience.
So after Round 1, banks are left asking key questions:
How can I leverage the best ideas of FinTech for my
business? What are the game-changing technologies
to embrace? How can I leverage these for my
existing and new lending products? How much do
I have to invest in new technology? And how do we
launch in three to six months?
At the same time, FinTech companies are
transforming the lending industry in three
key ways:
1. Relentless focus on the user experience:
FinTechs deliver on the “mobile first”, omni-
channel promise, leveraging a fully digital
customer experience that ensures fast
loan approvals and seamless interactions
throughout the lending lifecycle. FinTechs
Strategy Result
Fund Established financial services providing funding to FinTech
Higher returns on capital for banks, but at the cost of losing customer relationships and reducing profit through the cross-sell of other products.
Partner Established outsourcing lending to FinTech
While partnerships have mitigated operational risk, they have not built solidified customer experiences or loyalty.
Experiment Established creating accelerators, investments, etc.
The result has been a lot of activity, but the prediction is “In five years, most corporate accelerators and incubators will have disappeared. They aren't focused enough on customer problems and business objectives to deliver returns on their investments.”
Build Established lenders building their own platforms
The results here have been slow and painful: Schwab Intelligent Portfolios was a $50 million development effort, Deutsche Bank set aside €400 to €500 million for digital bank technology and it will take two to three years to replicate what the FinTech disruptors have built.4
Why Banks Need To Leverage FinTech Disruption
6© 2019, Q2 Software, Inc. All rights reserved.
In light of these transformative trends, banks and
other established lenders need a cohesive strategy
and a profitable path forward. Astute institutions
study FinTechs to learn from their success and better
understand the innovations that can help them
protect customer relationships and outperform
today’s market disruptors.
The CLS Innovation Center was founded to bridge
the gaps between FinTech disruption, existing
banks and lenders, and big data and analytics. The
goal is to help banks learn from and appropriate
the best of FinTech, to successfully develop new
lines of business that expand their revenues while
keeping existing businesses intact.
The Innovation Center makes use of FinTech’s
greatest strength—the ability to move fast with
laser focus—to deliver innovations that can
transform the status quo. By exploring possibilities
through action, banks can match the strengths of
FinTech as they transform their businesses to not
only compete, but to thrive.
They need to co-opt the challenge by selectively adopting Fintech as their own and marrying the disruptors’ innovative business models to their own strengths and considerable assets..
— The Economist Intelligence Unit, 2015
Why Banks Need To Leverage FinTech Disruption
7© 2019, Q2 Software, Inc. All rights reserved.
ground that focuses on separating the signals that
are truly important from the noise. Specifically, this
means that banks should be less preoccupied with
individual FinTech attackers and more focused on
what these attackers represent—and build or buy
the capabilities that matter for a digital future.”5
The Innovation Center comprises three key phases:
1. Evaluate your strategies to identify areas where
FinTech innovation can have maximum impact.
2. Understand your current situation, strengths
and weaknesses. Take an honest look at the
people, processes, and technologies you need
to transform your bank in a meaningful way.
Innovation must be driven from the outside in,
and be grounded in customer experience.
3. Adopt FinTech’s agile development cycles with
the market leading FinTech platform to deliver
a meaningful innovation in 4 months.
What is the CLS Innovation Center?
Banks and credit unions have many advantages that
FinTechs lack, established customer relationships,
vast capital holdings, and a working knowledge of
today’s complex regulatory climate. However, it has
been difficult for many banks to determine how to
use the latest technology to innovate in a meaningful
way. Thanks to highly accessible and versatile cloud
models, those business dynamics are changing
fast. What if your bank could define its strategy and
deliver functional innovation in four months?
Cloud Lending Solutions (CLS) is the market-leading
technology platform that is powering the FinTech
disruption. We started the CLS Innovation Center
to help banks and credit unions breakthrough the
FinTech noise and take the best of the innovation.
The CLS Innovation Center has a bias for action: we
help you explore what is possible by actually doing
it. If the greatest strength of FinTech is being able to
move fast and adopt a targeted, laser-like focus, we
have built the CLS Innovation Center to move at the
speed of innovation. We believe that community
banks and credit unions are ready to take the
next step – to fully adopt the new ways of
business and the technologies of FinTech,
just as the larger banks have.
A recent study by McKinsey & Company
details the imperative: “Banks are
subject to a lot of noise about FinTechs
today. Optimism regarding technology is
at a high, mobility is widely regarded as a
game changer, and vast amounts of capital
are being deployed in FinTechs. Banks may be
tempted to dismiss the noise entirely, or they may
panic and overreact. We recommend a middle
Innovation isn’t as far away as you
may think.
Why Banks Need To Leverage FinTech Disruption
8© 2019, Q2 Software, Inc. All rights reserved.
Members of the Innovation Center examine business models and utilize frameworks that can be deployed
today. Unlike consulting approaches, in which strategies are discussed but never executed, the goal of the
CLS Innovation Center is to apply strategy to execution in an agile, real world way.
The first area of strategic focus involves how community banks can internalize FinTech strategies into highly
valuable operations. How can banks beat the FinTechs at their own game while maintaining market share
with the big bank competitors?
For example, banks have an advantage over Fintech lenders with long-time customer relationships and
a local community presence. The CLS Innovation Center can help you strengthen customer relationships
across the omnichannel – from mobile and web to in-branch.
The game changers aren’t just in strategy, but in their execution. Finding the most valuable path requires
a combination of strategic planning and solid execution. McKinsey has provided a strategic framework of
digital capabilities that banks can build on. The CLS Innovation Center helps you build these execution
frameworks as we help our banking partners move from strategy to execution.
Banks should be focused on building an extensive set of distinct digital capabiliteis
Evaluate Your Strategies
Digital outcomes
+
Data-driven digital insights
Integrated customer experience
Digital marketing
Digital enabled operations
Next-gentechnology
Digital enablers
Comprehensive data ecosystem, including 3rd-party API’s
Customercentric experience design
Targeted digital media
Digitized sales and service interactions
Scalable application architecture
Robust analytics and data infrastructure
Omnichannel experience delivery
Content marketing
Streamlined and automated fulfillment
Cyber security
360-degree single customer view
Customer-decision-journeyexperience
Digital customer-life-cycle management
Operational-excellence enablers
Agile delivery to market
Targeted product and service decisioning
Source: McKinsey & Company
Flexible IT infrastructure
Digital talent management
Organization and governance
Innovative test-and-learn culture
Why Banks Need To Leverage FinTech Disruption
9© 2019, Q2 Software, Inc. All rights reserved.
Innovate
The fastest path with the highest probability
of success is to partner with an industry leader
that understands the business innovations that
differentiate the FinTechs and the technology
innovations that enable market disruption. An
Innovation Center partnership will allow you to get
to market fast, and maintain control over
your business.
Many areas of innovation are available for banks.
To successfully choose an innovation area, banks
should ask:
• Can we isolate this area so our current
operations don’t subsume it?
• Do we have the right team to work on these
agile business processes?
• Do we have the right skills to deliver an MVP in
partnership with the CLS Innovation Center?
• Do we have the right executive sponsorship to
complete the project?
Once these questions are answered, the
innovation will be clear and it is time to move
to execution.
Understand Your Current Situation
Each banking partner needs to answer key questions to focus their execution priorities:
Are we leveraging technology to provide a
world-class omnichannel experience? Have
we eliminated operational silos that fracture
the customer experience?
Are we using data-driven analytics to drive
better decisions informed by customer,
credit risk, and marketing? Are we
integrating big data effectively with our
internal data to increase loan volumes and
mitigate risk? Have we operationalized our
hands-on knowledge into our technology?
Can we digitally market to our customers
efficiently and effectively? Can we leverage
digital processes to guide customers
through clear and concise lending processes
with easy to understand offers? Can we
compete with online lenders that can sign
up new borrowers in minutes?
In short, can we mitigate the FinTech
attacks on the most profitable parts of
our business? Can we make use of new
technology and operational efficiencies to
defend the highest margin areas of
our business?
Why Banks Need To Leverage FinTech Disruption
10© 2019, Q2 Software, Inc. All rights reserved.
The CLS Innovation Center applies the agile development process to business and technology. Minimum viable products (MVPs) include minimum viable business processes as well. Only through this method will community banks be able to think and act like their challengers, but with stronger assets and the wisdom that comes from decades of experience.
Guiding Principle – Test and Learn
What We Can Do TogetherExample Innovation for Community Banks
The CLS Innovation Center’s first goal is to enable
community banks to take back the small business
lending market. This area is under disruption by
Alternative Finance (AltFi), and community banks
have witnessed steadily decreasing market share. The
largest banks and AltFi lenders have stepped in to take
small business lending from community banks. Wells
Fargo’s latest foray into SMB lending, FastFlex will only
increase WFB’s growth in the market. From January
2014 to March 2016, Wells Fargo has provided $40.7
billion in new loans to small businesses against their
5-year stated goal of $100 billion.
It is clear the threat to community banks is from within
the banking world and from without by FinTechs.
However, with the right technology, this market sector
can become as efficient and profitable for community
banks and credit unions, as it is for the FinTech
disruptors. And the right technology need not be an
overwhelming investment.
Small business lending needs to return to community
banks. The intimate customer and local knowledge of
community banks has been usurped by the FinTechs
and their unconventional sources of data.
The efficiency of AltFi technology has been
usurped by the large banks through partnership
and massive investment.
But there is another path. Community banks can
combine their local knowledge and affordable AltFi
technology into a game changing strategy. The rise
of commercially available, non-proprietary lending
platforms has opened up new opportunities to regain
the SMB lending market.
The CLS Innovation Center is focused on all types of
small business lending:
• Commercial Real Estate (CRE)
• Commercial and Industrial (C&I)
• Unsecured Small Business (SBA) loans
These three areas cover a vast opportunity that has
been the sweet spot of most community banks’
overall lending expertise.
To deliver market innovation, the CLS Innovation
Center combines people, process, and technology
to transform the lending market. It starts with your
bank’s industry experts and our AltFi technology.
It is guided by a strategic focus so you can get to
market as fast as our AltFi clients. It finishes with a
complete lending system that addresses a tangible
area of FinTech attack through innovation.
Why Banks Need To Leverage FinTech Disruption
11© 2019, Q2 Software, Inc. All rights reserved.
Create a small business flexible lending solution for Community BankAt the CLS Innovation Center we define from
the outside in. We start with a blank slate as we
build an innovation targeted to your needs. Key
questions help guide the process:
• What is the best-in-class customer experience
we want to deliver?
• What area of lending represents an
opportunity to maximize a return or displace
a competitor?
• What is the business model and processes that
we intend to define?
• How do we turn concepts into live systems that
deliver on the customer promise?
For example, our SMB loan systems are cohesive,
flexible, and include the features that define
today’s winners:
• Fully automated online, multi-
channel origination
• Innovative underwriting
• Loan approvals in minutes
• Defined closing process and tasks
• Complete compliance checklists
• Loan funding in a day
• Ongoing covenant tracking
• A four-month deployment
The end result is a new solution that improves productivity, accelerates time to market, strengthen customer relationships, enables an AltFi borrower experience, reduces costs and operational risks, and provides single-click auditing capabilities.
Why Banks Need To Leverage FinTech Disruption
12© 2019, Q2 Software, Inc. All rights reserved.
In the past two years community banks,
commercial banks and credit unions have been
able to watch and learn from the disruptors as
new FinTech companies and large banks tried
various ideas and options to see what works and
what doesn’t. But it is not wise to sit on the sidelines
for too long. The CLS Innovation Center enables
community banks and credit unions to seize today’s
most exciting innovation opportunities:
• Next generation borrower experience
• Small business lending
• Marketplace lending
If partnering with like-minded institutions to create new industry
standards sounds interesting, we would love to include you in our
early access program and give you a chance to influence these rapidly
emerging, industry-wide innovations.
Find your path to innovation
Conclusion
Why Banks Need To Leverage FinTech Disruption
Foot note
1 https://www.wellsfargo.com/about/press/2016/fastflex-smallbusiness-loan_0510/
2 http://techcrunch.com/2015/12/14/j-p-morgan-ondeck-and-the-future-of-alternative-lending/
3 http://www.ft.com/intl/cms/s/0/9925cc9e-f9a4-11e5-8f41-df5bda8beb40.html#axzz48s56UIAE
4 Forrester: Financial Services Firms Flirt With Startups, Digital Executives Must Choose to Build, Partner, or
Buy, 2016
5 McKinsey & Company: Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks,
December 2015
83-31-0419 © 2019, Q2 Software, Inc. All rights reserved.
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