Once a year, the board members of the Federal Home Loan Bank get together to talk about how their member banks are performing and ways to improve these businesses. For quite some time, they have been aware of the radical changes technology companies are starting to bring to the banking industry. The fintech sector has received a lot of attention and investment over the last few years, and board members wanted to learn more about what specifically these startups are doing. They asked Silicon Valley Innovation Center to design a custom Silicon Valley immersion program to get insights on the latest innovations in FinTech.
After three days in Silicon Valley, meeting with leading FinTech startups and thought leaders in the financial technology space, the group realized that the changes in the banking industry are real and occurring much faster than they thought; embracing partnerships with fintech startups is the way to go forward to protect and grow the bank’s business.
“It’s a fascinating time to have this experience. And it’s been very well rounded. Things were over my head. Things were right at my level. And things I’ve wanted answers to and didn’t know what the answers were before.”
Larry Parks, SVP Legislative Affairs
Carefully curated by SVIC, the program consisted of meetings and visits to companies such as Amazon, Airbnb, Earnest, Blend, Eltropy, Novo, Abra, and the Blockchain University to cover the latest developments in the areas of:
● Personal loans being issued and serviced by startups
● Expedited mortgage applications
● Chatbots for collecting information and answering questions
● Fully online and AI-assisted small business banking
Here are some key takeaways from the program:
1) FinTech startups are starting to move up the banking value chain
Retail Banking UBER Moment
A few years ago when fintech companies started to get market traction, they did so by targeting their services to personal, non-business customers. Lending Club would offer loans at lower rates than banks by pooling the resources of private lenders. Acorn started to help millennials save money by automatically rounding up payments and depositing the round up into a savings account. They could do this because small individual deposit accounts and small personal loans were the least profitable services offered by banks. Banks focused their time on business accounts because the volume and variety of services were better. Businesses had a personal banker to call, while small individual depositors had frustrating 800 numbers. Now that the fintech market has a solid foothold in the individual banking space, they are starting to swim upstream into the business banking segment.
2) Banks must include fintech services into their services or risk losing customer relationships
One meeting between the Federal Home Loan Bank board and a startup called Novo was particularly insightful and eye opening. If one thing is true above all, it is that banks want to maintain relationships with business customers. When a business grows, the bank wants to be able to grow the deposit account and offer additional banking services like equipment financing or rotating lines of credit. They want the customer to know their brand. They want the customer to say, “I bank with Wells Fargo.” Fintech startups like Novo also want to attract business clients. They want businesses to open an account with Novo and say, “I bank with Novo.” Unlike Wells Fargo, or other existing banks, Novo can offer lower rates as they don’t have the brick and mortar overhead. Novo also applies Artificial Intelligence (AI) to your transactions to help you make smarter business decisions. And because it is built by developers, they offer startup software teams the ability to integrate their services with their banks. What traditional banks can do that?
3) Applications of Artificial Intelligence in the banking sector are a game changer
FinTech startups developing AI-based solutions for the financial services sector are booming. Take, for example, Blend, visited by the group. This promising startup is focusing on the home mortgage space, an area dear to the Federal Home Loan Bank. On Blend, potential home buyers can fill out information online, connect their bank accounts and social media profiles, and, instantly, a mortgage is offered. Compare this to the days or weeks that a traditional bank might take to do the same. Not to mention when dealing with sensitive information, many people (millennials) are more comfortable providing it to a computer rather than telling another person. The best part about Blend is that they can white label their solution under the brand of existing banks so that the relationship with the customer stays with the bank. Banks should evaluate the use of Artificial Intelligence and get creative in applying this technology to solve their digital transformation challenges.
4) Banks should be embracing the cloud
The Cloud is sweet
Both Amazon and Mohr Davidow Ventures talked about the increasing trend of banks moving to cloud data storage. From an economic perspective, it makes sense for companies to move to cloud computing because you only pay for services as you use them instead of investing up front in the purchase, installation, and ongoing maintenance of onsite data centers. Often, the argument comes up that banks, and other companies, are worried about the security of their data on the cloud. Amazon, Oracle and Google all stressed that data stored in the cloud is more secure than private servers because you have teams of PhD cryptographers working on security so tight that even the NSA has to ask for patches. In addition, one of the major uses for AI now is to patch security holes that humans create, forget about, or are too slow in their response.
5) It is time for every bank to start piloting blockchain applications, bitcoin included
When most non-techie people think about bitcoin and blockchain, they think of a wildly speculative asset class but fail to understand the greater value. Even if it turns out that bitcoin crashes and burns, the underlying blockchain technology still has the potential to disrupt the banking system. Banks should understand the potential of blockchain regardless of bitcoin’s success. One such application is a faster and cheaper settlement process. Because blockchain is an indelible record of transactions, banks can benefit from the recording of all historic transaction links. This not only makes auditing faster, but also helps to understand cases of fraud, and provide backup in case of system failure.
After the three days, the senior banking leaders had a thorough enough understanding of bitcoin, distributed ledger and artificial intelligence to start internal discussions about where these new technologies could be applied inside their businesses. Larry Parks, SVP of Legislative Affairs for FHLB, summarized the trip best when he said that he learned things about which he has been wanting answers for a long time. It will be exciting to see how these board members decide to apply this learning over the course of the next few months.