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FinTech Discussion –

Identifying the Problem and Creating Solution

FinPro State of the Industry Summit

November 10, 2016

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Relative to technology, what should depository institutions focus on in 2017?

Reduce spending

Rethink location strategy: change delivery channels by pushing mobile technology and human branches

Increase employee productivity: invest in technology that empowers consolidation of FTE

Reduce waste

Cut from legacy systems: reduce burden of maintenance and vendor management

Remove clerical tasks: automate customer interaction where possible

Ensure consistency in applications: update software and centralize software platforms where possible

Augment analytics

All files should be digital

Streamline capture, storage, and analysis of not only credit information, but customer patterns in order to predict their needs

Utilize new technology

Invest: be involved in the design, share in the risk/reward

Partner: allow FinTech firms to work along-side employees to solve challenges

Consume: lagging adopter

KEEP DATA SAFE!

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Why is technology such a prevalent topic for community banks?

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Today Tomorrow

Uber Driverless Cars

Doctors Watson On Line Medical

Passwords Recognition Software

Computers, Smart Phones Etc HoloLens, Oculus Rift

Utilities Renewable Energy

IRS Flat Tax

Amazon 3D Printing (Goods on Demand)

This is Strategic Risk!

Technology is the Disruptor!

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Regulated financial institutions are trying to be both disruptors and competitors . . .

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Banks must be fearful of not only being obsolete, but vulnerable to attack . . .

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Types of Attacks

Malware / Destructive Malware

Key Loggers, Trojans, Ransomware, Wiper

Often exploit a “zero day” vulnerability in software

Phishing/Spear Phishing

Distributed Denial of Service (DDoS)

Compound Attacks: combinations of the above

The “Russian hackers” and

“lost email” story lines in the

campaign will influence the

prevalence of cybersecurity

risk.

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Comptroller of the Currency Thomas Curry soundly rejected the possibility of creating a "safe space" for fintech firms to operate outside of consumer protection rules while they develop and test new products

It is the company's responsibility to ensure products and processes are safe before rolling them out

The OCC is also preparing to release its determination on the question of whether to create a charter designed for fintech firms

"It is clear that the OCC has the authority to issue a charter to companies that engage in at least one of three core banking functions—taking deposits, paying checks, or lending money," said Curry. "And, it's clear that many fintechs perform these activities."

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In early November the OCC announced that it would open an office dedicated to innovative products and companies operating in the financial sphere . . .

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More competition will come from non-deposit institutions as we move forward . . .

Deposit

Institution

Deposit

Institution

But for now, a regulated financial institution is on both sides!

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Notice in almost every case that customer needs are not changing, what is changing is how those needs are met! So how do depository institutions deal with Strategic Risk?

Defend and market the industry’s 2 HUGE competitive advantages

Insurance

Leverage

Focus on having right people, systems and controls

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BODs must provide a clear IT Corporate Governance framework

Sound objectives

Policies

Risk limits

BODs must monitor whether officers and employees are complying with framework

Credible challenge is critical

Must occur

Must be documented

Utilize the methodology in The FFIEC Cybersecurity Tool (June 30, 2015)

Types of technology and data connections

Delivery channels

Online/mobile products

Organizational structure

External threats

Inherent Risk: Least– Minimal – Moderate – Significant

Mitigation Level: Baseline – Evolving – Intermediate – Advanced - Innovative

NOTE: Vendor management is being included with IT examinations

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People, systems, and controls require a strong Corporate Governance for safe and sound technology operations . . .

© 2016 – FinPro, Inc.

Small number of core banking software vendors has cornered the U.S. market — FIS, Fiserv, Jack Henry, and D+H (through its recent acquisition of Harland). Together they own about 96% market share

There is a second tier of vendors, but the number of providers is down from 117 companies at the peak to around 20

Strategic Risks

Hard for banks to innovate: Some banks still use core software purchased 30 or more years ago, and have layered on top of it "ancillary" products such as online banking and mobile banking software

They are slow to innovate: The top four vendors have been compared to the large pharmaceutical companies "they wait for others to innovate. When others innovate, they acquire them”

Challenging to get data: With fixed data structures, it is difficult for banks to leverage data and conduct proper analytics (example: loan level stress testing)

Looming obsolescence: Block chain and start-ups are going to drive them to extinction

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Core system providers are not a good ‘partner”. They have old technology and charge customers too much for data on the way in and out . . .

Therefore,

Banks Need to Lead the Drive for New Technology

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Band together to have power

Revisit approach to IT budgeting and spending on strategic initiatives:

Emerging technologies

Cloud Services – migration from owned resources to shared resources

Private vs. Public Cloud

Key Terms

SaaS – Software as a Service

PaaS – Platform as a Service

IaaS – Infrastructure as a Service

Blockchain

Cryptocurrencies

Mobile financial services

Automated financial advisers and customer care centers

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Areas of opportunity for community banks . . .

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What are examples of emerging technologies that COLLABORATE with community banking?

What is Simple:

“Simple offers an account that has all the tools you need to manage your money

built right in. The funds in your Simple account are held by our partner bank, The Bancorp Bank, Member FDIC.”

“Bundle” Components:

• Credit Card

• Now Account

• Debit Card

• Direct Deposit

• Free ATM nationwide

• Bill Pay

• Mail a check

• Link to other accounts

• Instant transfer to Simple Customers

• No Fees

• Real Human Support

• Push notifications

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In the Simple example, technology is the solution for flexibility in personal product bundling and pricing . . .

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Money Market

Home Improvement Loan

Comfortably Retired

Urban Builders

Young Urban Renters

Struggling Seniors

Know your customers. They may have common characteristics, but some segments have a lower propensity to utilize any financial products.

Core Products

Niche Products Niche ProductsAuto Loan

2nd Mortgage

401k, 529, HSA

Mortgage

Checking

Savings

Overdraft

Bank Credit Card

CD

Home Equity LOC

IRA-CD

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Collaborative FinTech is the key to continued profitability . . .

Cost savings

Customer interface

Streamline production

Augment marketing and delivery channels

Data gathering (storage and security)

Data analytics (intelligence)

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Collaboration with FinTech is a Must!

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Contact Information

Conversations on FinTech or FinPro services:

Don Musso

dmusso@finpro.us

908.234.9398 ext. 101

Stephen Brown Klinger

sbrownklinger@finpro.us

908.234.9398 ext. 112

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