How Banks Can Work With Fintechs to Modernize Legacy Infrastructure

Partnerships with fintechs and legacy core systems coexisting with a digital “wrapper” on top are more likely. This lets banks bring in best-of-class solutions and gives them a lot of the value offered by modern core systems.

What This Means: The session unpacked the digital transformation of Midwest BankCentre, a community bank established in 1907 in St. Louis, Missouri. Midwest executive VP Erin Erharr shared what the bank learned from working with fintechs.

• Community banks are particularly reliant on core systems, and their “level of comfort with doing things differently can be low,” Erhart said.
• For a community bank, saying, “Hey, we’re not going to have signature cards or use photo IDs” was a big step, she noted. Change can threaten a bank’s identity, so creating a culture of change was critical.
• For a tech initiative to succeed, it’s important for banks to understand what problem it’s trying to solve. Midwest put a lot of thought into how to support growth by reworking its deposit strategy, seeking flexibility in its branch footprint, and appealing to a younger demographic that often overlooks community banks.
• Selecting the right vendor was key. When vendors under consideration spoke of simply moving a manual or physical process online, “the demo would stop right there,” Erhart said. The bank wanted a vendor with vision for a seamless transaction that was fully digital.
• Laura Spiekerman, founder and owner of Alloy, said fintechs need to spend a lot of time educating banks—for example, by running tests in parallel to prove that a variety of data sources from Alloy might be as good or better than what the bank’s core provides.
• Erhart cautioned banks against “lowering the bar” on their digital aspirations—it could prevent them from finding that best-in-class vendor willing to spend time educating the bank, as Spiekerman described.
• Banks also need to shift from seeing tech as a cost center. Spiekerman said: “When they’re viewing it as an investment and not looking for the cheapest way to launch a digital project, they do the best work.”
• Erhart compared due diligence in technology investment to what’s needed when building a branch. “There’s a reason for placement in that community and a goal for breakeven and profit. The same goes for technology.”

Our Take: Smaller US banks start out at a technological disadvantage compared with their larger counterparts. US small and medium-sized financial institutions (FIs)—defined as those with less than $100 billion in assets—have small budgets for technology that make it harder for them to recruit talent, per Insider Intelligence.

To keep their digital offerings competitive, small and medium-sized FIs have three options: They can 1) build new products internally, 2) combine with other banks to pool resources, or 3) partner with outside vendors.

Teaming up with third-party companies like Alloy and Mantl can be the most efficient of the three choices, as vendors have already developed resources and are ready for quick deployments.

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