Should you swipe left on fintech? Startups help banks with veterinary firms.

As banks continue to rely on fintech vendors and partners to upgrade their internal technology and the products and services they offer customers—and as regulators continue to scrutinize those relationships—a cottage industry of sorts has emerged. New companies such as True Digital and Tech Passport help banks investigate and conduct due diligence on fintechs.

True Digital allows banks to provide detailed reviews of the fintechs they work with as suppliers and partners. TechPassport was developed in collaboration with 15 global banks, including Morgan Stanley, HSBC, Citi, Fidelity, to create a set of “business-ready” questions that start-ups need to answer in order to work with the big banks. Alloy Labs has worked with banks to create guidelines and standards for fintech partnerships.

“Fintech partnerships are increasingly important to banks’ innovation strategy,” said Sean Manahan, global head of business development and partnerships at Morgan Stanley. “Giving fintechs a blueprint they can follow to prepare and assess their readiness can streamline the onboarding process and save time, money and energy for partners on both sides.”

Meanwhile, properly controlling fintechs has become more critical as the risks of working with them have become clearer in recent months. FTX’s collapse continues to have a devastating effect on the banks that worked with it. In January, JPMorgan Chase’s acquisition of Frank ended in a lawsuit with claims of fraud on the fintech’s part. In February, the Ministry of Finance became post a report about the gaps it sees in the banks’ use of providers of online cloud-based data processing, such as technology companies’ lack of communication about interruptions and the banks’ lack of internal cloud expertise. And the office of the Comptroller of the Currency consent order against Blue Ridge Bank for its many fintech partnershipswhich the agency said lacked proper AML and BSA compliance, was a warning to banks that their banking-as-a-service fintech partnerships could be subject to new scrutiny and criticism.

Bankers praise the idea

Among community bankers, interest in working with fintechs as suppliers and partners is strong. According to a survey of 204 community bank and credit union executives released Wednesday by Forrester Research and NovoPayment, 88% said outside vendors that can fill gaps in their digital efforts are important or very important.

FirstBank in Nashville, for one, has enthusiastically partnered with fintechs.

“Fintechs are very good at building out specific usage platforms where banks aren’t very good at it,” Wade Peery, chief innovation officer, said in an interview. “We collaborate where we don’t have the talent to do certain things, and it’s just worked really well for us.”

The bank has been through six acquisitions since 2015 and has grown from $2 billion to $12 billion. In 2015, it was decided to move to all cloud-based systems.

“We haven’t operated anything at the site since 2015,” Peery said. “So we’re happy to partner with fintechs. We’re able to run a pretty lean IT shop because we’ve done that.”

The OCC’s consent order against Blue Ridge Bank came just as FirstBank stepped up its banking-as-a-service program.

“We saw the writing on the wall,” Peery said. “Early on, we felt that it was a competitive advantage to have a very strong compliance function tied to banking as a service, because it’s clear that if a fintech bank gets into trouble, they’re in trouble, and vice versa.”

True Digital appeals to Peery because he wishes he had something similar several years ago, when the bank grew out of its core system and rebuilt or replaced about 90% of its core and add-on software, treasury management, online and mobile banking platforms and card issuing systems.

“I clearly remember going through all that thinking, am I making the right decisions?” Peery said. “How do I know everything there is to know? Is this interface tested and tried? Have they done this before? How will software A work with software B? All of this makes for a lot of sleepless nights. So having a tool where you could pretty quickly go in and see who fintechs have worked with and have a resource to reach out and contact that isn’t a given reference would have been incredibly helpful.”

True Digital provides information on all the major players in one portal, and allows the bank’s managers to spend more of their time on time planning and planning, he said.

“It helps you shorten that cycle of identification and due diligence work,” Peery said. “The more banks that want to participate, the better, and as the banks are willing to share information and knowledge and experience, it should build in value over time.”

The Forrester survey found that many community banks and credit unions see larger banks as a threat and could be steamrolled over: 80% said they are concerned their customers will move to a larger bank with more digital services available. They see fintech partnerships as necessary to compete.

“The good news is that technology is helping small banks,” Josh Williams, executive vice president, chief bank officer and head of partnerships at Seattle Bank, said in an interview. “The bad news is that it helps big banks, too, and they have more resources. I think it’s very difficult to compete with Chase and BofA and Wells on their digital consumer offerings. They just have overwhelming resources to build really amazing solutions and to take advantage of innovation.”

Partnering with fintech can be helpful, he said, but it also puts pressure on banks to have the right people who know how to handle fintech partnerships.

Seattle Bank hired a CIO five years ago who has a strong understanding of technology compliance and “was able to make sure that our core infrastructure is as open as possible. Over time, what that has allowed us to do is we can now plugging more and more things into it. So it’s an architectural question there, but along the way our vendor management process has to be very thoughtful to say, okay, now that we’ve added this other piece, how does that change our risk profile? Or how does that our risk profile? that changes what we do in terms of our own systems?”

How the platforms work

TechPassport was originally founded to facilitate the onboarding of new vendors for banks, according to Layla White, founder and CEO. She previously held supplier management roles in, among other organisations, Deutsche Bank, Lloyds Banking Group and HSBC.

“In my experience working in banks, I was the person who negotiated against the vendor,” White said in an interview. “I could see that there were a lot of challenges and frustrations for the business that wanted the process to go faster so that the banks could innovate at a good pace. It stood out to me that if all the banks were trying to engage with the same type of startups, in a silo-oriented way, then there had to be a reliable party sitting in the middle who would bring the two parties together.”

The idea behind Tech Passport was to gather information about fintech startups so that when a bank wants to find a startup, they find the right one the first time.

The next step was to make sure the startup is ready to work with that bank.

“As soon as I got into the startup side and realized how difficult it was to work with banks, it became, how do we make it easier for the startups as well?” White said. “How do we help ensure that startups are in a good position, that they understand what is required of them to work with a business, so that they don’t waste time and effort and money, maybe in the wrong sector, and potentially kill really good products, just because of the long sales cycles.”

She created a think tank with executives at major banks who came up with a set of “business-ready questions” that Tech Passport gets startups to answer. Uptime, robustness, meeting service requirements, security, ESG, data protection, encryption, exit planning, auditing, SOC 2 certification, breach alerts and diversity are all on the list. TechPassport also allows banks to grant approvals to startups.

True Digital was founded by Patrick Sells, former chief innovation officer at Quontic Bank and American Banker’s 2020 Digital Banker of the Year. Banks and credit unions subscribe for a fee to the database with information about fintechs. If a user wants to buy, say, new account opening software, they can look up that product category, see what vendors offer it, and see what experiences other banks on the platform have had with it. They can also search for suppliers according to objectives, such as increasing deposits, increasing non-interest income or improving efficiency ratios. There are references not provided by the vendor for each fintech.

“There’s someone you can call and say, was it easy or was it taped together?” Sells said. “It is a known reference, only financial institutions can access the site, so no fintech or provider can, and we are never paid by a provider or fintech. We are only paid by the financial institutions and we never resell the data.”

The platform also sends out alerts when suppliers miss a service level agreement requirement, experience unexpected downtime or suffer a data breach.

“Any time you can get more visibility, it’s certainly helpful,” Williams said of the concept. “To the extent that you’re able to get a sense of what’s actually been in the market versus some kind of idea, I think that’s helpful.”

Better information about fintech partners can help banks balance customer service and risk management, Williams said.

“Often it’s just to get a little extra information,” he said.

Williams also wonders with services like these whether they collect all the information a bank likes his needs, and whether bankers will be willing to share all that information or withhold what they love or dislike about providers.

“If it’s, hey, what’s your experience with this vendor? I think there’s going to be a pretty high willingness to share that,” he said. “If it helps us get 80% of what we need, and then we only need 20% more, that’s great.”

The Alloy Labs Alliancewhich is managed by Jason Henrichs, also helps banks find the right fintechs to work with and provides guidelines for these partnerships.

“I think overall, all the same, it’s been really good,” Williams said. “We’ve definitely been interested in some of the things they’re doing. We’ve certainly met people through Alloy who have solutions to things we’re looking for.”

Next week, the True Digital team will take an RV trip where they will visit community banks in preparation for the official launch of the True Digital platform in April. Sells and his team will host talks on innovation, culture and digital transformation in Atlanta, Nashville, Little Rock, Dallas, Fort Worth, Houston, San Antonio and Austin, True Digital’s headquarters.