Just as it almost seemed like banks and FinTech startups were past the confrontation stage and had entered a constructive mode of collaboration and mutual empowerment, community banks have demonstrated a certain rigidity to accept the trend. It appears that the community banks are sticking to competition and believe that FinTech startups are eating up their bread.
The ICBA (Independent Community Bankers of America), in particular, has recently called regulators to toughen up on FinTech startups playing the “Lending Club card” in explanation of its position.
As Karen Thomas, Senior Executive Vice-President at the trade group commented, “ICBA believes that the recent problems that some of the online marketplace lenders have experienced with liquidity and earnings, as well as with compliance, makes it important that these lenders be subject to safety and soundness supervision and regulation.”
At the same time, Ms. Thomas fairly noticed, “Expanding examination to include more third parties would encourage higher security standards across the industry and provide consistency to the small third-party providers as well as their bank customers.”
The level of concern of community banks when it comes to other players in the market could be explained by the substantially weaker position against tech-led, agile, online-centered startups in comparison to large international financial institutions that have the financials and manpower to defend their borders if necessary. However, the other reason to that is a desire to create safe and equal conditions for themselves in a competitive environment.
In the letter from the ICBA to the Office of the Comptroller of the Currency (OCC) published a week ago, the organization stated, “As community banks conduct their due diligence, they often face challenges because they generally will not have the size and scale that larger institutions have for negotiating power.”
The regulatory burden as an innovation inhibitor
Although the community banks seem to be calling for a tighter regulation of third-party providers, which could potentially be FinTech startups, it doesn’t necessarily mean that they want to suppress the growing competitor. Based on the emphasis of ICBA on a cumbersome and expensive process of third-party assessment as part of risk management, it may indicate the desire to bring the sometimes loosely regulated counterparts to the same level in order to cut down the time and resources consumed to assess their credibility and financial standing before joining hands for a better service.
The situation with the hostile regulatory environment for community banks is similar to large financial institutions. Ms. Thomas strongly believes that“regardless of the excitement around the prospect of innovative banking in communities across the country, the biggest barrier to future innovation for community banks is the regulatory burden these institutions face on a daily basis.”
Community banks seem to be stuck in a position when they either miss out on the opportunity to take advantage of the technological advances that are available or they have to invest in the extremely timely, costly and burdensome task of changing their third-party relationships.
How are the community banks doing overall?
According to the WSJ reports based on the Federal Deposit Insurance Corp. data, community banks are doing quite well as their earnings rose 9.7% last year, which is better than the industry-wide growth of 7.5%. Moreover, their loan portfolios grew 8.6%, versus the industry’s 6.4%.
Nonetheless, the FDIC data indicated that banks under $1 billion in assets having less in net income last year than they did in 2007, while the industry’s 2015 earnings were up 55%. Banks under $1 billion have 18% less in loans than in 2007; banks as a whole have 12% more.
Community banks are in quite a controversial position. On one hand, they are open and eager to adopt innovative technologies and create beneficial partnerships to provide better services in more cost-effective manner. On the other hand, they are operating in a strictly regulated environment, where safety is a priority, hence, they would not want to encourage agile tech-powered counterparts to operate in a risky manner.
As a result, community banks probably see tightened-up regulation for counterparts as a solution and a way to create a safe environment for rapid innovation adoption, where they can be sure that the third parties have been examined by the government and curated.