Small banks provide big opportunity for fintechs


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Hey Fintech fam,

It’s great to be back in your inbox after a busy week at the Greenwich Economic Forum. I moderated conversations with private equity titans, fund managers and a British Treasury official. But the speaker who created the most buzz by far was Noah Kerner, chief executive of Acorns. Attendees lined up to speak with Kerner after the event — the queue was so long that I left to get lunch before we had a chance to sit for our post-panel photo. If conference engagement is any indicator of investor sentiment, it’s safe to say there is plenty of interest in fintech.

In-person conferences are back in a big way with the CB Insights’ Future of Fintech and Money 2020 conferences slated for next month, so standby for more on-the-ground dispatches. If you are also planning to attend I would love to say hello. You can reach me at

Opportunities created by the fragmented US banking market

For years, technology has been cited as the biggest driver of consolidation within the American banking industry. As the market digitised, small community banks were supposed to be compelled to join forces to better compete with megabanks, such as JPMorgan, which boasts a $12bn technology budget. 

But nearly two years into a pandemic that has caused the industry to adopt digital technology at a record pace, consolidation has slowed. Between 2016 and 2019, the total number of FDIC-insured banks in the US declined at a rate of at least 4 per cent annually. But that number decreased to 3.4 per cent in 2020, and the number of FDIC-insured banks has only shrunk 1 per cent so far this year.

Column chart of Percent change in banks reporting to the FDIC showing The pace of US bank consolidation has slowed since the pandemic

In fact, small US banks have proved particularly agile during the pandemic with the help of fintechs. Platforms such as Synctera have played a significant role in connecting community banks and credit unions to fintech companies that specialise in helping smaller banks meet their customers’ new digital expectations.

Other platforms such as the banking software provider Q2 helps financial institutions outsource development.

Roger Amador, Q2’s vice-president of enterprise business development, said his phone had been ringing off the hook for the past 18 months.

“We have a lot of our customers, both banks and credit unions who have come to us . . . asking for help with getting to market quickly, innovating faster so they can compete more effectively in their local markets,” he told FintechFT.

Q2 recently partnered with the larger fintech business Plaid to provide its network of 500 banks and credit unions with easier access to thousands of fintech apps that include third-party budgeting tools.

The benefits flow in both directions. The fresh sense of urgency among community banks to bolster their technology has been a boon to fintech service providers’ business.

“Smaller institutions are still revamping their internal platforms and organising themselves around this new world,” said Plaid’s head of financial access Ginger Baker. “This area is really a growth opportunity for us, mainly because this population has generally been undersupported.”

Although tech partnerships are helping to make small banks more competitive, the industry’s underdogs still have to contend with a wide profitability gap. Combined profit across the roughly 5,000 US banks that report to the FDIC rose 281 per cent in the most recent quarter, while profit at community banks — which account for 91 per cent of the market — rose by less than a third.

Quick Fire Q&A

Each week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry.

Roboadvisors have had a rough ride recently in European markets, where a limited appetite for automated investing tools has led to a spate of high profile closures by companies, such as Scalable Capital, Moola and Investec’s Click & Invest. But this week I spoke to Marc Tempelman, co-founder of Paris-based Cashbee, who thinks there is reason for optimism in the industry. The former Bank of America executive says the roboadvisor he founded with Cyril Garbois and Chaker Nakhli in November 2019 has resonated with savers. Since January, Cashbee’s customer base has grown from a few hundred to over 4,000 and the volume of assets under management have increased from €27m to €82m.

How is your business model different from the typical roboadvisor?
We recognise that culturally, European savers are extremely risk-averse and financially very often ill at ease. We have designed our app in order to fit the cultural background of the European saver, which is very, very different from the American way of doing things. The paradox that we observed was that Europeans are great at putting money aside, but they are horrible at putting it to work. Instead of bringing clients immediately to the stock market, we have designed a very simple interest-yielding savings account, which is totally free. [Then] we take them by the hand and gradually accompany them to higher-yielding longer-term savings solutions. The secret sauce is that initial savings product, and with that you address the massive cultural barrier to help European savers get access to money that works for them.

How do you make money?
For the savings accounts, we get paid by the bank that we bring the deposits to because our model relies on getting a commission from the bank that actually wants the deposits. For the longer-term savings funds, our model is one whereby we act as a broker and earn a cut of the commissions.

How much have you raised and who are your investors?
We’ve raised €2.5m from business angels, including Didier Valet.

How did Covid impact your business as you were trying to get it off the ground?
Covid did two things. The first thing it did was force people to save even more. So the amount of money that was being put on dormant cash accounts that basically return a negative yield was exploding above and beyond the huge amount of money that Europeans already were putting aside in zero-interest or extremely low-interest-rate accounts. At the same time, people were starting to get even more concerned about their financial future. More people started thinking about savings more tactically as a result of the Covid crisis. That helped us.

Over the summer you announced a partnership with payments company Lydia to offer saving accounts as part of the “super app” it is trying to build. Do you eventually want to make Cashbee a super app in its own right?
No, we think of ourselves as your private bank in your pocket. We are a savings app but customers are expensive to acquire. For us, the partnership with Lydia is a great way to access and to offer our services to the masses. And for them, it’s a great way to add a component or a tool to the range of solutions that they’re building in order to become the super app they would love to be. There are so many platforms out there that have the desire to monetise the client base that they spent years building, and saving services are a must-have for anybody who aspires to be a super app.

Why can’t incumbents do what you do?
The traditional banks really do not have the manpower, nor the digital tools to serve the mass affluent. For them, giving the right advice to clients depends on the number of bankers that you can put in front of your clients. So there is a linear correlation between the number of clients you can serve and the number of banks that you have or need to recruit.

Fintech fascination

More stories from the industry that caught our eye this week

‘Buy now, pay later’ debt is a hit on Wall Street Investors can’t seem to get enough of Affirm’s buy now, pay later loans. Since 2020 the BNPL giant has raised over $2bn by securitising short-term and typically zero-interest loans to customers at yields that rival US Treasuries. Investors are particularly attracted to Affirm’s securities compared to rivals due to its focus on partnerships with high-end merchants like Peloton and ski-rental software Aspenware, which have more affluent customer bases.

China makes crypto ‘illegal’ The People’s Bank of China expanded its crackdown on cryptocurrencies last week, declaring all digital coin-related activities illegal. It said it was illegal for foreign exchanges to provide services to Chinese residents and that it would investigate Chinese nationals working at crypto exchanges abroad. The diktat comes as government agencies around the world are zeroing in on the enormous but lightly regulated, crypto market. However, fintech companies have not been deterred. Last week, Robinhood said it would test crypto wallets with brokerage customers and PayPal’s Venmo offered cash incentives to consumers who bought a digital coin through its app.

Chase goes digital in the UK American banking giant JPMorgan Chase has finally launched its version of a digital challenger bank in the UK. Chase has chosen a particularly crowded market for its first-ever overseas retail bank and will face fierce competition from incumbents like Lloyds and established challenger banks such as Monzo and Revolut.

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