Pub. 10 2019 Issue 2

www.wvbankers.org 18 West Virginia Banker Surf’s Up: How to Ride the FinTech Wave Rather Than Be Swept Over By Liz DeVos, Brad Rustin, and Randy Saunders; Nelson Mullins Riley & Scarborough, LLP A ny banker that has not felt the current building around personalized financial services has not read a newspaper, used a mobile phone, or turned on the televi- sion in the last five years. While initially, many traditional community, regional, and national banks pushed back and fought against the tide of FinTech; now, innovative and growing banks are embracing these companies, driving revenue growth, and building partnerships that retain customers, drive deposits, and lower costs. Traditional banks that viewed growth as a matter of acquiring others, building branches, or merging have now found new opportunities embracing FinTech. However, to ride this wave requires significant institutional knowledge and the right approach to risk management. From 2010 to the third quarter of 2017, more than 3,330 new technology-based firms serving the financial services industry have been found- ed, 40% of which are focused on banking and capital markets. 1 The financing of these firms has been growing rapidly, reaching $22 billion globally in 2017, a thirteen-fold increase since 2010. 2 Lending by FinTechs now makes up 36% of all personal loans, from less than 1% in 2010. 3 Banks can either become part of this wave, or can be swept by and under. These same FinTechs that are growing ex- ponentially faster than traditional banks are faced with a daunting challenge—the federal and state regulations surrounding financial services. As their products grow, the FinTechs realize that the “Fin” of FinTech involves sig- nificant, sometimes decades-old financial reg- ulations. Rather than spend millions of dollars from its limited capital to obtain licenses and registrations (or, presumably, an OCC Special Purpose National Bank Charter), 4 the FinTechs can bypass these issues by partnering with an existing bank. Rather than viewing these groups as competi- tors, entrepreneurial community and regional banks now partner with these groups, serving as the regulated financial institution for the platform and letting the FinTech focus on the “Tech” portion of the equation. Telling, of the FORBES 10 Biggest FinTech Companies in America, seven of the top ten use a bank as the basis of their platform or have pursued bank charters. Though participating in this space requires a great deal of knowledge on the part of the bank partner and a robust compliance department, the benefits to the bank can be unmatched. As an example, WebBank (Avant, LendingClub, Prosper), as of the close of 2007, had 14 employees, $23 million in assets, no non-mortgage consumer loans, and $1 million in net income. Ten years later, WebBank has 82 em- ployees (+19% annualized growth), $628 million in assets (+39% annualized growth), $173 million in non-mortgage consumer loans (+567% annualized growth), and $27.5 million in net income (+39% annualized growth). Similarly, Cross River Bank (Affirm, CoinBase, Peerform, Upstart), as of the close of mid-2008 (earliest available) had 7 employees, $9 million in assets, no non-mortgage consumer loans, and -$651,000 in operating income. By the close of 2017, Cross River Bank had 142 employees (+35% annualized growth), $877 million in assets (+58% annualized growth), $330 million in non- mortgage consumer loans (+610% annualized growth), and $26 million in net operating income (+451% annualized growth). Cross River has now originated over $20bn in loans. However, with this growth also comes significant concentration concerns. Typical Peer Group 2 and 3 banks have 0.32% and 0.20% average loans held for sale as a percentage of assets. 5 Comparatively, WebBank has 49.7% loans held for sale and Cross River Bank has 14.92%. 6