US regulators are failing to provide the necessary support to foster innovation among the country's community banks, according to Suresh Ramamurthi, chief technology officer and chairman of CBW Bank.
"If I, as a bank, need support for innovation that I am doing, I don’t know who to call,” says Ramamurthi.
“We have zero support. In fact, we end up with higher scrutiny because we are considered to be something new, which slows down what we are doing,” he says. “If we don’t have these rails and the infrastructure on which you can innovate, you can only innovate around the fringes.”
On October 2, chairwoman of the Federal Deposit Insurance Corporation (FDIC) Jelena McWilliams told a conference in Missouri that her goal was to lay “the foundation for the next chapter of banking by encouraging innovation”.
“This is not optional for the FDIC. We must lay this foundation because the survival of our community banks depends on it,” said McWilliams. “While the FDIC has limited ability to address the direct cost of developing and deploying technology at any one institution, there are things that we can do to foster innovation across all community banks and to reduce the regulatory cost of innovation.
“We cannot sit on that proverbial regulatory perch and observe the change from above. We have to get on the ground, roll up our sleeves, and get to work on supporting and advancing scalable technological change that works for community banks,” she said.
But part of the problem is the lack of expertise within community banks on how to go about investing in fintech firms, according to Ramamurthi. In an attempt to overcome the issue, some community banks have formed groups to work together.
“One [community bank] group has approached us, and we are studying it and looking to see how we can help them out,” says Ramamurthi. “They are still trying to understand how to work with fintechs.
“I don’t know if banks can directly invest in fintechs and take the same level of risk of a VC company,” he says. “I would argue that not all [community] banks have the expertise to invest in a Silicon Valley start-up. Some VCs I’ve talked to expect that when they make 20 investments, they are going to lose 19. So, 19 of them are going to most likely fail or break even.”
Difficulties in integrating new technology with community banks’ core banking systems adds to the challenge, according to Ramamurthi.
“We’ve met quite a few community banks’ chief executive officers… they are all stuck with existing core vendors, and they cannot integrate a fintech into their bank easily,” he says. “Until you replace [core banking systems] you are not going to be able to do much.
“[Core banking infrastructure] is controlled by five or six companies in the country, and there is no fintech challenging that right now,” says Ramamurthi.
“The existing core vendors have extremely strong contracts with the community banks, so the banks cannot change core vendors for five or seven years.”