For banks, it’s a fight for relevance, and the fintech industry threw the first punch.
But Cleveland’s largest bank is fighting back.
KeyCorp is staking its claim in the surging financial technology industry that’s drawing billions of investor dollars and disrupting the banking sector. Key has formed partnerships with a couple fintech companies, it’s seeking others and even participating as an investor with some.
The strategy is a way for banks to become bigger players in the innovation-driven fintech industry, which generally encompasses any business offering some kind of financial service through various technologies. Most focus on the payments industry, often specializing in improving super-niche transactions potentially in any industry where some kind of payment takes place.
Naturally, fintech companies and startups are disrupting the banking sector, an industry not historically associated with developing innovative new technologies within their own walls.
Saying fintech companies focus just on payments, though, is applying too narrow a definition, asserts Clark Khayat, head of enterprise commercial payments for KeyCorp. He prefers the even broader term of “treasury management.”
And when it comes to treasury management, competition isn’t coming from other banks, but fintech companies and ambitious startups that saw investments triple last year, according to CB Insights, a New York-based firm that tracks investments and venture capital. The pace is only expected to accelerate.
“In this business where we are providing our clients with access to payment capabilities and information, how do we compete in a space where most of the disruptors are not our standard competitors? The disruption is often happening at a place in the conversation where we haven’t even approached the client yet,” Khayat said.
Other banks have certainly gotten involved, too. Mega banks like JPMorgan Chase have become major players in the fintech space. More locally, even Fifth Third Bank is getting involved. But each is approaching the space differently.
So in the battle for relevance, if you can’t beat them, join them. Or, convince them to join you.
That’s Key’s perspective anyway. Because, Khayat said, “If the banks don’t do this, someone else will.”
The veritable fintech movement truly began at Key when executives put Khayat and Ken Gavrity, head of products and innovation, in their roles less than two years ago. Neither brings a payments background. Khayat, for example, was previously running merger and acquisition strategies at Key.
But the duo say not having a payments background is actually beneficial because they don’t feel directed by historical trends in that space, giving them a fresh approach to fintech relationships.
And they’re definitely taking a unique approach.
In the past couple years, Key has formed partnerships with Charlotte, N.C.-based AvidXchange and Philadelphia-based InstaMed. Both deal with payments: AvidXchange uses its software platform to digitize paper invoices, while InstaMed focuses on health care payments.
In both cases, Khayat and Gavrity have joined the boards of directors as each partnership eventually led to investments — the size of which Key declined to disclose.
Key applies the new payment technologies to its various industry verticals. The partnering companies might not receive an equity investment, but they instantly benefit from the sheer size of Key’s customer base to which their technology can be applied.
“We tell them we have a lot of clients — they have great solutions, but not clients. So we can be a distribution arm for you and professionalize your institution … in a way a startup can’t,” Khayat said.
Not every partnership may draw an equity investment, but the potential is there. One recent partnership connects Key with Century City, Calif.-based Aptexx Inc., which has a niche specialty in managing payments for multifamily real estate developers and investors. There’s been no investment component there so far.
One thing that’s unique about Aptexx, Khayat points out, is the company issues surveys after a tenant moves into a space and tracks data showing whether the person is more or less likely to renew a lease based on their satisfaction.
All those partnerships bolster Key’s already strong verticals in commercial real estate and health care.
“There’s so much innovation out there,” Gavrity said, “I think everybody is struggling to figure out, how do you synthesize strategies around everything that’s happening?”
While most traditional investors are in it for a sizable financial return, banks like Key are particularly interested in the benefits of the symbiotic relationship. Key better understands the niche industry or payment solution in which the fintech company specializes. Key also can help with maturation and understanding the complex regulatory environment surrounding the payments space.
Years ago, these deals and conversations would’ve never happened. The fintech movement seen today was in its early years, most companies were in their infancy — which inherently creates more risk for an investor — and the strategy for the bank wasn’t defined.
“Three, four, five years ago we would’ve never looked at a company like these as a potential partner with the bank,” Khayayt said. “We would’ve had to mature them too much around the data security and money management side. But now so much of that can be outsourced to really large companies that do it well, that doesn’t prohibit them from entering this space and partnering with someone like us.”
Key is still in the early stages of its fintech strategy, but the bank is encouraged in that it hasn’t partnered with any companies that have failed so far, although the risk is there, Khayat said.
“There’s bound to be a failure at some point,” Khayat said, “and we want to be prepared when that happens. Hopefully, we’re close enough with these companies that we’re not surprised.”
In the meantime, time to market with new technology is dramatically reduced, and client engagement in areas where fintech is improving payments is higher, Gavrity said.
“Our tech folks are good, but it would take us two, three years maybe to develop some of these (solutions),” Khayat said. “We’re now going from talking to these companies to being in the market in a pilot in five months. Speed in this industry matters, and banks historically haven’t been very fast with it.”