Q2’s Software Helps Community Banks Digitize Customer Operations

Q2 Holdings (NYSE: QTWO) sees big opportunity in the digitization of small banks.

The Austin, TX- based company sells software to community financial institutions, including credit unions, so that they can offer banking services online and via mobile devices. In March, the company went public in a $101 million initial public offering, selling 7.8 million shares at $13 each. I recently caught up with Q2’s CEO Matt Flake following the expiration of the post-IPO quiet period to find out about the company’s customers and its expansion plans.

“We’ve been around for 10 years…digital services have become much more common in banking,” he says.

The catalyst? Proliferation of smartphones and the advent of social media sites like Facebook and Twitter. “With the ramp up of mobile, what you’re seeing in business technology is the need to function on all of these devices all the time,” Flake added. “People aren’t going to the branch anymore. ”

Big banks are already tailoring services to enable customers to conduct many transactions online and via their smartphones. Flake says Q2’s software helps their smaller counterparts level the playing field. After all, he adds, community banks make 75 percent of the loans to small business. “They are the lifeblood of the economy,” he says.

Founded in 2004, Q2 now provides electronic banking services to more than 340 banks and credit unions. That’s less than 3 percent of the 13,500 such institutions in America today, but Flake says Q2 is growing. The company has customers in 48 states, with 3.5 million users—a growth of 33 percent in the past year—accessing their services through Q2’s software.

For the first quarter, Q2 reported a net loss of $5.3 million, compared to a net loss of $2.2 million from the same quarter a year earlier.

The company plans to use the new funds to expand its sales and marketing efforts as well as invest in R&D to come up with new software related to security and analytics, Flake says. He plans to expand Q2’s workforce by nearly 100 people to 500 workers by year’s end.

Q2 is part of a broader group of tech firms seeking to innovate within the financial industry, an area covered by my colleague, Joao-Pierre Ruth, Xconomy’s New York editor. For example, earlier this year, Quovo announced it had begun a private beta of its portfolio management software after having raised $1.4 million in a Series A funding round. The New York-based startup particularly targets smaller financial advisors and foundations that don’t have the IT resources of bigger firms.

Another New York startup, EquaMetrics, has developed software called Rizm that gives individual traders an automated platform similar to those used by hedge funds and other large institutions. EquaMetrics was started in 2011 and has so far raised $4.5 million in venture capital.

Flake points out that Q2’s customers of small banks and credit unions are ripe targets for the company’s services, “since most of the technology that they use is from the late ’90s that didn’t contemplate modern design or devices.”

The old technology also did not provide these institutions with the ability to analyze customer behavior and then tailor services to meet those needs, he says. Such scrutiny helps banks keep an eye on unauthorized traffic. “The technology to monitor traffic is more sophisticated than it was even 7 or 8 years ago,” Flake says. “It takes all the behavior that occurs on all devices and sees the patterns—that you typically log on from the same device, do the same things, interact with the system in the same way. We monitor all of those behaviors.”

Clients using Q2’s system have stopped $12 million worth of fraud, he adds.

Flake admits that the transition to an increasingly digital experience takes some acclimatizing—for both the banks and their customers. “There is a cultural issue with people not used to it; bankers are used to delivering things in person,” he says. “We think the digital experience can be just as rewarding as a personal experience.”

And Q2 does have competitors in this space. Flake points to Digital Insight, a systems provider that was purchased by Duluth, GA-based NCR (NYSE: NCR) for $1.65 billion earlier this year, and First Data, an Atlanta-based payments processing company.

Flake says Q2’s advantage is that the company has developed e-banking software from the beginning and has that business as its only focus. “There was no legacy technology to hold us back and no customers that we had to address,” he adds. “We were able to start with a clean slate.”

Angela Shah is the editor of Xconomy Texas. She can be reached at ashah@xconomy.com or (214) 793-5763. Follow @angelashah

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