Anton Schutz, founder of Mendon Capital Advisors, is helping set up a fintech fund designed to let community banks find new technology for both deployment and investment.

The Mendon Ventures BankTech Fund intends to raise $100 million and will assist lenders in scouring through financial technology companies to order to find services fitting banks’ needs, Schutz said in an interview. No more than 40 banks will be able to join the fund as investments will be limited to between $2.5 million and $5 million.

“We want to be a little more bespoke and spend more time individually with the companies that invest so we can find a solution for their desires, their needs,” Schutz said. Data analytics, automation, core banking, payments, and risk and compliance will be among key focus areas, according to Andrew Marquardt, another of the fund’s co-founders.

The fund is targeting small- to mid-cap banks with up to $50 billion in total assets, and a few lenders with assets of less than $1 billion have already committed investments, Schutz said, reflecting a push to work with banks that lack the resources to wade through fintech proposals. For banks, the payoff from partnering with a tech-savvy fund could be quick and easy access to fintechs offering both potential investment gains and competitive advantages in their day-to-day operations.

“If you have a fund that’s pre-screening this stuff, then you can potentially share in some of the upside,” said Michael Rose, an analyst for Raymond James. “That could be a win-win both from a time perspective, but also from a first-mover advantage.”

The effort is similar to the Jacobs Asset Management LLC-sponsored JAM FINTOP Banktech fund, which also has banks as limited partners and is making investments in the financial technology space. While participating banks will certainly look for investment returns, a primary goal will likely be exposure to a multitude of fintech startups that could improve the banks’ operations.

“A lot of people think: Are they going to make money? But I think that’s secondary here. For a lot of community banks, the fintech world is vast and unknown,” said Michael Perito, an analyst for Keefe Bruyette & Woods, speaking generally about venture capital funds, not the Mendon fund specifically. Perito said small community banks can struggle to identify the right fintech partner, so participating in a venture capital fund can be an effective method of weeding out ineffective fintechs.

Schutz, who founded Mendon Capital Advisors in 1996 and primarily invests in financial services, said his fund will differentiate itself through its intellectual capital and a smaller investor group. Also, joining Schutz as co-founders are John Clausen, a portfolio manager and former analyst and regulator; and Daniel Goldfarb, a longtime small cap portfolio manager.

Schutz said the fund will look to close its first investing round in the early fourth quarter and make some investments immediately after the close as they have already entered final due diligence on some ideas. Fintechs focused on banking technology have attracted significant investment dollars recently.

When upgrading their technology offerings, banks have faced a “buy, build or partner” decision: buy a fintech that provides the service, build the service themselves or partner with a fintech. For community banks, the buy and build options are difficult to impossible considering sky-high valuations and the high cost of hiring tech-savvy employees, Perito said. Participating in a venture capital fund allows banks to pursue the partnership option without dedicating significant hours to wading through the thousands of options.

KBW’s Perito also said participating in a fund can save community banks time and ensure they are staying on top of the latest fintech innovations. He said small banks that are not participating in a venture capital fund are likely “in a very challenging place.”

Even limiting the fintech world to startups that focus on banking technology represents a vast space. There are fintechs looking to improve all sorts of banking activities, from core processing to data analytics to risk and compliance. Perito highlighted fraud prevention and Know Your Customer compliance as a top fintech area of focus for banks, as well as end-to-end digitization of basic offerings such as account openings or mortgage refinancing. “A lot of banks will tell you they offer that, but if you ask whether it’s a 100% digitally native process, the ‘yeses’ get a lot fewer,” Perito said.