[Originally published by the Florida Bankers Association]
The financial world is obsessed with fintechs. Not a day goes by that we don’t hear something about how they are changing payments, money transfer, and the entire financial services industry.
If you’re like most financial services professionals, you’re trying to figure out what role they play in your business. Are fintechs a threat or a potential partner? Are we supposed to become a fintech, invest in a fintech, acquire a fintech, or stay on the sidelines hoping for the dust to settle and a clear path to emerge?
Define the Concept.
Let’s begin with a simple definition. Quite literally, financial services + technology = fintech. When you hear that word mentioned, you may be thinking to yourself, well, if that’s all it is, then we are already offering fintech! And that’s good news, as Fortune reported in October 2021 that nearly 9 in 10 Americans are using some type of fintech platform a) to manage their financial lives, b) looking for ways to save time and money, or c) seeking more financial control.
Another obvious realization you probably have had is that in today’s world, it’s almost impossible and unheard of to offer financial services without the involvement of some type of technology. And you’d be right. In fact, operating as a financial institution with any degree of success guarantees that fintech is part of your business.
Define the Relationship.
Knowing what fintech is helps us understand our relationship with it. There are several possible connectors to you and fintech, we’ll explore four of them here:
1. If you are utilizing technology right now to offer even the bare minimum of digital services to your customers, you’re most likely using fintech as a vendor.
2. There can be an unintentional relationship in which your customers use fintechs that may interface with services you offer, often without your endorsement. The fintech Plaid offers an interface between financial institutions and apps such as the budgeting app Mint, and the payment transfer app Venmo, both of which are fintechs themselves. These services may be considered complementary or competitive to services you provide.
3. This is when fintechs need banks for their financial infrastructure and access to the payment system. The simple fact is, fintechs depend on traditional banks and credit unions to access the banking system. In this scenario, the bank simply serves as a vendor to the fintech.
4. This may be the best-case scenario for all parties involved. That’s where you, as a bank, identify a specific technological direction you want to go, peruse the vast number of players in the fintech world and select the right one to partner with. Rather than viewing each other as necessary evils, both fintechs and community banks stand to mutually benefit from a strategic partnership.
Define the Opportunities.
Now that we’ve defined the relationship, let’s take the next step. Let’s readjust the lens a bit and see if a broader perspective helps you identify ways to utilize those relationships to your best advantage. What’s the end game? Well, every financial institution desires to increase market share, elevate customer experiences, improve efficiency, and boost revenue. The right relationship with the right fintech can help you achieve those goals in three specific ways: operational technology solutions, customer facing solutions or front-end technology solutions.
1. Operational Technology Solutions
You may have already applied third party technology to your core to improve operational efficiencies. For example, technology to automate and streamline wire processing, or technology to automate Reg. E disputes. In addition to efficiency gains, operational technology solutions often improve internal controls, compliance and monitoring, and ensure you are delivering consistent and expedient customer experiences. It’s likely you’ve already implemented such technology using the fintech-as-vendor connection.
2. Customer Facing Solutions
When your core providers don’t support the innovation, customization, or specialization you need to meet your growth goals, it’s time to look for a fintech partner who provides customer facing technology solutions. Fortunately, there are an abundance of fintechs who provide a wide range of core-agnostic solutions to support the result you seek. This differentiation may allow you to gain market share within your geographic footprint, or access niche markets nationwide.
For example, many banks partner with a fintech to offer online lending platforms, integrating the processes from application to decisioning to funding and documentation. Or, by offering small business depositors sub-accounting and escrow services through a fintech, you may be uniquely positioned to gain new customers from business loan and deposit clients. Offering specialized services for your consumer and business clients positions your financial institution as innovative and forward-thinking, further amplifying your position as a market leader.
3. Front-end Fintech or “Banking as a Service”
Front-end fintech partnerships are arrangements where a bank’s infrastructure is combined with a fintech’s technology in order for a non-bank to accept deposits, extend credit, access payment systems and issue debit and credit cards. This model typically involves the fintech using the bank as a vendor and is described as Banking as a Service, or BaaS. This relationship can be a lucrative business model for banks. For example, the automated savings app Digit reports they have helped customers save over $7 billion since 2015. Those funds are swept from their users’ financial institution accounts into a Digit savings bucket. Digit deposits those collective funds in their BaaS provider.
Define the Strategy.
Without a doubt, fintechs have initiated an era of radical change for community banks. They’ve opened up possibilities and created opportunities for new geographic markets, niche segments and services offered by financial intuitions of every size. In many respects, fintechs are leveling the playing field between community banks and the largest national providers of financial services, as well as opening financial services to previously unserved or under-served markets.
However, truly decoding the fintech puzzle starts with your strategic plan. When you have a clear business strategy, you can find the fintech solutions and partners to help your financial institution reach your unique goals and objectives.
Using your strategic plan as your roadmap, you can then explore and prioritize the right service offerings to support your plan, conduct a feasibility analysis and risk assessment, identify your goals and key performance indicators, find and evaluate fintechs providing solutions to meet those needs, conduct a thorough vendor analysis and due diligence, and negotiate a contract with your preferred partner. Then the fun begins with implementation and marketing your new service or solution.
Rather than reacting to headlines and the pressure to “do something NOW,” we find the wisest course of action is a strategic one. We believe fintechs can be great strategic partners, adding significant value to your business and helping you thrive in this age of opportunity.