The financial services industry is abuzz with nascent fintechs on one side and veteran banks and credit unions on the other. Characteristics of a strong ecosystem with multiple players, coupled with burgeoning partnerships are manifest. Yet are today’s community banks and credit unions prepared to espouse and foster this new phenomenon?
It is imperative for community banks and credit unions to participate in the connected ecosystem, with governments, other incumbent FIs and fintechs resigning to coevolution to serve their customers. The customer is the driving force, propelling FIs to adopt newer business models in order to meet their changing expectations. A PWC survey among bank executives revealed that 75% of banks are investing to develop a more customer-centric business model, while a mere 17% feel “very prepared” to undergo this change.
With antiquated legacy technology being the primary obstacle to meet customer demands, many institutions are choosing to partner with fintechs as a means to extend the value of their existing technology infrastructure and accelerate the development and deployment of new digital banking capabilities.
Community FIs can partner with fintechs on different fronts to remain relevant in the rapidly evolving environment. Technology can be a major enabler if leveraged for the right reasons with the right partner, presenting a gateway into the field of innovation and fulfilling the following objectives.
Enhancing the customer experience
FIs partner with fintechs to provide a better experience for their customers in the form of products and services. The very philosophy that customer experience will translate into acquisition and retention is the primary objective of these endeavors. An enhanced customer experience allows more ways in which customers can stay connected to the FI, such as registration, onboarding, account closure, money management, alerts and messaging, appointment scheduling, virtual assistants, application tracking, and many more. FIs have realized the value of enhancing customer experience from cradle to grave, traversing discovery, exploration, product offering, usage, helping and engaging through different channels.
Improving operational efficiency
These partnerships are primarily focused on the back-end operations of the FIs, including research, compliance, legal, risk and keeping abreast with regulations. This positions FIs to achieve increased effectiveness and efficiency in the product-related primary activities and the secondary support activities of the FI.
Reaching a broader customer base
Powering the fintechs with their financial infrastructure, FIs can provide their banking services to an extended customer base through the user interface of the fintech. These services can include, but are not limited to, payments, insurance, wealth management, lending, and capital markets.
Credit unions periodically resurge, as they did during the Great Recession and have done so during the 2020 pandemic. The trend is optimistic for savings, bolstered by stimulus checks and low gas spending, leading to a 20.6% increase of savings balances in 2020 and poised to grow by 15% in 2021. FIs catering to the increasing lending demand from Baby Boomers and Gen X have realized that the only way to retain customers is to keep up with the big tech experience.
Offering a big tech experience in a restless market brimming with fidgety customers requires an agile and adaptable business model that can easily accommodate fintech partners so that FIs can augment their capabilities, while still pursuing their basic mission.
Competition is kept at bay by meaningful partnerships and strategic acquisitions. Bigger banks like Goldman Sachs, Citigroup, and JPMorgan Chase are supplementing their offerings through fintech acquisitions. While their smaller counterparts cannot follow suit with the same strategy, many have opted to offer key collaboration with fintechs who are waiting to hinge onto bank infrastructure to bring their offerings to the market. Banking as a Service is a great facilitator to significantly reorganize the business models. FIs embarking on Banking as a Service should consider the following:
Ensure fit-for-purpose partnerships
Many community FIs are overwhelmed by peer pressure and often resort to services and products that don’t fit into their primary business model. It is important to ensure that the FIs do not deviate from their key values, trivializing their intended mission. Partnerships should be a bridge to filling the strategic capability gaps to meet the demands of the customer.
Use the opportunity at the nodes of partnerships
FIs should wake up to the strengths of their existing systems that have been built with purpose and reason and use fintechs to make them stronger in providing more innovation at the nodes of their incumbent strengths and fintech capability. The trust and goodwill that is inherent in community FIs through their regulated financial products such as loans, deposit accounts and payment systems, are provided to the non-bank players, who in turn offer these to their own clients, with less regulatory overhead on them. In the tableau of Banking as a Service, each actor plays to their strengths.
Use technology that can accelerate partnerships
The advent of the cloud has opened infinite possibilities through scalable platforms and powerful APIs that can help FIs partner with ease. FIs must consider a unifying cloud-based platform that can be a canvas for innovation through Banking as a Service. Fintech partners can simply integrate through APIs while FIs can enjoy the customer base that is multiplying – thanks to the fintechs. More and more community banks and credit unions are fitting into the digital curriculum by opening their financial infrastructure to fintechs through digital banking platforms.
Do not disrupt the core
After all, time is of the essence when it comes to keeping up with changing customer expectations. FIs are tending towards adopting solutions that do not rip and replace their existing cores, but rather easily integrate with their cores. This is made possible through the power of modern technology platforms discussed earlier and helps FIs to stay relevant by reaching the market more quickly.
There is an obvious correlation between FIs’ appetite to use BaaS and their success in staying relevant in the connected ecosystem. BaaS has helped non-banks increase their revenue by offering banking services, while FIs can easily reach a broader customer base of the non-banks. The concept is a testimony to the synergetic relationships which is fundamental to the connected world of the future.
Booshan Rengachari is founder and CEO of Finzly, a fintech provider of modern banking applications for payments, foreign exchange, trade finance and digital account opening. For more information, visit www.finzly.com.