Existing trends that will continue past 2020
For a long time, banks and fintechs have tended to view each other as competitors. But increasingly, both sides are coming to appreciate the value of working together rather than against each other. This has led to a rapid rise in the number of bank-fintech partnerships, a trend that is only going to accelerate in 2021.
Principally, this is a matter of strategic synergies. Fintechs need the banking licenses, large balance sheets, and back-end infrastructure that incumbents are able to provide. And incumbents can benefit from the innovation and digital distribution channels that fintechs bring to the table.
As a result, banks have been investing heavily into early-stage fintech startups even as venture capital funding has declined during the pandemic. Many banks have realized that the ebb in VC investments presents a compelling opportunity to secure equity stakes in valuable fintechs at favorable valuations. In addition, these investments also give them early or proprietary access to new technologies that give them an edge over the competition.
Apart from direct investments, banks are also leveraging financial data APIs to embed their financial products in fintech apps. In fact, from Dec 2019 to July 2020, G2 saw a 133% increase in traffic to their Financial Data APIs category. This allows banks to leverage the fintech’s digital distribution, while the fintech is able to offer their customers a wider range of products.
While bank-fintech partnerships can often be mutually beneficial, many banks find it challenging to integrate their offerings with fintechs.
Primarily, this is due to a lack of in-house technical expertise or bandwidth. Since each fintech provides its own API, proper integration requires a significant investment of time and technical resources. So while banks may want to partner with multiple fintechs across the value chain, they are constrained by the pace at which they can effectively build, maintain and update those integrations.
This has led to the development of fintech-as-a-service (FaaS) platforms, which act as a modular middle layer between the bank’s core systems and fintech offerings.
These solutions are especially valuable for small and medium-sized banks that are light on in-house technical resources. For example, FaaS provider Synctera specializes in helping community banks partner with fintechs who provide reconciliation, regulatory compliance and operational services. Banks can either pick and choose between best-of-breed components or opt for an all-in-one solution, which greatly facilitates the partnership process.
Other FaaS providers offer a streamlined way to improve the core rather than simply interface with it. Fintel partner Finzly’s cloud-based operating system, BankOS, creates a digital layer on top of a bank’s existing core, providing an Appstore ecosystem for rapid prototyping and deployment of new services. The platform also integrates seamlessly with 3rd-party fintech solutions, allowing banks to leverage best-of-breed services instead of re-inventing the wheel.
Neobanks continue to take market share
Neobanks have been gaining ground on incumbents for many years now. According to competitive strategy firm CG42’s 2018 Retail Banking Vulnerability Study, the top 10 U.S. consumer banks stand to lose 11% of their clients to neobanks if they continue on their current digital trajectory. That translates into $344 billion in lost consumer deposits and $16 billion in lost revenue.
The main reason for this is that neobanks have been very effective at adopting an 80/20 strategy.
From a marketing perspective, this manifests in their targeting of underserved markets. As Anthony Costanzo, Director of New Business Development (Banking) at QuinStreet puts it, “They’re really focused on serving the underbanked communities. [They] might not have looked like competitors, but they are building platforms in order to compete with community banks […] by creating online experiences that are a one-stop-shop for consumers.”
And from a product perspective, neobanks focus on providing these customers with only the most important products for their specific needs. Frank Rotman, Founding Partner of QED Investors, thinks that this has been key to establishing a beachhead against incumbents. “While these neobanks can’t yet match the complete suite of banking products that a traditional branch-based bank can, this doesn’t matter to the typical consumer because they rarely, if ever, use any of the hundreds of products that are in a bank’s arsenal. So we’ll be talking about challenger banks in 2020 and in 2021 and in 2022 and eventually, the ‘challenger’ title will be dropped because they’ll be major players in the ecosystem.”
New trends for 2021 and beyond
Holistic approach to small business clients
In the small business market, fintech giants like Amazon, Stripe, and Square have come to dominate point-of-sale (POS) and payment activity. Thanks to their access to merchant transaction data, these companies are able to embed banking services like loans and deposit accounts into their existing services at a very low acquisition cost.
Banks should not seek to compete for head-on with these companies on their own turf. Instead, they will achieve better results by serving unmet needs across the small business value chain. This can include payments since the average small business accepts 11 forms of payment, many of which are not offered by Square or Stripe.
But more importantly, banks should also seek to offer services at the beginning of the value chain – such as inventory management and payroll – and after payments in the value chain – such as invoicing and accounts receivable. Small businesses spend more than $500 billion on such services from third-party providers, which presents a major opportunity for value-add.
For example, banks can partner with Autobooks to white-label accounting, invoicing, and payment systems for small businesses. Or they can use Nav to leverage data from retail POS and accounting systems to identify potential lending opportunities to small businesses.
Fintel founder Nicky Senyard believes these value-added services present a major opportunity for banks in 2021. “Most banks I’ve spoken to understand how fintechs disrupt personal banking and some aspects of payments. But for their business customers, banks must also start paying attention to disruptions at every layer of their value chain,” she says. “Financial institutions that can solve for their holistic needs — everything from receivables to payroll — and market those solutions well, have an opportunity to create stickier relationships with their customers.”
Banks go digital-first
In their 2020 Digital Banking Maturity study, Deloitte found that 60% of banks have either reduced branch hours or closed physical branches entirely. The pandemic has greatly accelerated digital adoption across all demographics, resulting in 59% of adults using more fintech apps compared to 2019.
Even before factoring in the effects of the pandemic, in-person visits are expected to continue to decline significantly over the next few years, as customers become increasingly comfortable with digital banking. In order to compete effectively, banks will need to develop a robust portfolio of digital products with user-friendly design and strong online distribution.
The transition to digital goes beyond banking apps and extends into payments as well. With contactless payments rapidly becoming the norm worldwide, 74% of global consumers say they will continue to use contactless cards and mobile wallets even after the pandemic. In dollars and cents, the global contactless payment market is expected to grow from $10.3 billion to $18 billion over the next five years, at a compound annual growth rate of 11.7%.
Regtechs at the forefront
In 2020, the average global bank had 10-15% of staff dedicated to compliance and regulatory activities, for a worldwide total of $287 billion in annual expenditure. And the penalties for lapses are stiff, with regulators issuing $10 billion in anti-money-laundering fines, a 26% increase from 2019.
Simply put, investment in compliance and regulatory activities is an expensive necessity, and the only question is how to do it as accurately and cost-effectively as possible.
That’s where regulatory technology (regtech) comes in. Leading-edge regtech solutions are allowing banks to streamline and automate routine compliance work while reducing the risk of human error.
According to Juniper Research, spending on regtech is expected to increase from $33 billion in 2020 to over $130 billion in 2025, for a whopping 290% of growth. This rapid growth is fuelled by two key trends:
- The increasing importance of digital onboarding. 184 million new bank accounts were opened via digital onboarding in 2020, and that number will balloon to 330 million by 2025. Banks will need automated checks and approval systems to support this increased volume.
- Advances in AI technology. AI systems in areas like ID verification will allow banks to automate most of the know-your-customer (KYC) process, providing cost savings of over $460 million in digital onboarding alone. While only 4% of digital onboarding processes used AI in 2020, this will increase to 18% by 2025.
Another area where regtech is likely to be valuable is digital marketing compliance. Due to the high visibility of marketing content, there is not only a heightened risk of regulatory lapses but also greater potential for reputational damage.
Dave Hunkele, Chief Strategy Officer at Finzly, recommends that banks account for regulatory considerations at the start of their marketing initiatives, rather than as an afterthought near the end of the planning process. This should be supplemented by regtech monitoring solutions like Fintel Check, which allows banks to automatically monitor link and content compliance among affiliate partners.
Change means opportunity
By getting ahead of these key fintech trends, banks will position themselves well for the new normal. To learn more about how Fintel and our partners can prepare you for the future of finance, contact us today.