The following is a guest post from Chris Tremont, Chief Data Officer, Grasshopper, and Chris Dean, Co-Founder and CEO of Treasury Prime.
Much has happened since 2019 when Fintech Nexus (formerly LendIt Fintech) convened for the last time in-person in New York City.
For one, the effects of the pandemic and the rise of new technologies have propelled embedded finance to become a high priority among consumers and businesses.
As the Great Resignation and the booming gig economy — which grew by 33% in 2020, according to Small Business Trends — gained momentum over the past two years, it shined a light on the growing need for personalized digital products in banks’ client offerings.
For example, the banking industry continues to adapt to the demand for embedded finance options and increasingly offers banking as a service (BaaS), which is often white-labeled or co-branded services that nonbanks use to serve customers.
However, for this to work, embracing new technologies and capabilities is essential because BaaS requires the deployment of APIs and substantial risk and compliance management of the fintech partner.
At Fintech Nexus, executives from Grasshopper, Treasury Prime, Silicon Valley Bank, and Capchase came together in our session entitled “Why the Real Threat to Banks is Complacency.”
We discussed how banks must embrace fintech partnerships to be competitive. This is undoubtedly the case for digital banks, which in many respects, have a leg up on the competition given their tech-centric approach to building customer relationships. It provides a clear opportunity for businesses and consumers to benefit from efficient, low-cost services that meet each customer’s specific needs.
As proclaimed, “every company will be a fintech company” – embedded finance makes this possible. BaaS is an example where fintechs and banks work together to enable brands to offer banking services to their customers directly. Embedded finance options suit the needs of a new wave of entrepreneurs since the pandemic. More people are starting their businesses and need better opportunities to meet customer demands, primarily based on doing business in a digital environment. For consumers, it means more access to financial products, a seamless experience, and lower costs.
By working together, banks and fintechs no longer see each other as competition but as strategic partners that can provide the best possible customer experience to both of their respective client bases. This new approach offers a world of possibilities with a client-first strategy that tailors products and services to customer needs through intuitive technology and a forward-thinking business model.
Examples of why partnering is important
Traditional banks and challengers need to embrace fintech capabilities for several reasons.
First, customers increasingly seek “simple, holistic, embedded, and direct experiences.”
The more integrated, the better. As McKinsey points out, they are becoming more interested in “multi-product customer experiences” known as ecosystems.
According to Accenture, 47% of U.S. businesses are investing in and plan to roll out embedded finance products that meet these needs (The Financial Brand). People want a different way to access money and a more straightforward way. To do that, you have to have the right technology. Innovative banks recognize this.
Banks that will win over the longer term can attract clients and gather deposits through diversified channels.
Having options is good, and this can come in digital efforts, BaaS, and in-person. But not having some digital strategy as we enter this next chapter will make things more complex, and all banks should be thinking through this.
As pointed out during the session, deposit gathering hasn’t always been easy. Becoming a trusted advisor is hard. One important point made – “If banks are sitting back thinking this is always going to be easy, they’re going to be overrun. You have to have some kind of digital strategy in place and people who know how to turn dials and find deposits”.
For banks (both digital and traditional), building their technology offerings can be costly and time-consuming.
Chances are, a fintech firm has already perfected the technology. Fintech partnerships save money and allow banks to get solutions to market quicker. If your strategy, business model, and size support it, and you want better margins, buying a bank seems like a great idea, but running a bank is hard.
With banking APIs, both sides can save time and money through a quick BaaS integration. According to Accenture, APIs will provide new income potential, as embedded finance growth is expected to rise 215% over the next five years.
Fintech companies such as Plaid are raising the bar for accessibility to customer data. As stated during the session, “more Gen Z and Millennials are becoming business owners, and they’re sitting there wondering why it’s so hard to run a business when it doesn’t have to be.”.
Bank-fintech partnerships can fill the gap and provide the modern data tools that young consumers and entrepreneurs demand while accessing the banking tools that anchor these new products.
Some advice for banks and fintechs
Ultimately, at the heart of these partnerships, banks can realize their mission of improving customer relationships by being responsive to the needs of businesses and consumers and, by extension fueling the economy.
Customers need a trusted banking partner that prioritizes their individual needs and ensures that it can understand their business. By combining the tech-savvy software with a dedicated team of BaaS experts, banks can offer the complete package and approach customers with empathy and expertise.
Our advice to fintechs trying to work with banks is to make sure you’re spending time with the decision-makers from the start and keep engagement ongoing throughout the partnership because culture is essential.
Next, take compliance and regulation seriously. Finally, the partnership has got to be a win-win for both sides; make sure the deal economically serves both of your interests, and you’ll go far.