Partnerships between banks and fintechs serve consumers better than competition
It was a busy summer in the "regtech" world. On July 31, 2018 the OCC announced it would begin accepting national bank charter applications from financial technology companies. The decision was unveiled only hours after the Treasury Department released a report endorsing a national fintech charter. Just one week later, the CFPB announced it was forming a global network of regulators to help guide fintech firms, a network that did not yet include the OCC or other U.S. agencies. The CFTC, meanwhile, started its own international effort at fintech coordination, and the FDIC has a potential claim to the space through its industrial loan company charter.
What does all of this mean for Wisconsin's banking industry? "In my opinion, the regulatory moves are really non-events," said JP Nicols, managing director at Fintech Forge. "Fintech is already a major force in the financial services industry without there being fintech charters." While a charter may make sense for some fintech companies, many are doing just fine without one. Eight of the LinkedIn Top 50 Startups (and six of the top 25) are fintechs, and none of them have shown any public interest in pursuing a banking charter. Either way, fintech is here to stay. But, that doesn't mean traditional depository institutions will disappear, provided they keep their focus on serving their customers.
Open for Collaboration
Financial technology companies have been around for decades—digital banking products and services aren't new. For example, WBA subsidiary FIPCO had been selling electronic forms to financial institutions since the late 1980s before launching its latest software product, Compliance Concierge, in 2012. In the early days, fintech companies were closely tied to the banking industry, according to Forbes, primarily focused on improving products and processes rather than inventing new ones. The "new wave" fintech startups that have galvanized the industry and reignited the disruption debates in media started out wanting to replace traditional banks. Over the past decade or so, the ones that have survived have gotten wiser with age. "Reality has sunk in with a lot of fintech companies that it's not that easy," said Girish Ramachandra, senior manager leading fintech and blockchain initiatives at Wipfli. "What we see today is a lot more fintech companies open for collaboration."
One of the largest hurdles for that collaboration is regulatory concerns on the banks' side, and many states are taking steps to address those. Following a U.K. model, in April 2018 Arizona became the first state to enact a law allowing for the establishment of a "regulatory sandbox" program, and several other states are following suit. Generally speaking, these sandboxes create a relationship between a regulator and financial institution where the bank may test innovations with actual customers without full regulatory burden. "Regulatory sandboxes will help catapult collaboration to the next level," said Ramachandra. "Wisconsin banks should focus on participating in these regulatory sandboxes. There isn't one in Wisconsin yet, but it is being discussed."
Several Wisconsin banks have already forged partnerships with fintech companies. The Bank of Lake Mills and MPOWER work together to provide financing for foreign students, Richland County Bank and Shell Lake State Bank were the first banks to go live with Compliance Concierge, and Horicon Bank joined forces with Malauzai to upgrade its entire digital presence. "We were trying to improve our online systems and that led us to search for something different, which led to Malauzai," said Horicon Bank President Fred Schwertfeger. "Our task was to find a true digital partner who could help us expand our digital offerings and take advantage of our core's flexibility and maximize efficiencies," explained Mark Nelson, chief information and operations officer. Finding opportunities to collaborate and potential partners requires banks to be proactive, Nelson says. "It's important in this space to be out and about. You can't expect it to come to you." He advises going to conferences and serving on boards and committees with vendors as a good way to make connections and find potential partners.
The Consumers Will Win
Ultimately, the most effective collaborations between banks and fintech companies are driven by a desire to better serve their customers. Adapting and adopting digital platforms and other technologies offered by fintechs helps banks meet their customers' demands—demands which have fundamentally changed over the past decade. "There's a disconnect for your customers if your bank isn't as responsive and available 24/7 as other services like Amazon," said Nicols. That change means banks are no longer only competing with each another to offer solutions. "It doesn't matter if the solution is another bank or not," Nicols continued. "Losing is losing."
In order to make sure they're on the winning side, banks need to align their products and delivery channels with customer needs and wants, not just what technology is available to them through their current vendors. "Demographics and behavior are changing so rapidly, with so much change in digital and social, the way customers buy is changing," said Ramachandra. "Ultimately, the customer has to win." To figure out what their customers wants and needs are, banks should analyze their customers' behavior. "Every small and midsize bank should do customer journey mapping every year," Ramachandra advised. "You need to have that data so you can provide an experience that is a hybrid of in-branch, online, and mobile banking."
The New Model: A Hybrid Experience
As the way in which consumers expect to bank has changed, a new model for success in financial services has arisen: delivering a hybrid experience with in-branch, digital, and mobile channels all working together seamlessly. "Customer experience is the best with hybrid models," Ramachandra explained. "It's not one versus the other. It's about working together to give the best experience to the customer."
It is extremely difficult (and expensive) for most banks to develop those platforms and delivery channels in-house—that's where the fintech partners come in. The good news is, it is not as difficult as some might think for banks and fintechs to integrate. In order to implement internet and mobile banking services, for example, a bank may have up to a dozen interfaces and six or seven vendors—including core systems—involved. "When you think about it, seven or eight fintechs are fit together serving that bank," said Robb Gaynor, general manager and head of digital banking solutions, North America for Malauzai, a Finastra Company. "The whole industry is already set up to allow fintechs to service banks."
One critically important consideration for any financial institution looking to partner with a fintech is how well the new system will integrate with the bank's core. "It's hard to do any transactions if the digital system doesn't interact with your core," said Nelson. "There are new systems out there now where digital systems and core are almost merged. For us, it's very important that those two systems work hand-in-hand." The most common way for that to happen is through open banking and application programing interfaces (APIs). In Europe, open banking is gaining traction with the support of regulation; the Payment Services Directive 2 (PSD2) requires lenders to share consumer banking data with third parties when authorized by the customer. "In that world [of European open banking], banks will need to be a platform, not just pushing their products out through their pipelines," Nicols explained.
Gaynor would prefer to take it a step further. "I want 50 percent of the digital services consumers use to be third-party products rather than ones the bank provides," he said, emphasizing that the banks still need to be very involved. "Part of their responsibility as a provider is to deliver not only the bank's technology, but also third-parties'." Currently, he estimates that consumers use 10 percent third-party products, and are not getting the best solutions as a result.
And that is the key to success for any business, whether it's a bank, a fintech, or an online retail giant like Amazon: providing customers with the best possible solutions. It is up to banks to overcome obstacles to that goal if the industry is to thrive in the new world of open banking and hybrid models. "Ultimately, consumers suffer when cool fintech solutions can't get into their hands," said Gaynor.
The future of the financial services industry is not banks or fintechs; it's banks and fintechs.