FinTech Helps Reshape the Banking Industry

Banks engage in embedded FinTech to meet consumer expectations

By Hannah Flanders

As competition throughout the banking industry continues to rise and digitalization takes the world by storm, many banks are turning to new opportunities with FinTech providers.

Today, consumers throughout the U.S. seek immediate, safe, and easy solutions in every aspect of their day-to-day lives — from transportation and grocery shopping to banking.

As banks throughout Wisconsin look to best serve consumers, their ability to create innovative, flexible offerings is one of the most important factors to consider in remaining relevant and competitive in their communities.

The Growth of Technology

In 2021, nearly half of all households across the country utilized nonbank online payment services, including peer-to-peer payments (P2P), according to the Federal Deposit Insurance Corporation’s (FDIC) 2021 Survey of Unbanked and Underbanked Households. P2P payment solutions — such as PayPal and Zelle — and other technology innovations, including Uber, DoorDash, and Zoom, have deeply engrained themselves into households across America and become especially important for younger generations to make transactions.

Already, over 1,200 banks around the country, including over 50 in Wisconsin, have begun integrating Zelle — a digital payments service offered by the FinTech provider Early Warning Services, LLC — to help meet the expectations of their customers. However, as banks continue to compete for deposits and new loans, innovation beyond incorporating P2P payments into their online services may become a necessity.

What is Embedded FinTech?

Virginia Heyburn, director – research, insights, & advocacy at Engage fi and recent keynote speaker at the Wisconsin Bankers Association’s (WBA) 2023 Bank Executives Conference, describes embedded FinTech as a strategy by which traditional banks own the experience and work to build FinTech functionality into their own digital banking experiences. This is comparable to the Banking as a Platform, or BaaP, model that banks may utilize to integrate FinTech solutions into their existing offerings.

Embedded FinTech emphasizes the bank’s possession of the brand, by way of providing the service on their own platform, and the augmentation of FinTech functionality behind the scenes. This process allows banks to strengthen their own offerings, increase customer engagement, and build loyalty rather than provide services to outside users, as is the case with embedded finance or Banking as a Service (BaaS).

What Embedded Fintech Means for Banks

Although 95.5% of all U.S. households were banked in 2021, according to the FDIC’s survey, Heyburn states that it is important that banks continue to deepen their relationships with their retail and commercial customers and offer features that are valuable to them.

By integrating property management capabilities into digital portals for landlords, disbursements for commercial clients, or intelligent budgeting and savings tools for retail customers — banks have the ability, through a partnership with a FinTech servicer, to provide an even greater number of tools and resources for consumers.

As the banking industry evolves faster than ever before, embedding FinTech into their online services will not only allow banks greater flexibility in the products offered, but provide the opportunity for banks to increase their technological capabilities. Early Warning Services, LLC, the FinTech provider of Zelle, highlights that these valuable partnerships permit banks to
utilize technology to consider new ways to attract and engage customers, including cross-selling and engagement with the banking app, as well as reduce costs in other areas such as cash and check management.

“I expect nearly every bank to pursue embedded FinTech strategies within five years,” Heyburn states.

The Challenges

While embracing FinTech solutions may be the next step for a bank, Heyburn says that legacy technology has always made the interoperability of systems challenging. Between delays, a strong reliance on core vendors, and inconsistencies, there are a number of factors to consider when strategizing a frictionless exchange of any internal or external system.

With mobile and online banking being the primary way many consumers interact with their bank, it is critical that banks not only have the personalized products individuals expect, but also can deliver information efficiently.

“Customers are no longer willing to tolerate delays and defects in the FinTech era — they are voting with their fingertips as they choose online banks that offer the speed, ease, and convenience they want,” states Heyburn. “The cost of doing nothing has never exceeded the cost of making a change — until now.”

As Forbes published in a recent article entitled Digital Transformation in Banking, in order to rapidly and cost-effectively design, create, plug in, and deploy new digital products and services, the bank’s digital product platform must be component-based, API-driven, and cloud native.

The Benefits

While less than 60% of all financial institutions currently deploy APIs or cloud computing, according to Forbes, many understand this conversion as a solution to meeting customer needs and expectations. In addition to allowing consumers the ability to connect their accounts across platforms,
engaging with FinTech servicers will provide many banks with the ability to simplify their technology — which in many cases, may be limiting an institution’s ability to roll out new competitive features or service offerings — as well as save on maintenance costs that limit the ability to compete on service price, according to PwC.

By incorporating an open banking system into their digital offerings, banks are able to balance safety and security with the expectations of all consumers. As the industry continues to evolve, and greater emphasis is placed on increasing competition in the marketplace, driving financial inclusion, and creating more consumer choice, partnerships between banks and FinTech providers have the potential to assist banks in not only improving their technological capabilities, but also more effectively serving their customers.

Interested in developing a partnership with a FinTech provider? Learn more about WBA’s upcoming FinTech Showcase at wisbank.com/FinTech.

Engage fi is a WBA Associate Member.