Reaching new customers through fintech partnerships 

Reaching new customers through fintech partnerships

Sergio Barbosa, CEO, FutureBank


Co-founder and CIO of enterprise software development house, Global Kinetic, Sergio directly heads its open banking platform, FutureBank. A skilled software engineer, innovative product developer, and keen business strategist, he has participated in several notable fintech milestones, including building the southern hemisphere’s first digital-only bank all the way back in 2002.

Back in October, I made an argument for open banking’s relevance to regional American banks and credit unions. I listed several ways that open banking platforms could benefit institutions like these – specifically those with under a billion dollars in assets.

My focus in this post is on the enormous potential banking-as-a-service (BaaS) and banking-as-a-platform (BaaP) have for helping traditional banks reach new customers, including those that were uneconomical, unreachable, or unheard of in a physically restrictive and data deficient banking paradigm.

Platforms that leverage APIs and facilitate integration can enable banks to benefit from fintechs’ data-driven and customer-centric approach to innovation by offering them the embedded finance foundation that fintechs need in return for greater customer acquisition on the bank side.

They can also enable banks to develop highly engaging new offerings faster, more efficiently, and with far less risk than before. Both fintechs and banks could leverage a combined customer data set in various ways – with their approval, of course.

Let’s look at three broad opportunities banks and credit unions have to gain new customers or members through open banking partnerships.

Meeting the needs of niche markets

What bank is the best fit for serial house restorers? And for TikTok entrepreneurs? Convenience store franchisees? Everything counts in large amounts, as the song goes, and the economies of scale that digital technologies can provide could bring millions of potential customers within reach of the smallest bank. Sifting through them, you’re bound to find a market, even a very niche, geographically distributed one.

Going “niche”, as they say, means targeting market segments and communities united by emotional or cultural bonds, personal concerns, and unmet financial needs that have little to do with geography. 

US banks and credit unions have long focused on the needs of narrowly-defined communities, but their geographical footprint has almost always been limited by cost considerations related to their physical branch and ATM networks, if not by their charters too.

No more. Digital channels have freed them – and their competitors – to market to prospects and serve customers far beyond their home county, state, or region without much additional outlay. To get a good return on investment, however, they have to hone their value proposition carefully – and that may require further specialization.

Going “niche”, as they say, means targeting market segments and communities united by emotional or cultural bonds, personal concerns, and unmet financial needs that have little to do with geography. These groups may always have been there – ethnic, racial, or sexual minorities, for example – or could be entirely new – think of crypto-asset traders and gig economy workers.

It’s an approach that many smaller financial institutions see as a way to differentiate themselves from competitors large and small, gain customers, and profit from value-added services delivered through low-cost channels – even as banking infrastructure and traditional banking products are commoditized.

Some examples:

All of these businesses reflect something profoundly different about the open banking paradigm: banking is increasingly conceived of as something rooted in everyday life, occasioning a far wider range of interactions at many more moments in the day.

High-context recommendations – product and service cross- or up-sell, meaningful communication and useful advice, shortcuts to the next step on any given journey – these all depend on knowing your customer intimately and understanding the motivation behind their transactions.

Fintech partnerships help these financial institutions:

Meeting the needs of the unbanked

The US federal Community Reinvestment Act obliges financial institutions to serve neighbourhoods across a range of incomes in their catchment, but industry consolidation, commercial imperatives, as well as patchy enforcement have seen low-income communities – urban as well as rural – hit disproportionately hard by branch closures spanning decades. It’s a leading cause of financial exclusion, together with lack of government ID, insufficient credit history, and unaffordable or unpredictable service fees.

Open banking platforms can go a some way to addressing financial exclusion while helping mid-sized banks and credit unions reach new customers at reduced risk. 

According to the US Federal Reserve, 6 percent of adults in the United States are unbanked, while 16 percent are under-banked (the FDIC has similar figures). These millions of Americans represent frustrated human potential and an untapped market. Digital service provision is not a cure-all, as the Fed pointed out just before the onset of the pandemic, but open banking platforms can go some way to addressing the problem while helping mid-sized banks and credit unions reach new customers at reduced risk.

Partner-provided data concerning devices, payments, online and social media interactions, etc., combined with third-party AI systems help manage risk and improve efficiency, so that the market can be served more cheaply and effectively.

Fintech partnerships help these institutions:

Meeting the needs of other businesses’ customers

Open banking – BaaS in particular – has opened many senior executives’ eyes to the exciting potential in distributing financial services over third-party channels, essentially reaching and making money from people and businesses with which their institution does not have a direct relationship.

With embedded finance, the bank brand may take a back seat to another – a racing car maker, a global charity, even a Kardashian or two – but the opportunities to extend your reach are immense. 

These third parties are often fintechs, but they could be any enterprise looking to leverage banks’ money-moving infrastructure, rich troves of data, and competencies in areas like fraud detection and prevention, identity and access management, and regulatory compliance. Banks, in turn, either gain revenue directly from the fees they charge or benefit from their products’ relatively cost-effective exposure to a wider, captive audience.

Some examples:

Embedded finance is an especially promising development. It allows financial services providers and an almost limitless number of non-bank brands to integrate financial services seamlessly in websites, apps, games, and the point of sale for greater convenience and deeper engagement. The bank brand may take a back seat to another – a racing car maker, a global charity, even a Kardashian or two – but the opportunities to extend your reach are immense.

BaaS partnerships help these institutions:

You don’t have to be a fintech startup to be excited by the future these partnerships will help build. Regional banks and credit unions have as much to gain as any other stakeholder, and with the right partners and a few good ideas, they will.

FutureBank is a fintech marketplace and technology platform enabling banks and credit unions of all sizes to test a wide range of third-party products at scale. There is minimal upfront cost and significantly less risk involved in making an investment. Compatible with over 6000 financial institution back-end systems, we offer a single integration point for fintech technologies for rapid time-to-market.

Looking to explore new opportunities in open banking?

Contact FutureBank for a presentation.

Regional banks have a big opportunity in open banking

Regional banks have a big opportunity in open banking

Sergio Barbosa, CEO, FutureBank

Co-founder and CIO of enterprise software development house, Global KineticSergio directly heads its open banking platform, FutureBank. A skilled software engineer, innovative product developer, and keen business strategist, he has participated in several notable fintech milestones, including building the southern hemisphere’s first digital-only bank all the way back in 2002.

Pandemic spurs digital transformation drive

Even as this pandemic pushed digitalization to the top of banks’ agendas, associated business stresses cut into their capacity to respond. Forced to prioritize measures to survive now over thriving the year after next, they re-allocated resources overnight. IT budgets were hit hard. Big digital transformation projects – including open banking initiatives – were cut or scaled back at HSBC, ING, RBS, and other boldface behemoths.

At smaller financial institutions, the situation was often critical. Regional banks and credit unions that were further along in their transformation journeys were in a significantly better situation than those that were not, but everyone was stretched by the new imperative to serve their customers and members remotely in straightened circumstances.

And yet. Over 18 months since the drama of that first lockdown, thousands of US financial institutions can proudly say that they got there faster than they thought they would. Many of their customers took a leap into the digital void with them, and a large percentage of those will continue using self-service channels after the masks come off for the last time.

 

No time to wait on open banking

 

We aren’t out of the woods yet, mind you, not by any measure. Margins are thin, fintechs continue targeting the most profitable lines of bank business, and unprecedented self-service banking rates, otherwise a reason to celebrate, are negatively impacting customer satisfaction rates across all ages.

There are strong indications that traditional banks and credit unions, including the very largest, are losing primary account status to digital-only banks at a faster rate than before. As reported by Ron Shevlin of Cornerstone Advisors, “Roughly one in four Gen Zers and Millennials now call a checking account from a digital bank their primary account. That’s about double the percentage it was at just nine months ago” (my emphasis).

Financial institutions of all sizes – but small- to mid-sized ones especially – face some level of threat from categories of companies no-one would have heard of 20 or even 10 years ago. The point is that banking is being reshaped by forces outside of the industry’s traditional spheres of influence and ignoring it won’t make it go away. In a July 2021 report with a focus on the United Kingdom, McKinsey says, “If open finance continues to accelerate it could reshape the global financial services ecosystem, change the very idea of banking, and increase pressure on incumbent banks.”

Bank consolidation declined somewhat during the pandemic but is predicted to lurch upwards in the coming years, driven in part by digitalization. Change is no longer negotiable for incumbents hoping to be around in twenty years, and it has to encompass pretty much everything about the business. McKinsey again: “It will be imperative to understand and respond to these changes, reimagine offerings, adjust business models, and forge successful partnerships with fintechs or tech companies, to ensure continued success and relevance.”

Regional banks and credit unions face a dilemma like few anyone in the industry remembers. With barely any time to catch their collective breath, they must set about the next stage of their digital transformation. Covid-19’s systemic side effects did nothing if not make the case for open banking stronger, more urgently central to American financial institutions’ future prospects than it was before.

 

Open banking is also a significant opportunity

 

Research by the Digital Banking Report shows that over half of banks with assets of €86.22 billion or more already have an open banking strategy in place or say they will have within a year. Overall, 24 percent of financial institutions (all tiers) have a strategy, and another 21 percent plan to implement one in the next two years.

In the United States, regulators are not setting the open banking agenda, as they are in Europe, Australia, India, or Brazil. It’s commercial self-interest, good old-fashioned competition in an ever widening ecosystem owing its lush good health to technical innovation and the mutual benefit of value exchange. The APIs on which much of this ecosystem rests have contributed immeasurably to Big Tech’s successes and are driving the so-called “platformication” of nearly every business model out there, including banking.

 

Open banking can benefit banks and credit unions in several important ways, including:

 

I will go into some of these in greater detail in my next couple of blog posts. Today, I’d like to underscore how vital third-party partnerships and cross-organizational collaboration is in achieving each of these benefits, especially for institutions where the digital mindset is not yet pervasive and relevant expertise thin on the ground, which is to say, most banks and credit unions.

 

With open banking, small isn’t the big deal it used to be

 

I recently read that JPMorgan Chase’s annual tech spend is around €6.90 billion more than the combined amount at all 94 US banks with assets between €8.62 billion and €86.22 billion. Still, no institution – not even JPMorgan Chase – can do it all, well, and at the speed of change we are seeing. The days of going it alone are over.

There is a growing ecosystem that combines the best resources, niche products and services, a ton of data, and existing and potential customers. Using APIs, smaller banks can access the ecosystem and contribute to it through banking-as-a-service or -platform models. They can do pretty much everything their giant competitors do, faster than they could have before, with less risk and fewer development and operational costs, relatively speaking.

 

Partnering for the best value in open banking

 

Developing an open banking strategy and navigating the highly dynamic fintech ecosystem isn’t easy. Banks without dedicated DevOps teams and sandboxes usually need a partner to guide them through the process of testing and integrating complementary third-party products and services or facilitating the same for their prospective fintech partners.

FutureBank is a fintech marketplace and technology platform enabling banks and credit unions of all sizes to test a wide range of third-party products at scale. There is minimal upfront cost and significantly less risk involved in making an investment. Compatible with over 6000 financial institution back-end systems, we offer a single integration point for fintech technologies for rapid time-to-market.

I would like to invite any bank or fintech planning on or considering a banking-as-a-service or -platform play to view our offering, which I believe is unique in the market for its focus on both ends of the open banking spectrum, if not also the breadth of pre-integrated technologies on offer.

 

Looking to protect your institution’s future and explore new opportunities in open banking? Contact FutureBank for a presentation.