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Partnerships can help banks fill digital gaps

To hold onto their customers, traditional institutions should consider connecting with innovative fintechs to boost their capabilities.

Mar 13, 2023 / Digital Banking

Despite the fact that nearly every U.S. consumer has an account with a traditional bank, these banks are still feeling pressured by their digital-first competitors when it comes to customer experience.

Traditional banks are challenged to match the speed and innovation of their new competitors due to the complexities and regulations of the traditional banking industry. They’ve experimented with creating new internal departments, acquiring startups and even launching neobanks of their own. In being so hyper-focused on replicating the experiences offered by fintechs, most banks haven’t considered the opportunity to work with these digital challengers.

For our second annual Sopra Banking Software Digital Banking Experience Report, we spoke with more than 700 global banking leaders to gauge how banks’ mindsets towards fintechs are changing, and where these digital challengers fit into their overall digital transformation. Among the top-line findings: 74% of banks still view fintechs as a threat to their existence, but an even greater number (77%) feel pressured to work with them to stay relevant.

As banks contemplate what a future built on collaboration with fintechs looks like, here are three examples of what we can expect:

Banks take back the driver’s seat: The U.S. Treasury Department recently acknowledged the competitive pressure from fintechs on the rest of the industry, saying that non-banks have “increased competition and innovation” in the market. As a result, fintechs can expect more regulatory attention in the future.

While traditional banks have been adhering to regulatory requirements since their inception, fintechs have nowhere near the same level of history or expertise. This puts banks in a unique position to provide fintechs with the services and infrastructure they need to be in compliance with existing and future federal regulations.

And it’s not just regulations that banks can help fintechs navigate—they can provide fintechs with everything from banking licenses to infrastructure, too.

New business models, new revenue streams: This mutually beneficial relationship with fintechs can be extended into an entirely new—and extremely lucrative—business model for banks: Banking-as-a-service (BaaS).

The more that banks can help fintechs become fully functioning banks, the more revenue banks can earn. With BaaS, this means fintechs can offer traditional retail banking services, such as mortgages, personal loans and credit cards, without acquiring the licenses or building the necessary infrastructure. Fintechs and neobanks are freed up to focus on innovation and heightening customers’ experience with their bank.

Most banks are in agreement about the benefits of BaaS—according to the DBX Report, 74% said that this “as-a-service” approach will become the leading business model of the future.

BaaS means that banks will cede the consumer-facing piece of their financial interactions to fintechs, while they power back-end capabilities. While this model puts banks in more of an ‘invisible partner’ role, it empowers them to do what they’re good at and can drive significant revenue for them—BaaS annual revenue is expected to grow to more than $25 billion in 2026.

Future-proofing against up-and-comers: Banks were the sole providers of financial experiences to consumers until fintechs entered the market. There’s no doubt that this rate of innovation will continue and introduce a new wave of competitors that can take market share from both banks and fintechs.

Tech giants such as Google and Amazon, along with major retailers like Walmart, have taken steps to integrate financial offerings into their customers’ experience through features like money transfer, credit and financing, Buy Now, Pay Later and one-click payments.

Like fintechs, non-financial companies still have a long way to go before they can acquire the licensing and capital needed to become banks on their own. But their existing trust with consumers could be strong enough to pose a threat to banks and fintechs alike, should they choose to head in this direction.

In fact, 46% of consumers would be willing to bank with companies like Amazon, Apple and Microsoft if they were to offer banking capabilities, according to the DBX Report.

The good news for banks is that consumers trust them, too. To hold onto their customers, banks should consider partnering with fintechs as a way to fill gaps in their digital offerings. In such an arrangement, both parties strengthen one another and give consumers one less excuse to bank elsewhere.

Eric Bierry is CEO at Sopra Banking Software