Thursday, May 12 , 2022 | James White
Fintech disruptors have many benefits over traditional financial institutions:
Despite these realities, take heart! Not all is doom and gloom for us in the financial services industry. In fact, a tremendous opportunity awaits.
Historically, fintechs' greatest asset has also been their greatest limiting factor. That greatest asset is data. Fintechs have been able to monetize their data, which has given them great flexibility in their business model. As an example, it has allowed them to go after the non-banked and the underbanked. On the other side of the equation, most fintechs only have access to the in-house data that they generate. That data has been very profitable for them but limiting all the same. Integrations are costly and can be complicated and overly complex to realize due to the required design and support. This is amplified given that newer fintechs use a data model that is designed to assist in the monetization of the data versus the ease of normalization and standardization. As such, most needed integrations are to establish connectivity to legacy systems that require custom code, long development cycles, and costly investments to create and maintain the business model.
Now let us evaluate the trends that we see coming into the fintech space. A lot of copycat fintechs have created products already being used in the industry. This has often been done as companies try to fill niche needs and market opportunities due to current limitations. We project that we will see some consolidation in this area as the fintech spectrum begins to widen. Many of you may have seen the recent PSD2 directive in Europe or that the Financial Conduct Authority (FCA) now regulates Open Banking in the United Kingdom. Both regulations are primarily focused on access to account holder data. Even though this is related to governance in these regions, finance is global, and this is the beginning for Open Banking and Open Finance across the world. We are already seeing this trend in the United States as a trickle. This shift is great for fintech disruptors because data access has been the limiting factor for them. Having more access to data will allow companies to create more comprehensive applications that allow consumers to view multiple accounts and products from multiple firms and multiple platforms in one streamlined and comprehensive user experience. Think about something like Hootsuite but in the financial services industry. This will open the door to data aggregators and more comprehensive and cohesive user experiences. You will start to see large entities like Snowflake begin to open marketplaces and app stores that allow users to download apps that connect directly into the data streams. This will allow the source of record to remain the sole source of data and remove the need for extracts and multiple copies of data. While it may be a trickle now, the flood is coming, fast. It is time to build your ark.
Source: Expectations & Experiences: Fintech Adoption; November 2021 (Survey questions to all respondents: Imagine that a well-known technology company offered a mobile app or website that allowed you access to a set of financial services, but it required you to link your banking information. How likely are you to consent to share your banking/checking account information for this purpose?)
Where does that leave the financial services industry? First, appreciate and understand the risks associated with this new trend. The biggest risk is a saturated market taking consumers one at a time. The reduced friction that consumers now command will spill over into diversification of accounts, products, vendors and create additional competition. Our immediate thoughts go to the belief that customers and members do not want to share their information. According to Expectations & Experiences, a 2021 consumer trends survey from Fiserv, that is not the case. Younger demographics are more comfortable sharing their information, with over half of the younger population surveyed stating that they would share data. The biggest risks can be the greatest set of assets. Financial institutions have an ocean of data at their fingertips. The difficulty is normalizing it and making it actionable. If financial institutions develop a strategy now and begin to execute, this will allow them to co-innovate on ideas that compete with fintechs and big banks. It will afford the opportunity to get creative with revenue streams and capital investments. As an example, credit unions can create credit union service organizations (CUSOs) that allow them to innovate, share data and generate noninterest income. With Open Finance, financial institutions can look at transaction aggregation that allows for posting priority and reduced fees that afford tremendous advantages over the block chain. It is time to embrace and own the future, not just accept the inevitable. The industry is evolving, and financial institutions need to be in front of that wave now.
We are in control of the future, but we must be active, aware, and ready to pivot. If we are not prepared, not actively focusing on popular trends, and stuck in the “we have always done what we have always done” mentality, then resistance is futile. Passiveness will cause our businesses to slowly erode with each of the new players in the market.
Keys to make sure that your financial institution is ready:
Find your way forward now. Be bold, assertive, and unafraid to evaluate aggressive change, and you and your institution will be ready.