“At the heart of every bank is a service company.”
Jim McCarthy, president of i2c, remarked to Karen Webster that there are many opportunities (and some challenges) ahead of traditional financial institutions (FIs), as the shift to digital channels raises the bar for financial experiences and expectations. consumers and businesses.
Many people, he said, grow up and move forward in life having barely set foot in a brick-and-mortar branch. The app and mobile device have been the conduits for everyday financial life.
But far from being obsolete in 2022, he said, banks have a real role to play in the evolution of finance, as trusted providers – and as providers of far-reaching tech stacks. which may assist third parties in creating their own banking-like offerings integrated into the Platforms.
There are signs that FIs are realizing the potential: Consider the fact that, according to PYMNTS research, 11% of FIs are pursuing a bank-as-a-service (BaaS) strategy, while 46% are willing to consider one. . Another report predicted an overall value for the BaaS platform industry of $12.2 billion by 2031, up from a 2020 threshold of $2.5 billion.
See also: How BaaS Integration Can Enable Non-Financial Businesses to Deliver Next-Gen Payment Experiences
The time for BaaS has arrived. It’s only been a decade, he says, but “we’re a long way from the days of renting a BIN.” [bank identification numbers].'”
BINs, of course, are the numbers on payment cards that help identify issuers and FIs. Then sponsor banks would “lease” the right and ability to non-financial entities to offer cards and other products and services.
And while white labeling of account numbers and cards has been around for a while, now, 22 years into the new millennium, open banking and APIs combine compliance, payments and all sorts of back -end in a way that opens up banks to new possibilities beyond the confines of BIN numbers, pipes and rails. JPMorgan stands out, McCarthy said, having committed billions of dollars of capital each year to various technology upgrades and initiatives.
Banks must quickly move beyond their traditional “swimming lanes,” he said, if they are to be the back-end provider that helps other businesses cement lasting relationships with end users, by especially software vendors. In McCarthy’s view, every software company has the opportunity to become a FinTech, helping to facilitate payroll, for example, or corporate treasury services. And every bank, the chance to become a service provider that allows them to provide compliant banking services.
From competitors to partners
Of course, the battle has been fully engaged as banks and FinTechs vie for position with enterprise and client platforms.
“The jury may still be out who wins this race, but you need compliant, regulated entities,” McCarthy said, “and banks have a tremendous base that most FinTechs don’t.”
BaaS’s economics make it extremely attractive to US banks, especially those with less than $10 billion in assets, the so-called Durbin-exempt players. These banks are exempt from exchange caps and are well positioned to make money from customer swipes (and these banks have traditionally been the “BIN” sponsors mentioned above).
“But now a lot of banks have started realizing that they can play a bigger role,” he said. “Compliance is an asset.”
Read more: Consumer demand drives banking-as-a-service innovation
Banks are becoming emboldened enough to offer the technology stack that businesses and client platforms need. This, in turn, is helping forward-thinking customers move far beyond the limits of just offering prepaid cards with sophisticated mobile interfaces, and moving more towards offering credit to small businesses and consumption, and even BNPL. Prepayment or debit are just pieces of a big puzzle.
The expertise of traditional FIs is particularly valuable to FinTechs, as these companies face tough macroeconomic headwinds and margins shrink amid inflation. Capital is harder to come by, he said, and FinTechs are looking at how to get where they want to go, strategically. For FinTechs, the measure of success shifts from the pursuit of growth to the pursuit of profitability.
As McCarthy put it, “If you can ‘install’ FinTechs on top of your ecosystem in a way that people can easily take advantage of – with modern capabilities and a strong, regulated base, then you’re in a good place. .”
Looking ahead, he said Europe remains ahead of the curve when it comes to open banking adoption, and the rest of the world is a little behind. Banks will first struggle with the fact that there is no money to be made on exchanges.
“But there are still a lot of opportunities globally,” he said.
To achieve this, FIs will need to view their retail and corporate customers through a broader perspective of retail banking profits and losses. Banks, he said, have always struggled to discern the needs of small businesses from individual consumers, which FinTechs are navigating with aplomb. Advanced technology and machine learning can help banks help their users review their own liquidity and cash positions. Traditional financial institutions, he said, have a wide range of mortgage, auto, consumer loan and other financial products to harness the data that gives rise to a holistic view.
Meanwhile, in the next five years, there will be a market upheaval, more banks will enter the space and help fully integrate finance into various ecosystems. Banks should view compliance not as something that holds them back, but as something they are good at and something that has real value for corporate customers.
“Banks bring trust,” he said, “and they always possess trust.”