By W.B. King
Billed as the premiere event focusing on financial data and the ecosystems built by data aggregators, banks, payment firms and fintechs, several industry insiders came to together virtually at Tearsheet’s DataDay Conference in late June 2022 discussing a host of related topics.
“This world we are entering into of open finance, data aggregation, interoperability…it really points to the ability of a financial institution (FI) to learn how to partner and to partner better and quicker,” said Zack Miller, founder and editor-in-chief of Tearsheet, who hosted the session: “What FIs Need to do to Become a Fintech, or Compete with Fintechs.”
Miller asked his guest, Fiserv’s Head of Next Generation Solutions David McIninch, what it takes for banks and credit unions to successfully partner in this era.
“From the bank’s point of view, they are the ones actually controlling all the data and customer relationships and all the access to those customers. They recognize where they sit and how valuable they are in the ecosystem and reach out and look to partner with fintechs that can help them,” said McIninch. “Whereas a lot of fintechs are thinking that they need to distribute through a bank channel but there is a 10-to-one ratio between fintechs and banks and fintechs and credit unions.”
As a result, he said FIs are bombarded with fintech proposals with the latter trying to figure out how best to move through the value proposition process.
“The fintechs need to understand what’s in it for the bank earlier on. As a core provider, we [Fiserv] are sort of agnostic, so if you want us to plug in an app to just about anything, we will work with you to get that done,” he said, adding that Fiserv is essentially a technology facilitator.
“We can’t certify the reliability of it [the app] or anything like that, but we can help our banks go through that process,” he continued. “It’s really important for those two groups to meet and recognize what the value proposition actually is and how they are going to make beautiful music together that benefits both parties in the equation.”
Determining Where FIs and Fintechs Fit Within the Greater Ecosystem
In Miller’s view, there is a different mentality at play with FIs and fintechs, so he queried McIninch on what’s “powering” successful partnerships.
With regard to banking as a service (BaaS) and embedded finance, McIninch said there is larger ecosystem comprised of application programming interface (API) providers and data orchestration tools, among other variables.
Many fintechs, he further explained, are coming to the market promising to build BaaS solutions that include overseeing all complexities on the back end, such as plug-and-play and running the solution through an FBO (For-Benefit-Of ) account.
“That is a very reliable partnership in many cases and there are very many distinguished fintechs out there that are doing that," he said. "So again, I go back to: Does the bank understand what it is trying to accomplish?”
Optionality, he added, can “potentially sink a lot of these efforts — where you could go in a million different directions.” Banks and credit unions, he noted, have to be laser-focused on initiatives, whether it is growing low-cost deposits or increasing a loan-to-deposit ratios or developing products for millennials.
“Whatever it is they want to accomplish, that has to be nailed down first. Finding that right third party — whether a systems integrator or a BaaS provider or collectives that are now popping up that are [comprised of] ex-bankers who are focused on BaaS as a platform, those could be the right [partners] if you hone in on the right outcome.”
The good news for banks and credit unions is that they are in the driver’s seat, McIninch said.
“They should recognize that and think very carefully about what can I accomplish and how fast because that’s also part of the equation,” he said. “There are a lot of third parties out there that can help marry the fintech and the bank in a way that makes everything run really well.”
The Hunt for More Efficient Solutions
Miller asked McIninch to explain in greater detail how FIs are thinking about embedded finance and the hunt for better solutions, such as lower cost deposits while driving the demand for credit products.
“Banks, at least a lot of them, are still fairly immature in terms of understanding how the whole value chain kind of works. They are used to sending someone out into the field to source new opportunities, especially on the commercial side,” he said.” They have a proactive sales force that is out there hunting for new deposits. Whereas now the best place to aggregate those, in many cases, is in a digital channel.”
FIs, he said, are discovering that they are not proficient at acquiring low-cost deposits through digital channels. A traditional bank, he explained, will spend approximately $300 to acquire a deposit account relationship.
“The best fintechs are doing it for $15 to $30 dollars for an acquisition,” he said. “Banks should recognize that if they are not good at doing that, they probably shouldn’t and let the fintech go and acquire. And on the back end, the bank just needs to think about the things they are good at and where they have scale and leverage that scale to the benefit of everybody.”
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