By Roy Urrico
Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.
Finastra, a global provider of open financial platforms, software applications and marketplaces, released new research that examines what financial institutions think about fintech investment, integration, and environmental, social and governance (ESG).
The study from U.K.-based Finastra, which also has U.S. headquarters in Lake Mary, Fla., concluded that 90% of financial institutions are actively pursuing new fintech partnerships to improve their offerings. The Finastra survey, produced in collaboration with business banking market research and analysis firm East & Partners, indicated that financial institution leaders seek fintech partners who can help progress innovation and provide clear return on investment.
“In an environment characterized by uncertainty, high inflation, fluctuating interest rates and recessionary risks, banks are under an increasing amount of pressure to drive operational costs down while continuing to improve how they serve their customers,” said Isabel Fernandez, executive vice president of lending at Finastra. She noted the survey demonstrated the recognition from financial institutions that they cannot navigate these waters alone. “They are instead opting to partner with fintechs, with a preference for plugging into a platform of integrated fintech solutions, to help them to adapt quickly while reducing costs.”
The research was conducted among 783 interviewees at 260 financial institutions in the U.K., Europe, the Middle East, Asia Pacific, and the Americas, as well as 393 interviews with North American community banks and financial institutions. The markets covered: Kenya, Nigeria, South Africa, Tanzania, Hong Kong, Singapore, Japan, Australia, Germany, France, U.K., Nordics, United Arab Emirates, Gulf States and North America.
"Major inflection points in recent years have had, and are still having, a dramatic impact on how financial services is evolving,” said East & Partners Global Head of Markets Analysis Martin Smith. “This is forcing institutions to reconsider how they manage risk, increase their agility, and fast-track innovation to evolve with new demands. We partnered with Finastra to better understand and showcase how banks are adapting to this environment. We believe that despite the challenges facing global banks, the industry’s focus on collaboration and driving ESG initiatives forward, highlighted by the research, will ultimately have great benefits for financial institutions and their customers, today and in the future.”
Key Findings
The survey’s research reveals that when it comes to lending, financial institutions overwhelmingly view fintech partnerships as a vehicle to improve their offering. The major pain point they currently face stems from the lack of streamlined digital workflows.
Additional key findings from the survey include:
· Three-fourths of the financial institutions prefer fintechs that can clearly demonstrate black and white revenue gains stemming from streamlined processes, leading directly to increased share of wallet and retention.
· Fintech partners cannot have too disruptive an impact on operations and customers, with 65% of respondents indicating that guaranteeing minimal impact is a priority.
· Of the 69% of respondents focusing on ESG priorities, attaining senior management alignment on sustainability initiatives (59%) and reducing carbon emissions (36%) stood out as key drivers for fintech partnerships, representing a clear growing area of focus.
· Eleven percent of respondents said they utilize automated approvals, while just 10% offer automated loan closing processes. Even fewer respondents have succeeded with origination and servicing automation, at 7% and 6% respectively.
Other insights include:
Economic uncertainty affecting fintech investment. When considering the current economic climate, applying digital transformation received mixed results with under two thirds (62%) of financial institutions actively investing. Almost 40% of respondents delayed fintech implementation plans and instead adopted a “wait and see” approach, indicating fintech opportunities remain an option with more economic clarity.
Fintech integration comes with challenges. Interoperability constraints (47%), legacy system upgrades (36%), and automating manual processes (31%) persist as the main challenges teams face when integrating fintechs into their product offerings, highlighting the need for flexible software solutions powered by open APIs (application programming interfaces).
Opportunities for Credit Unions and Other RCFIs
There are a number of ways credit unions and regional and community financial institutions (RCFIs) can benefit from fintech partnerships. “There are clear opportunities for effective partnerships between institutions like community banks and credit unions, and fintechs,” Fernandez told Finopotamus.
“What we see really stand as a barrier to entry often is a financial institution’s main technology provider – many providers make it prohibitively expensive for banks and credit unions to work with outside software providers, which limits how much these institutions can benefit from innovation happening in the fintech ecosystem.” Fernandez said. She added, “For smaller financial institutions, in particular, who face greater competition and macroeconomic pressures than perhaps ever before, flexibility is key.”
Fernandez observed community financial institutions struggle with significant project overruns, the difficulty of integrating fintech apps with legacy systems, and the need to prove a clear return on investment (ROI) related to revenue growth or customer acquisition. “Enterprise institutions, however, noted that they plan to connect to four fintechs on average in the next 18 months. Across financial institutions, many teams focus on different outcomes and see different challenges, which may dilute the overall efforts to reach common goals.”
Fernandez pointed to the almost a third of the financial institutions surveyed (31%) responding that one of the primary barriers was internal coordination and cooperation when integrating fintechs with internal product offerings, while 20% said that a lack of a strategic direction and plan holds them back.
Providing ESG-Focused Solutions
ESG — a framework employed to evaluate an organization's business practices and performance on many sustainable and principled issues — shows growth as an area of focus for financial institutions. Of the 69% of respondents focusing on ESG priorities, attaining senior management alignment on sustainability initiatives (59%) and reducing carbon emissions (36%) are key drivers for fintech partnerships, representing a clear growing area of focus.
Fernandez explained RCFIs can help others achieve their own ESG goals through green finance initiatives supported by fintech partnerships. “One example is solar panel installation, which many homeowners and business owners now embrace across the U.S.” Utilizing various data sources, the energy yield of panels in a specific location when combined with a customer’s finances, can help a solar company provide financing options. In this situation, the financial institution can provide a green loan with a low chance of default, Fernandez suggested.
“The research also shows that ESG is continuing to expand throughout a bank’s internal operations and external offerings. At Finastra, we champion the idea that finance is open,” said Fernandez. “Whether through our open platform for collaboration and innovation – FusionFabric.cloud – or our belief in open technology, mindset and culture, we are helping banks future-proof their offerings and drive a better future for the communities they serve.”