Are Banks Blind to Fintech?

Conventional banks are not oblivious; rather, they are too large to cater to the needs of small to medium-sized businesses. (<$1B) While challengers to these big banks mainly target consumer markets with convenient money transfer, payment, and bill-paying services like PayPal, Apple Pay, Chime, and Stripe, the question arises: how can we extend this convenience to commercial accounts?

Small to medium-sized businesses often opt to open bank accounts with local banks, despite rarely visiting the physical branch and utilizing only a fraction of the services offered. The reason behind this behavior, according to SlipStream Financial, lies in the banks' lack of understanding of their specific needs and customer base nuances. As a result, many industry-specific software companies are now exploring the potential of BaaS (Banking as a Service) and Embedded banking solutions to provide tailored financial services, enabling these businesses to bypass the limitations of traditional brick-and-mortar banks. Let's delve into some key trends in the banking sector.

Eroding Bank Advantages

Traditional banks have a few advantages that they believe will protect them from the fintech threat: branch coverage, the trust they enjoy from customers and government regulation. However these advantages are eroding rapidly and are mainly focused on consumers.

According to consultancy firm McKinsey, in the past decade, the top 25 US banks managed to grow deposits while reducing their branch footprint by 15%. Clearly, having a physical branch in every neighborhood is no longer necessary to drive customer deposits, as well as engagement.

Misunderstanding Disruption

Legacy banks tendency is to have a narrow and misguided understanding of disruptive business models. This usually begins with treating a new competitor as traditional ones. For example Cathy Bessant, Bank of America’s CTO, commented on Apple’s announcement of a new credit card: “My reaction when I saw the announcement was, first competitively, all of the features that are in that card are offerings we have today.”

The propensity to see only the product or service and not the entire business model is common among incumbents across a range of industries. Kodak, Blockbuster and Nokia were only three of the hundreds of disrupted incumbents which were able to see only the product that threatened them and not how the business models of their competitors allowed the creation of entirely new ecosystems.

In Comes FinTechs

Fintech, a blend of "financial technology", encompasses companies leveraging cutting-edge technology to revolutionize traditional financial practices in delivering services. From mobile banking to borrowing services and exploring the realm of cryptocurrency, these innovations are geared towards making financial services more accessible to the public. Fintech companies, comprising startups, established financial institutions, and tech entities, aim to enhance or even replace the financial services offered by conventional banks.

Delving into specific fintech platforms utilized by commercial accounts and industry-specific software providers to enrich their core services, we encounter the realms of BaaS and embedded banking. These platforms empower businesses to provide banking-like services without the need to establish a full-fledged bank. However, venturing into these offerings necessitates collaboration with companies offering PM (program manager) services, compliance, and back-office operations. Noteworthy mentions in this space include www.marqeta.com, www.galileo-ft.com, and www.stripe.com, albeit requiring a significant initial investment exceeding $100,000. For those seeking a more accessible entry point, SlipStream Financial (www.slipstreamfinancial.com) stands out with offerings starting at a modest $10,000.

What is banking-as-a-service (BaaS)?

Banking-as-a-service (BaaS) is a model in which financial institutions provide access to their core banking functions through APIs. This enables third-party businesses to build their own financial products without needing to become banks. APIs allow these businesses to create and deploy a wide range of services, including payments, account management, and more complex functions such as lending. A good example of this is www.Brex.xom.

What is Embedded Finance?

Embedded finance is the integration of financial services into non-financial offerings. Examples of embedded finance could be a coffee shop app that offers 1-click payments, or a branded credit card. Another example is an insurance broker who wants to increase the “eye-balls” on his website or software. By providing more financial based services they can do this by providing a multitude of different financial services that fall under the wide breadth of “Embedded Finance”:

• Branded Cards – Loyalty Cards – Gift Cards
• Modernized vendor payments
• Bank operating accounts
• Debit Cards
• Loans