Where does the bank end and fintech begin?


The banking industry is in the midst of a strong transition, with the market digitizing at an unprecedented rate. In 2023, there are multiple venues for digital payments, be it digital wallets, cryptocurrencies, or online banking, and as a result, the financial ecosystem looks very different than it did a few years ago.

This is a shift from the traditional means of money where banks were the dominant players in money services, ushering in a new era of transactions. In fact, the global digital payments market is escalating and is projected to grow from $96.19 billion in 2022 to $111.11 billion in 2023 at a compound annual growth rate (CAGR) of 15.5%.

Following suit, financial technology (fintech) is rapidly gaining prominence to help this market transition. Although fintech has a microcosm of its own within the larger ecosystem, more and more new niches are emerging as this innovation begins to mix with other financial players. An example of this is what is known as banking as a service (BaaS), where multiple stakeholders come together to provide a variety of financial resources to customers in a centralized location.

This technological paradigm shift is altering the business models seen in financial services. Let’s take a look at what exactly BaaS is, how it’s changing the focus of businesses in the financial sector, and how the future of money services is being built.

BaaS gaining prominence

Among traditional finance organizations, 82% plan to increase collaboration with fintech companies in the next three to five years. As banks transition to the online interface, there are a plethora of options available, but most of them are made possible by what is known as an API.

An API is an acronym for Application Programming Interface, and it provides a single point of access for different systems in the financial sector creating what is known as “open banking”. Open banking allows different players to interconnect, and the API does the job by defining what information should be shared between the two systems, communicating only what is necessary.

For older institutions, such as traditional banks, this interface is critical, acting as the link between their legacy systems and newer systems, as seen in the fintech sphere. By bridging the gap between new and old, APIs allow the two players to cross-function without having to change their code and operating procedures, mitigating the risk of costly mistakes.

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McKinsey recently conducted a global survey of IT executives at major banks and their perspective on APIs, which revealed that 88% of respondents believe APIs have become more important in the last two years. Additionally, 81% think APIs are a priority for IT and business functions, with large banks launching API programs allocating around 14% of their IT budget to them on average.

BaaS providers, by leveraging the power of an API, can take collaboration in the financial ecosystem to the next level. Companies implementing BaaS can provide account holders with more alternatives for financial transparency by opening up their APIs to third-party developers to deliver new, more personalized services. Ultimately, this allows organizations to connect with their users’ banks to make money movements easy, with more options on how to move that money.

By launching its own BaaS platform, a legacy institution like a bank can advance the industry while creating new revenue streams. Customers can pay a monthly charge to access the BaaS platform, or they can pay separately for each service they use. Either way, banks will gain an advantage over their competitors in the new digital marketplace through APIs and BaaS.

Market Strategy vs. Ecosystem Strategy

This transition has put banks in a survival of the fittest situation because the digital experience is critical when it comes to people and their money. According to consumer research conducted by Salesforce.com, 80% of consumers say that the digital experience is as important as their products or services.

But banks are still in the early stages of customer-facing solutions, at least compared to what fintech will bring to the game in 2023. Only around half of banking industry respondents (53%) think they are consumer-focused, compared to more than 80% of fintech survey participants.

A go-to-market strategy essentially means building a platform that makes a bank available to the digital transaction market. A platform is any product or company that helps reduce market friction, but to qualify as a platform, it must enable transactions between two parties with the value generated by the transactions themselves.

On the other hand, a bank must work with other businesses to create value if it wants to become an ecosystem. According to McKinsey, a data ecosystem is a platform that combines data from numerous providers and generates value through the use of processed data. A successful ecosystem balances two priorities: building economies of scale and cultivating a collaborative network.

An ecosystem brings buyers and sellers together for transactions in various linked industries by offering a shared solution, within the context of a specific value proposition. For example, this could be a financial lifestyle proposition in the context of banking, where the bank acts as the orchestrator of the ecosystem, bringing together companies that help customers in all aspects of their financial lives. This could be things like insurance, renovation loans, or budget help, all of which are built into the bank’s platform.

In this context, a consumer is more likely to stay with a bank that offers integrated banking through an ecosystem because the loyalty services or programs are much more personalized. If banks can subscribe to this strategy, they can start to level up with fintech, offering niche solutions to their clients.

The future of financial collaborations

Technology can increase a bank’s contribution as well as its influence in the financial ecosystem, and there are many companies that are specifically designed to smooth this transition for legacy institutions. One such company is Infinant, which recently became part of the Jack Henry & Associates, Inc. family.

An S&P 500 firm and comprehensive financial technology provider, Jack Henry™ enhances the ties between financial institutions and the people and businesses they serve. They help provide banks and credit unions with access to a dynamic ecosystem of in-house capabilities, as well as the opportunity to engage with top fintechs. The collaborative network manifested by Jack Henry™ is helping businesses develop faster, differentiate themselves from the competition, and compete successfully and strategically while meeting the changing needs of their account holders.

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Infinant is a natural fit into this diverse financial ecosystem and will be a major driver for banks’ digitization by offering the technology platform and power tools they need to do so. Infinant’s “Interlace” platform offers a single cloud-native infrastructure to power both community banks’ integrated finance and BaaS programs. The platform can offer direct links to the back-end systems of records used by financial institutions, or it can be implemented to use the virtual account system, offering end-of-day settlement to Jack Henry’s central systems.

Interlace sets itself apart by allowing banks to choose the features, fintech, and processors that best suit their needs, giving banks the confidence to easily integrate banking and fintech into partner applications. This is significant because when banks are in complete control of their entire ecosystem, they have the opportunity to thrive with their customers, fintech, and brands.

Solutions driven by innovation and collaboration will help banks and fintechs come together to deliver a better future of financial services centered on openness, cooperation, and user orientation. Ultimately, this will lower the barriers to financial health for everyone transacting in the increasingly digital marketplace.

Disclosure: This article mentions a client of a company in the Espacio portfolio.



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