Banks, in one form or another, have been essential to the functioning of societies for hundreds of years. It is estimated that in the US almost all citizens (92%) has an account in a traditional bank. One of the reasons these institutions have the most consumer accounts is because of their longevity: no matter what’s going on in the world, they tend to come out the other side. Another reason so many people trust traditional banks is that, until recently, the only other options they had were other banks with fairly comparable offerings.
When challenger digital banks and fintechs (think: Chime, Ally Bank, SoFi) began to emerge on the scene, consumers had more banking options than ever before. These new banks have been able to attract consumers in a way that traditional banks have not: with low or no fees, a mix of low-interest lending and high-interest savings options, digital interfaces, and easy new features. friendly option and a more transparent approach to banking. Because they aren’t tied to clunky legacy IT systems or subject to the same regulatory requirements as traditional banks, digital banks and fintechs have also been able to innovate at a rate that traditional banks simply cannot.
While traditional banks still have the trust of consumers and the lion’s share of their accounts, they are falling behind their digital competitors when it comes to customer experience. According to a December 2022 Prosper Insights & Analytics survey, 3. 4% of consumers say they interact with their bank/financial institution more often on a mobile app, compared to just twenty-one% who prefer to go to a physical place. This gap will continue to widen as challenger banks make digital banking more attractive, accessible and mainstream.
According to Sopra banking software CEO Eric BierryInstead of oversaturating the market with banking options, traditional banks are considering options to diversify their business models to work with digital banks.
“Fintechs can innovate faster than traditional banks, but they don’t have the back-end infrastructure or industry expertise to go beyond basic banking. This leaves banks with the opportunity to provide digital banks with what they need to be fully functioning banks, through a new model: Banking as a Service (BaaS).”
I spoke with Bierry immediately after the company’s US expansion about how he sees traditional banks and challengers working together, and why this will result in a new generation of banks.
Gary Drenik: Traditional banks and fintechs have long been competing for market share. Why would they suddenly want to work together?
Eric Bierry: Traditional banks have a 100+ year advantage over their competitors. This gives them unrivaled experience and knowledge. It also means they are running on legacy systems that stand between them and their ability to innovate at the same pace as fintechs. But the reality is that they don’t have to.
The banking industry has taken such a narrow view of the need for banks to replicate the experiences that fintechs are creating, that they have not even considered the opportunities for them to work together.
The shift from competitors to partners will not happen overnight. Banks will have to change their mindset about fintech. We recently surveyed banks around the world for our annual Digital Banking Experience (DBX) report and found that 74% of them still view these new entrants as a threat to their existence. However, what is interesting is that they also recognize the potential of working with them.
Drenik: It sounds like you have high expectations of banks and fintechs working together. How do you see that both benefit from this “coopetition”?
beer: Digital banks and fintechs are not only growing at an exceptional rate, they are also changing consumer expectations of their banking experiences along the way. However, they are limited in what they can offer these hard-earned customers, considering that they are not in a position, now or in the future, to provide a full suite of banking services, such as mortgages, personal loans and credit cards. . . These things require banking licenses that are timely and expensive to acquire, and back-end infrastructure and industry expertise that they don’t have, not to mention capital and regulatory requirements. Fintechs are nowhere near comparing to traditional banks in these areas.
This is where banking as a service comes in. Through BaaS, traditional banks would provide fintechs with what they need to be fully functioning banks, including their banking licences, infrastructure, and expertise. This would allow digital banks and fintechs to continue to focus on innovation and customer experience, rather than having to deal with financing, lending, and regulation. For banks, BaaS offers lucrative new sources of revenue.
Drenik: There are a number of fintechs that are focusing on equipping traditional businesses with financial capabilities, such as payments and financing. Does banking as a service also have implications outside of banking?
beer: Yes, there are a number of potential revenue streams here and we’re seeing more than half of the banks (52%) are already offering their capabilities to third parties.
With a BaaS model in place, banks can “bank” companies in traditional industries such as auto manufacturing, real estate, and insurance.
Basically, banks allow businesses to interact directly with their customers and wholesale partners to offer bank-like services, such as financing. This opens companies to entirely new revenue opportunities.
Drenik: Can you share an example of what it would be like to ‘bank’ a traditional business?
beer: Take a car manufacturer. Instead of its wholesale dealers obtaining financing from a bank to buy their fleets, the manufacturer could extend financing directly to dealers. The manufacturer not only benefits from the interest generated by the loans, but is also better able to predict its future inventory needs.
The payment and financing capabilities also bring auto companies one step closer to the consumer, so they can process transactions directly and take advantage of emerging trends such as on-demand cars.
In real estate, companies can directly finance mortgages for their homebuyers. And so. This is just the beginning of the possibilities for BaaS – we will continue to see more use cases emerge over time.
Building this new generation of banks is one of our main focuses as we continue to expand in the US.
Drenik: There is no shortage of companies in the US looking to transform banks in one way or another. What do you think is the opportunity for Sopra Banking Software in the United States?
beer: We have worked with 1,500 banks in more than 100 countries, including Barclays, Santander, Credit Suisse Y Bank of Africa–to digitize their offers and innovate the banking experiences they offer their customers. This has given us a basic understanding of what these banks have in common, their challenges and the opportunities that lie ahead.
The United States has nearly 10,000 commercial banks and credit unions, and is home to nearly 45% of the world’s fintech unicorns. It also has thriving auto, insurance, and real estate industries, all of which are undergoing a digital transformation.
While there are many companies that specialize in reviewing legacy systems, few do what we do, which is provide banks and other businesses with the digital interfaces and tools they need to unify the systems they’re using and bring new banking services and financing options to your end users. And to be clear, the United States is not a testing ground for us. We already have more than 500 million people around the world using our software through the banks we work with.
By introducing Banking as a Service to banks, we will correct their journeys and reimagine their relationships with fintechs. This will have the additional benefit of setting the stage for banks to boost the ‘banking’ of traditional businesses.
As part of the Sopra Steria Group, we are in the unique position of being an agile fintech backed by a large company to support our expansion into the US.
Drenik: With consumer concerns about finances currently at an all-time high and more than half of consumers (51%) without “rainy day” emergency funds (source: Prosper Insights & Analytics survey, December 2022), it is reassuring to know that banks are going nowhere.
Thanks, Eric, for sharing a look at how Sopra Banking Software is working to change the way banks and businesses finance the people who buy from them.