What Should Fintechs Know About Bank Priorities?
By: Bryan Yurcan
Bank Director’s 2022 Technology Survey reveals key insights for financial technology companies who want to do business with banks:
- During the prior 18 months, popular areas of discussion for the leadership team and the board included: Cryptocurrency/digital assets: 75%; Banking as a service: 64%; ESG: 69%; Cannabis: 58%.
- Fifty-seven percent of bank directors and executives thought branches and digital channels were equally critical to growth. Only one-third thought digital was more important than the branch.
- Respondents were more likely to consider local banks and/or credit unions (56%) or big/superregional banks (46%) to be their greatest competitive threats — rather than digital, nonbank financial providers.
- Eighty-eight percent said their bank used the cloud to generate efficiencies; 66% used application programming interfaces. Only 32% reported using robotic process automation.
- Just 25% of respondents thought they had the tools to effectively serve Generation Z, while half believed they could serve millennials effectively.
- Eighty-nine percent invested in cybersecurity/information security tools during the previous 18 months; 56% invested in data/analytics and 53% invested in risk and compliance technology.
- Nearly half said they had a fully digital account opening process for consumers but only 26% had a fully digital process for small business deposit accounts.
- The median tech budget for fiscal year 2022 was $1 million.
In recent years, investment dollars flowed unceasingly into fintech startups. That’s less the case today. Plus, banks will be more judicious in which fintechs they decide to invest in or partner with over the next year. That doesn’t mean these partnerships will end, just that banks will focus on fintechs that solve a specific set of problems.
The good news is that bank tech spending does not appear to be slowing down. According to Bank Director’s 2022 Technology Survey, sponsored by CDW, 81 percent of banks increased their technology budget compared to 2021.
With the current uncertain economic conditions in 2023, spending on technology may be affected compared with recent years, but experts differ on how much.
“The uncertain economic environment does potentially impact 2023 spending,” says Sam Kilmer, who leads Cornerstone Advisors’ fintech advisory practice. “While the number of banks reporting a reduced IT budget for 2023 is only a small sliver, that sliver is relatively larger than in prior years.”
Banks may not necessarily spend less, but will be more judicious where they spend money, says Emmett Higdon, digital banking director at Javelin Strategy & Research, who also predicts banks will focus on tech that will help them with personalization and the digital customer journey.
Banks are likely to partner with, and invest in, fintechs “that help create better engagement with customers; it’s no longer about throwing more shiny objects out there,” he adds.
A Focus on Digital Customer Experience Tools
This focus on customer engagement will manifest itself a few different areas. Fintechs that can help banks parse massive amounts of customer data and provide unique, customized insights to end users are thus appealing partners, Higdon says.
Fintechs that can help banks digitize the entire customer journey will also be appealing partners. The system deployments banks plan in 2023 all center around this area, says Kilmer. Those include digital account opening capabilities, commercial and small business loan origination systems and consumer digital loan origination systems.
“[Bank purchasing] has changed to be predominantly digital now, from demand generation all the way through to evaluation and purchase,” Kilmer says. “What these top areas [of tech investment for 2023] all have in common is that, together, they allow a bank to systematically grow with digital as the primary (if not only) interaction point.”
Fintech companies that can help banks integrate these digital experiences into their customer journeys will be desired partners for banks. Fintechs need to “demonstrate a high-value, growth-driving experience that thinks through the necessary systems’ integration and compliance,” Kilmer says.
Banks, especially smaller to-mid-sized banks, are also finally turning their eye towards creating more innovative tech solutions for commercial clients. This is especially true of small business clients, who often use retail consumer accounts and digital products because there are no digital services designed for them. In the Technology Survey, 22% of respondents said they don’t have the tools in place to effectively serve small business customers; 18% of respondents didn’t have the tools to serve mid-sized customers. [More than half of respondents represent banks with less than $1 billion in assets.]
Specifically, digital account opening for small businesses will be a priority, says Ian Benton, senior analyst at Javelin Strategy & Research.
Smaller banks “are losing small business customers to big banks,” he says, adding that 60% of small businesses say they bank with Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. or American Express Co.
A big reason for this is those megabanks offer digital account opening capabilities, and digital loan origination tools. That includes not only pure digital account opening, but the ability for a cross channel experience, such as starting an account opening process online and finishing it in the branch without having to start over again, or vice versa. Many big banks provide the tools that smaller banks don’t.
Interestingly, in Bank Director’s Technology Survey, nearly half of the respondents said they had a fully digital account opening process for consumers but only 26% had a fully digital process for small business deposit accounts. However, that could be starting to change, Benton said. In the Technology Survey, only 14% had a fully digital process for small business loans; 33% had a partially digital process.
“Community banks are starting to come around and realize they need this option,” he notes. “All digital innovation doesn’t necessarily trickle down [from larger banks to small banks] but this might be one of the cases where it does.”
Cybersecurity and Fraud
Another likely spending priority for banks in 2023 is on cybersecurity and fraud tools. Nearly 90 percent of those polled in the 2022 Bank Director survey cited cybersecurity as a spending priority and 62% said tools to fight fraud were a priority. Those numbers are likely to rise as fraud and cybersecurity continue to be an issue in the industry; fraud attacks targeting banks grew by 159% in 2021 compared to the prior year, according to technology firm Feedzai.
In a July 2022 report, the Federal Reserve noted “the rising number of advanced persistent threats increases the potential for malicious cyber activity within the financial sector,” including ransomware attacks, sophisticated denial-of-service threats and the increased probability of state-sponsored cyberattacks stemming from geopolitical unrest.
Expect spending on cybersecurity to continue into 2023; a Boston Consulting Group report noted that financial institutions are 300 times more vulnerable to cyberattacks than other industries.
BaaS and Fintech Partnerships
Overall, more than half of survey respondents saw fintechs as vendors only, not collaborating partners. However, this could change as more partnerships are driven via banking-as-a-service (BaaS) arrangements. BaaS, which is gaining in popularity over the past couple of years, can be described as an arrangement where a fintech or other non-bank third party utilizes a banking platform to create and launch new banking products and services directly to consumers.
Seattle Bank, a private, $750 million asset institution in Seattle, Washington, has embraced several BaaS-style partnerships. In December it engaged in a partnership with Guidant Financial, which offers services such as helping retirees use 401(k)s or other retirement accounts to start a small business. The result of the partnership was a fully digital solution that allows Guidant’s clients to open a new 401(k) plan checking account to accept the rollover funds before transferring them to a C Corporation created on behalf of the client and then finally depositing them into the new business account.
The partnership illustrates Seattle Bank’s philosophy, which enables fintechs, and other non-financial companies to provide financial solutions and bring banking directly to customers through seamless, integrated transactions, says Josh Williams, chief banking officer and head of partnerships at Seattle Bank.
In terms of what Seattle Bank looks for in fintech or other non-bank partners, Williams asks: “Is it solving a problem for the end client, is it technically possible, does it meet the industry compliance standards and is it an economical benefit for all parties involved?”
Williams notes many of the fintechs for whom funding has dried up were at an early stage, or they did not have a clear value proposition. He believes fintechs that reduce customer acquisition costs, add convenience for customers and improve customer service will always be appealing as a partner for banks.
Williams also notes that with many fintechs losing funding in the past year, there is also an opportunity for banks to acquire them and add their technology and expertise. While this is not something Seattle Bank is actively considering, Williams notes that “we have had a few calls from some of these companies looking at what their options might be.”
Bank Director’s Technology Survey was conducted in June and July 2022. Almost half of the 138 responding bank directors and senior executives represented financial institutions below $1 billion in assets, while 35% were from banks with $1 billion to $5 billion in assets and 20% represented banks over $5 billion in assets.