By Frank Arellano, Founder and CEO of Revolv3.
According to research by Digital Banking Report 2022, 36% of financial institution executives believe that expanding digital products and payment capabilities is the next step in bringing about dynamic industry change in 2023. With connected commerce driving the digital economy and the ever-growing demand for agile, flexible, operating models, banking and financial institutions need to step up their innovation game to stay relevant to the modern customer.
Traditional banking structures and neo banks have much to learn from each other
Traditional banks have assets and resources that most payment innovators do not have, and technological innovations play a critical role in bringing the best of both worlds to merchants and customers. However, traditional banks are losing market share to their neo counterparts due to a lack of well-established digital capabilities to complement the retail side of things. Whereas, neo banks still have room for improvement when it comes to customer support and service- as a portion of the modern-day customer base still expects the kind of services they are used to getting from face-to-face or in-person interactions.
Particularly with digital banking, customers are looking for convenience and flexibility in handling their finances. According to a study by McKinsey, 71% prefer multi-channel interactions and 25% want a fully digitally enabled private banking journey with remote human assistance available when needed. They no longer want to choose between this or that when they can have it all.
What banking technologies are expected to bridge the gap between where institutions currently are and where they aspire to be?
Embedded finance: In a nutshell, embedded finance places a financial product in an otherwise non-financial customer experience, journey or platform, and as a natural extension, offers financial services through a multitude of possibilities like digital wallets, customer loyalty apps, accounting software and shopping-cart platforms. Supersized by the exceptional rise of e-commerce and marketplaces, embedded finance, and specifically embedded payments, is becoming increasingly common for all B2B2C and B2B2B businesses as a core value proposition. It has extensive potential to scale and achieve a sort of invisibility that will enable the integration of frictionless payments into customer journeys.
Today, banks have the opportunity to continue providing customer-centric services that they are uniquely positioned to, but at the same time make the best use of embedded fintech in delivering suites of integrated fintech products and services to match customer requirements as per relevance. As identified by a study from Cornerstone Advisors, embedded fintech opportunities for banks include bill negotiation services, subscription management, data breach and identity protection, wealth transfer management and cryptocurrency investing. This integration of fintech products and services into the financial institutions’ offerings and processes also means new revenue streams for banks as well as keeping up with the competition.
PayTech: With laser focus on enhancing the payments value chain, PayTechs make up 25% of FinTechs and are valued at over USD 2.17tn. Emerging PayTech ecosystems will be fully capable of securely storing, managing and leveraging customer and merchant data generated through transactions. Consider the popularity of Buy Now, Pay Later (BNPL), a credit option increasingly favoured by merchants and customers alike. What BNPL essentially offers banks is an opportunity to delve into an interesting new area to drive lending as well as collaborations with FinTech partners.
It’s also interesting to note that innovations in the payment space makes it easier for exciting yet complex business models to navigate their unique set of challenges. Subscription-based businesses, for instance, rely heavily on the quality of customer experiences that can make or break the relationship. Quality payment solutions play an inevitable role in ensuring that false declines and customer churn stay as low as possible. Technologies such as dynamic routing make this possible by reducing declines, optimising payment approvals and ultimately, achieve higher customer retention.
Open banking: It’s truly revolutionary how open banking is literally opening up a whole new ecosystem of global banking, driven by emerging technologies and the omnipresence of digital experiences. Application Programming Interfaces or APIs enable FinTechs and banks, each with their own set of advantages to come together and leverage each other’s assets to create the best possible outcomes for their customers. The open API market was estimated to be worth $2.48 million in 2022 and is expected to grow at a CAGR of 24.81% to over $14 million by 2030.
By eliminating the need for certain expensive labour and hardware, open APIs will enable pushing out microservices that are capable of reducing integration layers, especially when it comes to introducing or removing products and services with ease. Moreover, BaaS enables banks to generate more revenue as they allow FinTech to use their payment infrastructure for a fee and at the same time FinTechs benefit from the traditional banking infrastructure to build innovative financial products.
The ongoing transition from traditional to new-age
Banks have historically been risk adverse in their approach and operations, having taken their own time to adopt technological advancements, but are now increasingly catching up with new age banks. Complicated regulatory environments as well as the need to ensure security and reliability have slowed down the process of technology adoption but we’re starting to see promising developments, especially in mobile banking along with an overall infrastructural change from on-site to cloud based technologies.
The growing number of smartphone users is making ‘mobile-first’ strategies an inevitable area of focus for banks. With this, cybersecurity is a major concern for the sector and reinstating this issue is the fact that at least 39% of customers cite fraud and security threats as their top fear and frustration while engaging with online banking products.
Needless to say, not just the future but also the present belongs to those who embrace change and make the best use of opportunities. The more the banks act as controllers of money supply, the more opportunities there are for disrupters to own up spaces they carve out of challenges. Irrespective of being digital natives or legacy banks, those who choose not to move with the change will be the ones who will be left behind.
About Frank Arellano
Frank Arellano is the CEO and founder of Revolv3, a fintech SaaS platform based in Laguna Beach, CA. Frustrated by the lack of subscription management payment systems that could minimise false declines and maximise first pass payment approvals, he built his own. Frank started his career with startups. Afterwards he led as an executive at Ingram Micro and Experian for over 20 years. Now, backed by Rosecliff Ventures, he intends to reshape the recurring payment market.