Where does the bank end and Fintech begin?

The banking industry is in the midst of a steep transition, where the market is being digitized at an unprecedented speed. In 2023, there are multiple arenas for digital payments – be it digital wallets, cryptocurrency or online banking – and as a result the financial ecosystem looks much 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, and started a whole new era of transactions. In fact, the global digital payments market is escalating, and is expected to grow from $96.19 billion in 2022 to $111.11 billion in 2023 at a compound annual growth rate (CAGR) of 15.5%.

As a result, financial technology (fintech) is rapidly emerging to assist this market transition. Although fintech has its own microcosm within the larger ecosystem, new niches are increasingly emerging as this innovation begins to blend with other financial players. An example of this is what is called banking as a service (BaaS) where several stakeholders come together to provide a range of financial resources to customers in one centralized location.

This technological paradigm shift is disrupting business models in financial services. Let’s take a look at what BaaS is, how it’s changing the approach to businesses in the financial sector, and what the future of monetary services is shaping up to look like.

BaaS gets a prominent place

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

An API is an acronym for Application Programming Interface and they provide a single access point for different systems in the financial sector creating what is called “open banking”. Open banking gives different players the opportunity to connect, and the API does the job by defining what information is to be shared between the two systems, communicating only what is necessary.

For legacy institutions, such as traditional banks, this interface is critical as it acts as a link between their legacy systems with newer systems seen within the fintech sphere. By bridging the gap between the new and the old, the APIs allow the two players to work cross-functionally without having to change their code and operating procedures – reducing the risk of making costly mistakes.

McKinsey recently conducted a global survey of IT leaders at leading banks and their perspective on APIs, which revealed that 88% of respondents believe APIs have become more important in the past two years. Furthermore, 81% believe that APIs are a priority for business and IT functions, and large banks that launch API programs allocate an average of about 14% of their IT budget to them.

BaaS providers, by leveraging the power of an API, can take collaboration in the financial ecosystem to the next level. Companies deploying BaaS can provide account holders with more options for financial transparency by opening their APIs to external developers to provide new and more customized services. This ultimately enables organizations to connect with their users’ banks so that money movement is easy, with more options for how to move the money.

By launching its own BaaS platform, a legacy institution such as a bank can advance in the industry while creating new revenue streams. Customers can pay a monthly fee to access the BaaS platform, or they can pay separately for each service they use. In any case, banks will gain an edge over their competitors in the new digital marketplace through APIs and BaaS.

Marketing strategy vs. ecosystem strategy

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

But banks are still in the early stages of customer-centric solutions, at least in terms of what fintech brings to the game in 2023. Only around half of respondents from the banking sector (53%) believe they are consumer-centric. compared to over 80% of participants in the fintech survey.

A market strategy essentially means building a platform that makes a bank accessible 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 allow transactions between two parties with the value generated by the transactions themselves.

On the other hand, a bank needs to collaborate with other businesses to generate value if it wants to become an ecosystem. According to McKinsey, a data ecosystem is a platform that combines data from a number of suppliers and builds 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 across multiple interconnected industries by offering a shared solution, within the context of a specified value proposition. This could, for example, be a financial lifestyle proposition in a banking context, where the bank acts as an orchestrator of the ecosystem and brings together companies that assist customers with all aspects of their financial life. This can be things like insurance, renovation loans or help with budgeting, all of which are integrated into the bank’s platform.

In this context, a consumer is more likely to stick with a bank that offers built-in banking services through an ecosystem because services or loyalty programs are much more personal. If banks are able to subscribe to this strategy, they can start to catch up with fintech – and offer niche solutions to their customers.

The future of economic cooperation

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

Jack Henry™ is an S&P 500 company and a comprehensive provider of financial technology, enhancing the ties between financial institutions and individuals and the companies they serve. They help give banks and credit unions access to a dynamic ecosystem of internal capabilities as well as the ability to interact with top fintech. The collaborative network manifested by Jack Henry™ helps businesses grow faster, differentiate themselves from the competition, and compete successfully and strategically while meeting the changing needs of their account holders.

Infinant is a natural fit into this diverse financial ecosystem and will be a key driver of banks’ digitization by providing the technology platform and power tools they need to do so. Infinant’s “Interlace” platform offers a single cloud-based infrastructure to power both community banks’ embedded 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 deployed to use the virtual account system, offering an end-to-end settlement to Jack Henry’s core systems.

Interlace differentiates itself by allowing banks to choose the functions, fintech and processors that best suit their needs, giving banks the confidence to easily integrate banking and fintech into partner applications. This is important because when banks have full control over their entire ecosystem, they have the opportunity to flourish with their customers, fintech and brands.

Innovation and collaboration-driven solutions will help banks and fintech come together to provide a better future for financial services focused on transparency, collaboration and user-centricity. This will ultimately lower the barriers to financial health for every person transacting in the increasingly digital marketplace.

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