Are Fintechs the Future?

5 types of fintechs you should consider partnering with...but make sure it aligns with your mission, vision, and values 

Bank-fintech partnerships are heating up.  

A new survey from Cornerstone Advisors shows that nearly two-thirds of banks and credit unions entered into at least one fintech partnership over the past three years, and 35% made an investment in a fintech. Of those that haven’t partnered or invested, 55% plan to this year.   

As more banks tap fintechs, the number of partnerships is also increasing. In 2019, banks partnered with an average of 1.3 fintechs. Last year, that number grew to 2.5 partnerships. And this makes sense. Nearly nine in 10 financial institutions consider fintech partnerships to be important to their business, up from 49% in 2019. 

But with an overwhelming 15,000 individual fintechs spanning the globe, what types should banks partner with? We’ve outlined our top five technologies that are, critical for banks’ strategies.  

1. Digital Account Opening 

Digital adoption has been on the rise since the early 2000’s, but the pandemic accelerated activity–including account opening. Nearly two-thirds (64%) of checking accounts opened during the height of the pandemic were submitted either online or through a mobile device. After all, most of the world was on lock down.  

Fast forward to today, and digital is here to stay. However, banks’ digital onboarding and account opening services have not kept pace with consumer expectations, especially small businesses and corporate clients.  

In fact, The State of Corporate Banking Customer Onboarding 2020 found that corporate customers still encounter enormous friction when opening accounts online. For instance, over 40% of customers are still required to visit a branch and nearly 45% are required to print out documents to physically sign, making the process only partially digital.  

Banks must partner with fintechs to enhance the digital account opening process, streamlining and improving the customer experience. If they don’t, they’ll face off with digital-only neobanks, such as like Chime, that have focused entirely on the digital experience and seen rapid gains as a result. 

Read also: 3 Risk, Compliance & Vendor Management Mistakes that Cost a Fintech $11.5 Million in Fines

2. Artificial Intelligence

The use of Artificial Intelligence has been steadily rising over the last several years–and for good reason. AI can drive meaningful outcomes for banks, such as improving back-office operations, customer experience, and employee satisfaction. 

A recent McKinsey report also suggests that by using AI, the banking industry can gain an additional $1 trillion in value while saving an estimated $447 billion by 2023.  

According to a recent survey, 80% of banks say they are aware of these benefits and 75% with over $100 billion in assets are currently implementing AI strategies. Of banks with less than $100 billion in assets, 46% have plans for AI.  

3. Faster Payments  3. Faster Payments

While only 15% of financial institutions have deployed real-time payments, they are quickly becoming a priority across the country. Largely fueled by the pandemic, The Clearing House RTP network, Same Day ACH, and Zelle all experienced strong growth.  

This growth doesn’t appear to be slowing. Elena Whisler, senior vice president at The Clearing House, said in a recent interview with PYMNTS that real-time payments volume will soar in the new year and beyond. According to the publication’s research, real-time disbursements accounted for 17% of all disbursements made in 2021–up from 5.7% the previous year.  

Consumers have grown to expect and demand real-time capabilities in all aspects of their lives — including banking. To meet these demands, financial institutions should explore faster payments. According to Cornerstone Advisors’ What’s Going On in Banking 2022 report, over half (54%) have plans to do so by the end of next year. 

4. Digital Loan Origination 4. Digital Loan Origination

As borrowers toss out in-person application processes in exchange for mobile and online channels, digital lending is quickly becoming the new norm. Consumers and small businesses expect the same convenience and immediacy they experience in other markets, like e-commerce.  

In response, financial institutions must invest in technology that enables borrowers to use their mobile devices for loan applications. Banks are also utilizing technology applications such as cloud computing, bringing agility, cost-effectiveness, scalability, and optimal systems integration to a lender’s infrastructure. Investments in big data and analytics can also speed decision making while personalizing the customer experience.

5. Cybersecurity

According to IDC’s Worldwide Banking IT Spending Guide, tech spending on loan origination was $7.3 billion, or 44%, of overall loan IT spending in 2021. It’s expected to hit $9.7 billion in 2025.  

5Cybersecuri 5. Cybersecurity4. Digital Loan Origination 4. Digital Loan Origination4. Digital Loan Origination 4. Digital Loan Origination   Cybersecurity is a pressing issue for all industries, including banking. Ransomware and fraud are at an all-time high and cybercriminals are taking advantage of vulnerabilities stemming from an increasingly remote workforce.  

According to Peter Firstbrook, research vice president at Gartner, “Organizations worldwide are facing sophisticated ransomware, attacks on the digital supply chain and deeply embedded vulnerabilities. The pandemic accelerated hybrid work and the shift to the cloud, challenging CISOs to secure an increasingly distributed enterprise–all while dealing with a shortage of skilled security staff.”  

Increased cybercrime means increased costs for banks as they face pressure to reimburse defrauded customers. Recent research revealed that most consumers (67%) expect their bank to foot the bill for successful scams, regardless of the total amount lost. Over half (58%) of those who bank online are receiving scam attempts via email or SMS at least once per week, and 23% say they have been a victim of a cyberattack. 

To combat threats, banks are investing heavily in technology to monitor and mitigate risks. In fact, estimates from analytics firm GlobalData say that increased demand for cybersecurity will lead global security revenues in the retail banking sector to rise from $7.9 billion in 2019 to $9.8 billion by 2024. It is vital that banks maintain a robust cybersecurity strategy for 2022. 

Aligning Your Bank’s Mission with Its Fintech Strategy  

By partnering and collaborating with fintechs, banks benefit from cutting-edge innovation without the costly in-house investment. From digital account openings to cybersecurity, fintechs can bring the needed solutions to the table while allowing banks to meet their customer's expectations and remain competitive.  

But before any decision can be made, an institution needs to understand risk and how failing to align strategy and strategic objectives with mission, vision, and values introduces risk.   

For instance, a bank might consider a strategy of adopting faster or real-time payments.  This could be a smart move for an institution whose value is innovation; vision is to become a fintech leader; and mission is to provide customers with cutting-edge services. On the other hand, it may not make sense for an institution whose value is stability and efficiency; and vision is to be the market leader for mortgage originations.  

Read also: 3 Ways BaaS Platforms Can Help Fintechs Work with Financial Institutions—and 3 Critical Ways They Can’t

The idea of faster payments is exciting and supports evolving customer expectations, but it will require resources, which could mean fewer resources available to market, originate, close, and service mortgages while ensuring compliance.   

The only way to predict the results with any certainty is to fully assess these risks and opportunities to determine if the potential cost makes sense with consideration of the bank’s mission, vision, and values. It needs to know how much potential risk exists and whether it aligns with the institution’s risk tolerance or the maximum amount of risk an institution is willing to expose itself to. It must also measure those results against other potential strategies to see if a strategy with less risk is more appropriate.