The pace of change in fintech continues to disrupt how financial services are delivered and experienced. New technology, regulatory changes, speed of innovation, the rise of digital currencies and new entrants all point to an unpredictable and fast-moving future for fintech and financial institutions.
What does this mean for banks and credit unions?
While financial institutions once held a firm grip on wallet share, the very concept of a "primary" financial institution is being displaced today.
Consumers are increasingly turning to fintechs to round out their experiences and build personalized ecosystems of financial services. More than eight in 10 consumers already use at least one fintech app, according to Expectations & Experiences, a 2021 consumer trends survey from Fiserv. It's not just the youngest consumers either – 78% of Gen X and boomers who bought or sold crypto used a fintech, compared to 65% of Gen Z and millennials.
The data from financial institutions confirms this shift. Fiserv recently conducted a review of ACH debits for 188 community institutions. The analysis shows more than $15 million flowing out of those financial institutions and into more than half a dozen popular crypto wallets in just 60 days.
Fintechs also account for a large percentage of the outflows, outpacing more established businesses. More than twice as much money flowed to Robinhood through ACH than to Amazon and Walmart combined during the same period.
The bottom line?
Serious amounts of money and mindshare are flowing from financial institutions to fintechs every day, including many that didn't exist a few years ago. For financial institutions, the concern is that these funds may never come back. In addition, new disruptors may extend their suite of capabilities to provide more banking and payment services as they mature.
Those realities continue to shape three key priorities for today's financial institutions – stemming potential revenue loss, remaining vigilant for emerging forms of disruption, and focusing investments to deliver fintech experiences for accountholders.
Here are three ways financial institutions can address those priorities.
1. Got Revenue Leakage? Consider Ways to Monetize Your Charter
One way to address revenue lost to fintechs is to sell the financial institution to a fintech. While this may seem unlikely for many institutions, Bank Director magazine recently covered what could be an emerging trend of fintechs acquiring smaller banks at a premium to gain access to the acquisition's charter. That option is beneficial for institutions that choose to sell. However, the impact also will be significant for those institutions that are not ready to sell because fintechs enable a very different bank operating model – one that is less focused on net interest margin compared with what many community banks practice today, which shifts the competitive landscape.
A potentially more appealing option for a financial institution to monetize their banking charter is to become a sponsor bank and embrace the fintech partnership through banking as a service. The opportunity is there.
Fewer than 100 U.S. financial institutions are truly operating as sponsor banks today, and there are over 6,000 fintechs across the U.S., according to Crunchbase. In addition, a growing number of major brands are embedding financial services, including Walmart and Walgreens. This imbalance means we'll likely continue to see more sponsor banks coming into the fold. Not only is the demand great, but the potential to open new revenue streams presents a great way to modernize the current operating model.
For example, a financial institution might provide banking identification number (BIN) sponsorship to help a fintech launch a credit card. Or, if a fintech wants to issue loans, a bank could enable a borrowing option for a fintech's customers. Pricing models for those arrangements may include fee-for-service, licensing agreements or transaction fees, which means the sponsor institution can create an ongoing revenue stream while delivering services that protect the balance sheet.
2. Anticipate Ongoing Disruption and Make Your Own Waves
New market entrants, including neobanks and fintechs, have capitalized on the growing desire for compelling, personalized products and services by identifying gaps in the market and developing better experiences than what previously existed. And it's not only financial institutions being targeted by disruptors. The major networks financial institutions connect to are also seeing the emergence of alternative networks.
Networks formed by fintechs are recruiting financial institutions, promising better rails for domestic and cross-border movement of data and money. They see an opportunity to enable richer experiences and support faster money movement, including commercial payments and bill payments, through existing integrations to common platforms or by leveraging newer transaction methods such as stablecoins on a blockchain.
Serious amounts of money and mindshare are flowing from financial institutions to fintechs every day, including many that didn't exist a few years ago. For financial institutions, the concern is that these funds may never come back.
The USDF Consortium is one such disrupter. The USDF Consortium operates a stablecoin ecosystem designed to create opportunities for members to enable payments on blockchain. This association of banks was launched earlier this year to further the adoption and interoperability of a bank-minted tokenized deposit (USDF™). Issued as an alternative to nonbank-issued stablecoins, USDF can potentially meet demand for value transfer on blockchain while embedding consumer protections and bank-grade security measures.
Another example is the Alloy Labs Alliance, which formed a network of member banks to enable data sharing and accelerate the development of new products and services. Within three years, the alliance has grown to more than 50 institutions with centers of excellence focused on data, cybersecurity and banking as a service.
One final consideration: Established networks and business norms can be quickly disrupted by geopolitical unrest. Sanctions as a result of the war in Ukraine, for example, are significantly influencing payment networks and global commerce. Beyond the immediate impact of the sanctions, there may be longer-term effects, such as accelerating the development of alternative networks in select global markets and trading corridors.
3. Deliver the Fintech Experiences Accountholders Want
Financial institutions understand that staying competitive means plugging fintech services into their existing digital experience. But where should they focus their fintech investments?
Balance-sheet outflows provide insight into the fintechs accountholders are currently leveraging. Bringing these services under the umbrella of a financial institution helps build wallet share while strengthening the organization's brand.
Financial institutions should also consider how fintech partnerships support their overall strategies. If reaching younger consumers is top of mind, fintech partnerships can advance that objective. Fiserv partnered with Goalsetter and FutureFuel.io to make it easy for our financial institution clients to introduce financial wellness offerings that appeal to the next generation. This is timely given a nationwide focus on including personal finance education in school curriculum. At least 31 states have some type of financial education requirement and 54 personal finance education bills are currently pending in 26 states.
Those fintech services and many more, such as NYDIG for crypto capabilities, will soon be available through the new AppMarket from Fiserv, which provides ready access to fintech providers that are already integrated to our cores and vetted by Fiserv.
Financial institutions will benefit from acting quickly to maximize the value of their charters, staying abreast of market changes, and creating high-value partnerships and networks.
From what we've seen to date across our client base, you can expect these trends to accelerate and intensify in the coming year.