The Future of Banking in an Era of Fintech Disruption

Aug  20 
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Todd Horvath  EVP, President, Bank Solutions, Fiserv 

Responding to an accelerated pace of change in financial services

Never has there been a time of more excitement, or potentially greater challenge, in banking. Disruptive Fintechs, open banking and consumer expectations are fundamentally changing the industry in which we operate.

Gone are the days when Fintechs were a couple of kids in a garage with a dream. Today, they are experienced, empowered by easy access to technology and extremely well capitalized. They can now operate at scale, and with 35 percent of the financial services value chain now shared with Fintech, embracing third-party providers is becoming ever more important.

This new era is about cracking open closed systems in a secure way so anyone in the financial services value chain can quickly, easily and cost-effectively tap into it to move money and information in real-time. Working with Fintechs, financial institutions can continue to play a critical role in the client experience while opening their organizations to improved customer retention and new revenue streams.

What's at stake? Financial institutions face the erosion of the banking relationship by Fintechs and other third-party providers. Those potentially disruptive, sometimes unregulated businesses have quickly moved forward with innovation, offering simple but powerful services that fill gaps in the offerings of traditional banks and credit unions.

As deposits and value-added payment revenue are whittled away, accounts can become less profitable and banking relationships are weakened. Because it happens a little at a time, financial institutions may not realize what they're losing – until it's too late.

Think about my Starbucks card. When I reload it, that money flows directly out of my bank to Starbucks, which now holds my money and facilitates my in-store purchases – just like a bank. Companies other than traditional banks and credit unions now enable countless financial services such as free stock trading, HSA accounts, investing and a wealth of payment options.

Building Trust, Enabling Success

The good news is that financial institutions remain an arbiter of trust for consumers and will continue to play an important role in their lives. However, customers are demanding more – and sooner – because that's what they're accustomed to in the rest of their lives. As a result, some may believe banks and credit unions aren't flexible enough to meet their needs in the same way a Fintech can.

To change that perception and meet the growing demand for real-time, immediate and always-on experiences, financial institutions will need flexible solutions that give consumers and businesses what they want. After all, technology has always been an enabler of financial institution success.

It's time to think differently about Fintechs. Harness their power and agility to quickly bring new capabilities to market, deliver better insights to your organization and consumers, and solidify your position at the center of the banking relationship.

How do we intend to help you make the most of this opportunity? We are committed to providing your organization with the solutions you need to compete and win against even the biggest of giants, from financial institution competitors to the megabrands moving into financial services.

Engaging in this new era of banking requires a digital mindset and an approach to openness centering on three themes: cloud enablement, an API-driven environment and real-time access to data.

The Benefits of Banking in the Cloud

Cloud computing is an emerging factor in the delivery of enhanced services to consumers. While the concept is simple, the scale, compliance and high stakes of financial services for the cloud add complexity. Financial institutions may choose the public cloud run by companies such as Amazon and Microsoft, the private cloud that uses data centers run by providers such as Fiserv, or a hybrid model that taps into both.

The advantages of being in the cloud are becoming more evident, including the potential for cost savings and efficiencies. Operating in the cloud typically drives down costs due to its scalable environment, flexible architecture and pay-for-what-you-use pricing structure.

While security is sometimes cited as a concern by financial institution leaders, cloud deployment has great potential to enhance security. Companies offering cloud computing options, whether public or private, can invest more in security, risk management and compliance than individual financial institutions. That scale translates to environments that are sheltered from risk and extremely resilient. And if added services for risk and compliance, real-time fraud and other integrations related to security are needed, a cloud environment is typically nimbler.

Flexibility like that is another key benefit of the cloud. Of course, there are protocols and standardization in a core-hosted environment, but changes can easily be made. Because the capabilities added by Fintechs are not unique to just one organization, financial institutions benefit from the scale of those companies.

For financial institutions of every size, a robust API environment enables quick delivery of innovative, pre-approved applications to consumers to enhance customer satisfaction and provide competitive differentiation.

The Endless Possibilities of Open APIs

The notion of open application programming interfaces (APIs) is fairly new and their possibilities are endless. An API environment provides an open marketplace for co-innovation, giving Fintechs and other partners access to the data they need to create enhanced, insight-driven experiences. That, in turn, enables financial institutions to quickly and cost-effectively roll out new products and services and opens opportunities for new revenue.

Beyond enhancing traditional revenue streams, financial institutions that open their APIs can charge fees to third parties based on several factors, including the volume or type of data they use. Financial organizations can also build and sell their innovations to other organizations through an app marketplace.

An open banking sandbox creates a dynamic environment for testing, support and validation, which allows developers to mimic the production environment without exposing them to the customary accompanying risks. For example, a Fintech or other organization could access an API library and its data to create a solution for real-time micro-business lending and then make it available to financial institutions and small-business owners.

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Many banks and credit unions are using robust API environments to deliver innovative and differentiated services. Mature APIs can quickly and seamlessly handle multiple requests, processing them at scale with appropriate controls and risk management measures. Similarly, those who use integrations from an app ecosystem want to plug in the application, test it and deploy it quickly and securely.  

Can community banks get on the open banking bandwagon? I believe they should. For financial institutions of every size, a robust API environment enables quick delivery of innovative, pre-approved applications to consumers to enhance customer satisfaction and provide competitive differentiation.

The arduous alternative would entail organizations writing their own customer interfaces for every application, in addition to completing independent documentation, risk assessment, testing and deployment. That's a painful – and necessary - proposition.

Real-Time Access to Data Fuels Real-Time Banking

In a real-time environment, banking becomes a seven-day, 24-hour venture. Real-time money movement is the first wave of that fundamental transformation, but other capabilities, including immediate access to data, go hand in hand.  

In the emerging real-time paradigm, a centralized, enterprise-wide repository of data about customers, transactions, profitability, products and channels – a data warehouse – provides enormous value. That value is amplified by intuitive business analytics tools that provide financial institutions with holistic views of customer and household relationships and historical trends.

Financial and transactional data can be used to create highly personalized financial services and actionable business insights. Instead of exporting an entire day's raw data to a data warehouse for overnight analysis, financial institutions increasingly see the value of immediate access to those insights.

It's all about real-time decision making. If, for example, a small-business owner pays off a loan 36 months ahead of schedule and closes the account, a commercial banker wouldn't typically learn about it until after the transaction settled two or three days later. By that time, it's too late to change the outcome. The small-business owner – and the deposits – has already walked out of the bank.

Real-time access to financial data is just as important to consumers, who expect up-to-date information on loan payments, account balances, transactions and potential fraud. That immediacy also enables the delivery of financial insights to enhance budgeting and investing.

Thriving in a New Era of Banking

Financial institutions are no longer the only game in town. People are becoming more comfortable with the idea of using technology companies to manage their financial lives, according to recent Fiserv research. But while Fintechs are gaining the trust of consumers, it's not at the expense of banks and credit unions, which remain a trusted, relationship-driven source for conducting financial transactions.

Over time, look for capabilities such as artificial intelligence, open data standards and machine learning to pressure community financial institutions to create a differentiated experience. The future is bright for banks and credit unions that continue to bring value and innovation to their markets and communities in this new era of financial services.