Heading into the second half of 2022, fintechs are growing at a record-breaking pace – not just in number, but in valuation and product offerings. As the use cases for banking as a service, blockchain and data science expand, fintechs are looking for ways to differentiate themselves in an increasingly open financial ecosystem.
According to Crunchbase, there are over 6,000 fintechs across the U.S. On Morning Consult’s 2021 list of the “Fastest Growing Brands,” fintechs claimed five of the top 20 spots, including three in the top ten. It was the leading sector for investment in 2021, with a 177% year-over-year increase in venture capital investment. And, fintechs made up one-third of last year's unicorns.
The result of a high-stakes, high-reward marketplace? A hypercompetitive landscape where fintechs fight to define new use cases, gain market share and establish high-value partnerships with financial institutions.
Here are three ways fintechs are doing that today.
The proliferation of banking as a service means fintechs will need to act quickly to connect with sponsor banks and bring new services to market.
With the right partnerships in place, fintechs and financial institutions are creating new ways to increase speed to market. For example, Fiserv recently worked with a community bank in the Pacific Northwest to launch a fintech ledger in 90 days. The ledger runs separately from the bank’s regular banking business, enabling the bank to experiment freely with its fintech partner and target customer segments outside its existing market coverage.
Fiserv internal data shows there are fewer than 100 U.S. financial institutions operating as true sponsor banks today. Fiserv has relationships with most of them, which has given us the ability to engage a network of sponsor banks open to collaborating with fintechs for different use cases – whether that’s a bank helping a fintech enable small-dollar loans, launch a debit card, or a secured or unsecured credit card.
Partnerships allow fintechs to leverage the sponsor bank’s charter and offer services they would not otherwise be able to. The other option is for the fintech to acquire their own charter. We have observed an increase in fintech acquisitions of financial institutions over the last two years. It is an approach that will allow a fintech to offer the full suite of banking, payments and lending solutions to their target segment. They have the flexibility to dictate the credit box and balance sheet mix without looking over their shoulder.
But acquiring a charter is not without its tradeoffs. Fintechs that take this step face a host of new regulatory and compliance responsibilities, which could distract them from their core mission. An example is the current debate about neobank and fintech compliance with the Community Reinvestment Act (CRA), which was written for a Main Street banking model that focuses on branches and assessment areas.
Blockchain’s key features – that it is decentralized, distributed and immutable – present endless opportunities for fintechs to enhance how financial services are delivered. The market is already seeing a wide range of innovations, from crypto wallets and cross-border transfers to authentication of identity and assets leveraging smart contracts.
Blockchains are undertaking ongoing version upgrades to enable higher transaction processing rates, which is required for them to displace existing traditional processing networks. Bitcoin’s taproot upgrade delivers greater security and efficiency while Ethereum’s roadmap focuses on scalability and sustainability. Others, including Solana, Cardano, Algorand and dozens more, will race to establish the viability of their blockchains for different use cases, attracting fintechs who will develop new products and services that work across those blockchains.
As with many great disruptions, blockchain use cases are likely to focus on large-scale inefficiencies. Take cross-border transactions and remittances, for example. Those require multiple bank hops over the course of days and can cost as much as 10% of a transaction before reaching the last mile. If a chain can handle that faster and more cost-effectively – and assuming they are able to navigate the regulatory requirements – anticipate multiple players entering the race.
While competitors are moving fast, it is difficult to envision a “winner” being declared in 2022. Instead, expect a clearer picture of which use cases will work best on which blockchains in the near future.
Fintechs’ access to data and how they use that data will likely be a key differentiator in the coming months and years. Today, many fintechs have permissioned access to a large amount of real-time consumer financial information. How effectively companies use that information to offer personalized tools and services that people need – when they need them – will continue to set leading fintechs apart.
As an example, a fintech could analyze consumer data to understand when consumers are at risk of overdraft. Thanks to direct deposit data, the fintech would know when someone will be paid and could quickly assess risk. The fintech would then reach out with an offer of a small-dollar loan until the next payday. Such a solution is tailored to an individual’s unique needs and potentially saves the costs and anxiety associated with overdraft. This example is timely given the current focus on overdraft and other fees charged by financial institutions.
Similarly, with the right data, fintechs have the ability to anticipate when someone is interested in buying a house or car, is receptive to learning about investment strategies, might benefit from student loan refinancing, or needs budgeting and credit management tools. The possibilities for fintechs to become trusted financial partners to their customers are virtually limitless.
However, there’s one major hurdle for fintechs: fraud. As fintechs proliferate and as more brands embed financial services, fintech-related fraud and identify theft are on the rise. The pandemic highlighted growth in fintech fraud. For example, car rental companies stopped accepting cards from apps like Chime, Cash App and PayPal. Recently, PayPal reported that it had identified 4.5 million accounts that were illegitimately created.
Fiserv is working to help fintechs with products that mitigate financial institution and consumer concerns about privacy and providing access to credentials. For example, AllData Connect is a platform that enables tokenized credentialing on a secure portal. That allows fintechs to access consumer financial information without accessing login information.
While no one knows for sure what limits will be placed on accessing data, we do know fintechs cannot rely on risk and fraud platforms that were created for customers going into branches to open bank accounts. They need comprehensive, fully digital solutions that work with high accuracy in a space where consumers expect constantly evolving, personalized services in real time.
Put simply, fintechs need to be more innovative and more agile than the financial institutions they partner with, as that is why these partnerships are so beneficial. Financial institutions understand the regulatory environment, they excel at community outreach and build trust through personalized service. Fintech partnership provides a great way for them to stay relevant, reach new segments of the population and modernize their tech stack without large multi-year investments.
To learn more about how Fiserv is helping accelerate the future of open finance by driving speed to market for differentiating experiences, visit fiserv.com/fintech.