The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week, we tracked several discussions about banking models in retail banking. Will branches come back at the same level prior to the pandemic? Will digital adoption continue at the current heightened level?
Just as consumers have had to move to digital channels, businesses operating from home have also experienced an increase in digital activity. How many FIs have digital banking ready for businesses and corporate clients?
Finally, we look at FI and fintech partnerships. Are FIs ready to truly partner with swift tech firms? What about big tech firms?
The Future of Banking Models
PYMNTS believes that the pandemic is a tipping point in banking. The landscape has changed so dramatically that we will soon reference the pre and post-pandemic eras in banking. A reimagining of banking models throughout the industry may be one of the highlights of the post-pandemic era.
Scott Young, PSCU’s vice president of innovation, in a podcast with PYMNTS notes that CUs can have the upper hand versus banks due to their member focus and their ability to be agile. Scott believes the strategy that will win out is a true cross-channel model where digital and physical meet. He proposes a mantra for Credit Unions: “Easy is the new loyalty”.
In the meantime, Richard X. Bove, chief strategist at Odeon Capital Group, notes in an article on Cheddar that banks are likely to not open back many of their currently shuttered branches.
“You’re looking at a trend that was very persistent for a decade, since the last financial crisis. Now the coronavirus comes along and that becomes an excuse that banks can use to close even more branches.”
Rodger Levenson, CEO of WSFS Bank agrees, “This environment is certainly going to cause us to go back and take a look and will probably lead to some more consolidation of our branch locations.”
Steve McLaughlin, founder of FT Partners, notes that “most bank branches I walk by are pretty dead”. While he sees a role for physical branches still, he expects that those that will remain open “will look and operate differently as digital picks up steam”.
According to an article in Finextra, FIs should focus on “tackling any gaps in digital servicing and self-service capabilities across functions, as well as provide consistent capabilities across channels”.
Of course, these trends are nothing new. An article in Fintech Switzerland, reminds us that the move to digital was an imperative before the pandemic. They note that a “2019 Bain & Company survey found that consumers are increasingly willing to use tech firms for simpler banking products if a traditional provider makes it hard to find out about or purchase products on a mobile device or online.”
We believe that branches will have a hard time coming back.
There might be a near-term increase in use as people yearn for human touch. However, the convenience and increased investment in digital banking will result in accelerating branch closings and FI mergers and acquisitions.
Business Banking Digital Transformation
Several years ago, our Chief Strategy Officer worked at a bank where he championed digital account opening for business and corporate clients. The head of commercial banking vetoed every digital project for his unit because commercial banking is “shoe leather, face to face business that will never accept digital banking”.
This week Treasury & Risk wrote an article (registration required) on Citi’s success during the pandemic with corporate clients. Citi noted that they have “opened more than 1,000 corporate accounts digitally during the widespread lockdowns, a 300 percent increase from a year earlier”.
In the last few years, Citi set out to reduce the time it takes corporations to open accounts from several weeks to two days. “As physical interaction has become an issue and people are generally working from their respective residences, this particular capability became very handy,” said Naveed Sultan, global head of Citi’s treasury and trade solutions business.
While many banks and CUs continue to downplay digital for business and corporate clients, fintech firms and their investors are making bets that businesses are and will adopt more technology. This week was a banner week for investments by venture capital firms (VCs) in B2B fintech firms. PYMNTS reports much “of the $117 million raised by B2B FinTechs from venture capitalists this week targets money management services for businesses, including invoice financing, lending and banking.”
Among the B2B fintech firms raising money this week are:
- Turkey’s Figopara, an invoice financing platform for small and medium-sized businesses
- Singapore’s Validus, a small business financing platform
- UK’s Modulr, commercial and wholesale transaction banking technology startup
- San Francisco’s FortressIQ, a workflow optimization startup
- Washington State-based SirionLabs, an AI contract management platform
- UK’s ANNA, a small business banking and accounting firm
At the smaller end of the business spectrum, two neobanks separateley announced their services for freelancers, San Francisco’s Oxygen and Berlin’s Penta.
As noted in previous weeks, digital transformation from the large banks, like Citi, and the emergence of fintech firms, will continue to challenge other banks and Credit Unions.
Industry insistence that businesses do not value digital, particularly after the current crisis, will likely result in ceding large chunks of the banking market to large banks and swift fintech firms.
Partnering with Fintech Firms
Financial service firms facing a money crunch and a need to up their digital game are increasingly looking at partnerships with fintech firms. On the other side, fintech firms needing to scale and show their investors ability to grow are similarly looking to partnerships.
In an article in Forbes, Kathleen Craig CEO and Founder of Plinqit describes how a legacy financial service company should approach such partnerships. She councils FIs to start with understanding the “institution’s strengths and competitive advantage”. Fintech partners should be chosen that compliment the company and closes gaps in capabilities.
She notes that there “are numerous advantages to partnerships for both fintechs and community financial institutions”. Ultimately partnerships “can bring technological advancements to the industry and support their communities’ financial well-being”.
FIs should be aware that partnering with fintech firms isn’t exactly like signing up with another tech vendor.
Sankar Krishnan, EVP Capgemini, Industry Head, banking and capital markets, is quoted in a separate Forbes article noting that FIs “often have trouble connecting with fintechs, in part because fintechs are culturally very different.” FIs should “make it easier for fintechs to do business with them; it would be a win-win,” he ads.
Krishnan also notes “The crisis has forced all of us to be a lot more digital than we were before. I think we will see a new operating paradigm and a lot more collaboration with Big Tech. Apple is working with Goldman Sachs, Amazon is working with Chase, Google is working with Citi”.
Aside from the big banks, FIs look to Big Tech as potential competition. Ron Shevlin, Director of Research at Cornerstone Advisors notes in his own Forbes article that “Amazon is poised to be a vendor — not a competitor — to financial institutions”. He ads that “Google’s value proposition to banks is simple: ‘We help you monetize your customer relationships’”.
As FIs look to close up gaps in their capabilities, they should look to fintech, tech startups, and Big Tech firms — and not just to the usual banking vendors. We counsel our clients that an out of the box solution is not always a winning strategy in the rapid world of digitally transformed FIs. Partnerships can enhance an FI’s digital strategy, as long as it is well suited to the organizations strategic goals, and closely managed.
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