The First Considerations in a Bank-Fintech Partnership

Written by

A version of this article was originally published on April 3, 2023, as part of a special report called “Finding Fintechs.”

USAA Federal Savings Bank was among the first banks, if not the first bank, to launch mobile deposit capture to its customer base in 2009, long before such technology was widespread.

In the years since, $111 billion USAA has invested heavily in its mobile banking app, enabling its customers to complete a range of banking transactions, open new accounts, chat with a virtual assistant, apply for a loan or start an insurance claim. The San Antonio bank earns consistently high marks among its peers for its mobile and digital banking offerings, often topping far larger brands like JPMorgan Chase & Co. in customer satisfaction ratings.

Moreover, USAA has done this in an almost entirely digital environment. Because its core customer base — deployed military members and their families — tends to move frequently, the bank has barely any branches, and has poured significant resources into its digital offerings and customer service capabilities. Its core market is a small one, but keeping their specific needs at the center of its strategy has worked to USAA’s benefit, says Ron Shevlin, managing director and chief research officer at Cornerstone Advisors. He likens USAA’s strategy to a bull’s-eye, with deployed military members in the center, and retired service members and their family comprising the outer rings.

“They designed everything about their business as if they were serving the active deployed military member,” Shevlin says. “The reality is that by serving the bull’s-eye, they’re able to attract and serve the outer rings.”

That’s why Shevlin cites USAA as an example of what it means for a bank to have a strong digital strategy. When it comes to financial technology, a successful strategy begins before thinking about specific technologies or even using the word “technology,” Shevlin and others say.

Instead, banks can start by thinking about their core audience and how they can differentiate their organization in the marketplace, and using those principles as a guiding North Star. In turn, that can help communications between chief technology officers and the rest of the bank’s leadership, as well as decisions around staffing and prioritization of different problems.

A little over a third of bankers who participated in Bank Director’s 2022 Technology Survey expressed concerns that their bank was unable to identify specific technologies that would help achieve its strategic goals. A quarter also said they were concerned about an inability to identify specific companies or resources needed to achieve those goals.

“Rather than thinking of technology as a pillar or a piece of your strategy, you should come up with those strategic objectives. And then technology is a ribbon that goes throughout those strategies,” says John Behringer, a financial institutions leader and risk consulting partner at RSM US LLP.

Community banks may lack the talent they need to set up successful technology partnerships. Many community bankers also wear multiple hats, so they may not be able to focus on partnerships. Another crucial conversation to have around this time is how much staff the bank can dedicate to the success of this project. Under-resourcing these projects from the beginning can complicate the rest of the work — like due diligence, implementation and continued oversight — leading to underwhelming and unsatisfactory results for the institution. And banks that don’t have enough staff to manage these projects may need to bring in external consultants, which adds costs.

Shevlin recommends banks cultivate their internal competency for digital partnership collaborations throughout the bank — not just among finance and IT employees. A bank that wants to grow through fintech partnerships will need a number of experts in-house that can find, negotiate, bid, deploy, scale and monitor these new vendor relationships.

Ultimately, it’s the senior leadership team that develops a technology strategy in consultation with outside experts and internal ones, and with approval of the board of directors.

The chief technology or chief information officer is often responsible for managing and developing the bank’s technological resources, among their other duties. When it comes to larger strategic goals, this responsibility will likely include advocating for the bank’s technology needs before the board and other senior leadership. To do so successfully, that person needs to be able to tie those particular needs back to the bank’s core vision for what it wants to achieve, Behringer says.

For example, a chief executive or director may feel the bank has enough IT staff, not necessarily realizing that those employees are largely handling help desk tickets and other basic maintenance, not working on big-picture strategic needs. When communicating with the rest of the bank’s leadership, senior technology officers might emphasize the need for in-house staff working on initiatives that move the needle on strategy, while discussing the possibility of outsourcing or automating the more rote tasks needed to keep the lights on, Behringer says.
“Come back to, ‘What’s our vision? What do we view as kind of core to who we are?’” he says. “That’s where I think the CEO can do a better job. A lot of times with management, technology is an afterthought.”

Technology executives should also be mindful not to get too deep into the weeds and keep tech discussions focused on how they tie to broader business objectives.

“A CIO or CTO, even just talking to the executive team, has to translate the tech speak into business operational impact and dollars and cents: ‘What’s this going to cost us, and what’s this going to do,’ without going into mind-numbing levels of detail about the technology,” Shevlin says.

When considering broader staffing needs required to put strategic tech initiatives into play, it may be useful for banks to segment staff into those dedicated to running the bank and those dedicated to growing the bank, while improving efficiency and profitability. One centralized group should take responsibility for integration into the bank’s core, while another should have ownership for the results of fintech partnerships, Shevlin says.

Banking as a service and embedded finance are another story entirely, and banks that are getting into those areas should ideally have entire departments or business units dedicated to that. “You really have to understand that’s not your garden-variety fintech partnership,” Shevlin says. “That’s a whole new set of products and services.”

It’s also a good idea for bankers to make sure they’re fully utilizing the technology they already have, says Enrico Camerinelli, a strategic advisor at Aite-Novarica Group. The more technology a bank introduces, the more robust its backend systems need to be to handle that, he says.

“Banks need to leverage, as much as possible, the existing investments they have,” he says. “Technology is not necessarily always innovation in the sense of always building new things on top of old stuff.”

Legacy technology written in older programming languages doesn’t necessarily need to be scrapped as long as the bank is able to still maintain that infrastructure. In many cases, the
issue is not so much with older programming languages as it is with a lack of internal expertise about the language or tech in question.

“It’s not necessarily the software per se, but it’s the fact that it’s at risk of being unmanaged,” Camerinelli says. “That is the risk.”

Bankers can work on a broader strategy by mapping out whether a particular item on the to-do list is internal or external facing, or if it relates to a credit opportunity, mobile banking, the retail bank, a back-office function or some other function. Initiatives aimed at creating efficiencies within the organization can be just as meaningful as those intended to boost revenue or customer acquisition.

It may also help for bankers to think about setting measurable goals, within reasonable timeframes, as part of that strategic road map. For customer-facing technologies, tangible metrics could include adding more customers, growing market share or increasing the number of customers using digital banking or the bank’s mobile app.

“There should definitely be a growth target, from both the perspective of the percentage of customers that are in that bull’s-eye plus the percentage of revenue that is being generated by that segment,” Shevlin says. He adds that executives should be realistic in setting those goals, though, saying, “It’s never going to be 100%.”

Breaking larger projects into smaller chunks or tasks can also help keep teams motivated and on track when tackling strategic initiatives, says Laura Merling, chief transformation and operations officer at $26 billion Arvest Bank Group in Bentonville, Arkansas.

“You’re not shortcutting something, but you’re saying, what can be done in small chunks to show progress,” Merling said in an August 2022 conversion with Bank Director. “A lot of times in a bank, something might be a very long project that’s going to take 18 months to roll out. I don’t ever want a big aha at the end. What I want to see is incremental progress, which means figure out what you can roll out in 30 days, 60 days, 90 days, so that you have consistent progress. And then you measure it.”

Tech initiatives that serve an internal function can still be linked to some measurable outcome, but Behringer says that doesn’t necessarily have to be head count or expense reductions. Instead, bankers might look at improving the average time it takes to clear a particular task and once that’s accomplished, think about how they can deploy those fulltime employees more smartly. “I don’t like to just focus on cost-cutting,” he says.

Bank Secrecy Act and Anti-Money Laundering Act compliance may be one example of a function where a bank can digitize some part of the process and create internal efficiencies. Behringer describes one client that previously took about four hours to close out a suspicious activity report investigation because the BSA analyst needed to spend about three of those hours pulling data from various places. The firm built a bot that could automatically pull that relevant data for the analyst and was ultimately able to make that person’s job less mundane and repetitive. After making that change, a BSA analyst can now close out about eight alerts in a work day instead of two.

“That employee’s job satisfaction just went through the roof because they’re doing what they like to do, versus doing administrative tasks,” he says.

Bank Director Managing Editor Kiah Lau Haslett contributed to this report.

Effectively and Realistically Embracing Embedded Fintech

Written by

Banks continue to face shrinking margins, skyrocketing customer expectations, technology advancements and an increasingly crowded competitive field — challenging boards and executives with how to stay relevant and prominent in their customers’ financial lives.

Exacerbating the issue is that players from outside industries, such as major retailers and tech companies, continue to attempt to infiltrate the financial services landscape by offering banking and payment services that directly compete with existing banking relationships. To overcome these challenges, more banks are evaluating embedded fintech to extend their brand and presence into new areas of customers’ lives. Meanwhile, some are also considering embedded finance, which may sound similar but is, in fact, very different.

To determine the best path forward in banking — one that enables quick innovation, deposit growth and a stronger foothold in customers’ financial lives — bankers should first gain a clearer understanding of embedded fintech versus embedded finance and then identify an effective way to pursue their chosen path.

Clearing Up Confusion: Embedded Fintech Versus Embedded Finance
While these terms often get thrown around interchangeably, they have very different meanings and implications for banks. According to Cornerstone Advisors, embedded finance is the integration of financial services into nonfinancial websites, mobile applications and business processes. In other words, processes that used to occur within the bank ecosystem now happen extraneously.

Cornerstone defines embedded fintech, on the other hand, as the integration of fintech products and services into financial institutions’ product sets, websites, mobile applications and business processes. This option is all about banks and fintechs working together toward a common goal. Banks maintain customer relationships and provide new tools and technology based on customers’ needs, all within the bank-owned, regulated environment.

Embedded fintech may seem like the natural path, but executing a strategy may be easier said than done. For example, one-to-one fintech integrations have long burdened banks. The integrations, contracts and ongoing partnership management require time, money and resources — often more than are available in-house. It’s no surprise that banks have struggled to effectively implement new technology at scale.

A New Path Forward: Collaborative Banking
There is another option: pursuing an embedded fintech strategy through a collaborative banking approach that involves using application programming interfaces, or APIs, to connect fintechs to banks through a third-party platform. The key is that the platform should tokenize, normalize and anonymize customer data, allowing the customer to turn on fintech solutions without sharing personal identifiable information. This ultimately reduces liability and risk while positioning banks to become the bridge to a secure marketplace of customer-facing apps.

In this model, banks and fintechs work together instead of competing. What used to be banks’ biggest disruptors become a source of revenue. The bank remains the center of customers’ financial lives, deposits stay with the institution and new opportunities are sent back to the bank, leading to account acquisition and growth. Fintechs benefit by having a more effective path to market, including a distribution channel and customer acquisition and monetization model.

Increasingly, customers are in tune with data sovereignty and privacy and are increasingly wary of the risks involved with sharing personal information with technology providers. They’re looking for options to help manage identity, consent, data normalization, permissioning and data anonymization. Collaborative banking does this and more, presenting unprecedented flexibility and choice that allows customers to easily try out new technology and innovations through their financial institution. This empowers them to find and leverage the solutions that best meet their individual needs. Plus, they are able to manage all of their data and finances through a single, convenient location with a holistic view.

Embedded fintech via collaborative banking represents a new opportunity for banks to deliver needed technology and innovation to their customers in a safe, efficient and compliant way. Banks become the gateway to a secure marketplace of fintech apps, driving digital adoption, deposits and loans. This approach removes the time, money and burden of ongoing contract and partner management, along with the pressure to develop technology in-house. Customers benefit from a wider access to financial tools as well as greater control and choice over their data. Banks that embrace this path are primed to create new revenue streams, expand wallet share and strengthen customer relationships.

What’s Embedded Banking and Why Does It Matter?

Written by

The financial technology industry is notorious for its ever-changing nature. Silicon Valley’s breakneck pace is enough to make some industry veterans’ heads spin. Advancements in technology and changes in economic incentives can create ripple effects that shift the entire fintech industry at a moment’s notice. It can be a lot to keep up with: Web3, blockchain, crypto, NFTs, buy now, pay later, digital ID, know your customer and anti-money laundering laws, two-factor authentication… the list goes on.

Among the latest fintech phenomena to garner attention is embedded banking, a term that sounds both banal and confounding at first blush. Embedded finance has received some attention, but embedded banking remains a little-known concept among banks that have some of the biggest opportunities in the space.

Embedded banking is a model where banks can provide purpose-built digital services to their customers, including retail and small- to medium-sized businesses (SMBs). Embedded banking enables banks to offer a bespoke technology solution through an open framework that can meet the expanding business requirements of their SMBs customers. As opposed to embedded finance, where businesses access financial services through a third-party platform that is not a specific solution from a financial services company, embedded banking places the bank at the heart of an SMB’s operations. Embedded banking both helps strengthen an SMB’s technology and its relationship to their bank.

Embedded banking is not completely novel. The concept has existed for a few years now, but recent innovations have completely revolutionized the field. Embedded banking is moving from an “inside out” model to an “outside in” model. The inside out model of embedded banking used siloed digital channels per customer segment and direct integration with core banking systems. For example, each individual business segment — like SMB, commercial and treasury management — needed their own separate digital channel. Through an outside in approach, a bank can offer their SMBs one secure environment and a unified digital experience for integrating data from multiple backend systems.

The outside in approach to embedded banking is both more flexible and provides more robust services for customers. Outside in embedded banking also offers the customer an open view of multiple financial institution relationships and streamlines access to a portfolio of services through a unified user experience. This gives SMBs access to a much wider array of services to fit their unique needs, all through the bank’s digital channel.

Outside in embedded banking is the perfect solution for banks that want to provide top-of-the-line financial services in a constantly changing economic environment that requires small businesses everywhere to adopt more efficient technology. Inflation and interest rates increases means money is becoming tighter than ever; small businesses are the most at risk in an economic slump. In particular, SMBs want more payments options and faster access to their cash, while solutions like flexible invoicing options, expedited collection of payments and automated data exchange could become vital for a business’s survival.

Outside in embedded banking represents a chance for SMBs to modernize their digital experiences and streamline operations, and for banks to form stronger relationships with their SMB partners. Banks are perfectly positioned to throw a lifeline to their small business customers. Embedded banking might still be relatively unknown to many bankers, but it may just be thing that helps countless SMBs get through the imminent economic crunch.

Using Embedded Finance to Grow Customers, Loans

Written by

Embedded finance is all around us, whether you know it or not.

Embedded finance is a type of transaction that a customer conducts without even realizing it — without any disruptions to their customer experience. Companies like Uber Technologies, Amazon.com, and Apple all leverage embedded finance in innovative ways to create impactful customer engagements. Today’s consumers are increasingly used to using embedded financial products to pay for a ride, buy large items and fill in cash-flow gaps.

But the explosion of embedded finance means that financial transactions that used to be the main focus of customer experiences are moving into the background in favor of more intuitive transactions. This is the whole point of embedded lending: creating a seamless customer experience centered around ease-of use, convenience and efficiency to enable other non-financial experiences.

Embedded lending extends embedded finance a step further. Embedded lending’s invisibility occurs through contextual placements within a product or platform that small to medium-sized businesses (SMBs) already use and trust. Because of embedded experiences, SMBs can get easier, faster access to capital.

All of this could put banks at a disadvantage when it comes to increasing their reach and identifying more and more qualified, high-intent SMBs seeking capital. But banks still have compelling options to capitalize on this innovative trend, such as:

  • Joining embedded lending marketplaces. Banks can capitalize on embedded lending’s ability to open up new distribution channels across their product lines. Banks can not only protect their services but grow core products, like payments and loans, by finding distribution opportunities through embedded lending partners that match businesses looking for credit products and lenders on a marketplace.

Banks can take advantage of this strategy and generate sustained growth by using platforms, like Lendflow, that bring untapped distribution opportunities into the fold. This allows them to easily reach qualified, high-intent businesses seeking capital. Even better, their applications for credit occur at their point of need, which increases the likelihood they’ll qualify and accept the loan.

  • Doubling down on traditional distribution channels. Another viable growth strategy for banks is to double down on providing better financial services and advice through traditional channels. Banks possess the inherent advantage of being in a position to not only supply products and services, but also provide ongoing advice as a trusted financial partner. Incorporating additional data points, such as payroll and cash flow data or social scoring, into their underwriting processes allows banks to leverage their unique position to develop more personalized products, improve customer experience and better support customers.

Embedded lending platforms can aggregate and normalize traditional and alternative data to help banks improve their credit decisioning workflows and innovate their underwriting processes.

  • Reverse engineering on digital banking platforms. Banks can replicate this approach by embedding fintech products into their existing mobile app or digital banking platforms. Consider a bank that decides to provide shopping access through their online portals. In a case like this, a customer may apply for a car loan through the digital bank portal. The bank can then connect that customer to a local car dealership with whom they have a partnership — and potentially maintain revenue share arrangements with — to complete the transaction.

Lenders’ Crossroads Choice
Embedded finance’s effective invisibility of its services and products poses the biggest threat — or opportunity — to banks and traditional lenders. The convenience and ease of access of embedded financial products through platforms that customers already know and trust is an ongoing challenge traditional financial services providers. Yet embedded lending doesn’t have to be a threat for banks. Instead, banks should think of embedded lending as an opportunity to innovate their product lines and expand their reach to identify underserved small and medium-sized businesses in highly profitable industries.

Embedded lending opens a new world of underwriting possibilities because it relies on smarter data use. Platforms can pull data from multiple third-party sources, so lenders can efficiently determine whether or not a customer is qualified. With better data and smarter data use, fewer qualified customers get turned away, saving lenders time, cutting down underwriting costs and increasing conversion rates.