Why Embedded Finance Is the Next Area of Digital Revolution

The four decades after the internet made information readily accessible has led to inventions and innovations like smart devices, mobile apps and the ability to be constantly connected. Today, companies are focusing on harnessing technology to build smoother, richer and deeper customer experiences.

As the information age evolves to the experience age, the next digital revolution will be embedded finance. Embedded finance enables any brand, business or merchant to rapidly, and at a low cost, integrate innovative financial services into new propositions and customer experiences. Embedded finance is driven by consumers’ desire for more convenient and frictionless financial services. Several use cases that underline the demand for embedded financial experiences include:

  • Billing payments as part of the experience. Businesses are already using payment options, like buy now, pay later, to differentiate their offering, increase sales and empower buyers at checkout.
  • Growing popularity of Point-of-Sale financing. The volume of installment-based, flexible payment and instant credit options has increased significantly in the past five years, indicating a desire for instant access to short-term borrowing.
  • Mainstreaming of digital wallets. As more people use their mobile phones to purchase products and services, it makes sense that consumers want to access other financial services seamlessly within apps.

There is potential for embedded finance in almost every sector; in the U.S. alone, embedded finance is expected to see a tenfold revenue increase over the next five years. Financial institutions are in a position to provide branded or white-label products that non-banks can use to “embed” financial services for their customers. Banks must evolve rapidly to take advantage of this new market opportunity.

The front-runners will be institutions that can offer digital real-time payments or instant credit with minimal friction and optimum convenience to customers. But providing this requires new core technologies, cloud capabilities and flexible application programming interfaces, or APIs and other infrastructure to support new business models. Banks will also have to become much more collaborative, working closely with fintechs that may own or intermediate the customer relationship.

Embedded finance allows nonbank businesses to offer their customers additional financial services at the point of decision. Customers can seamlessly pay, redeem, finance or insure their purchase. This can look like buying, financing, and insuring a TV from a store’s shopping app, securing a mortgage through the estate agent’s website as part of a house purchase or obtaining health insurance from a fitness app. This does not mean that every retailer or e-commerce business will become a bank, but it does mean that many more will be equipped with the potential to offer more financial capabilities to customers as a way to compete, differentiate and engage more effectively.

In May 2021, Mambu surveyed 3,000 consumers and found the following:

  • 81% would be interested in purchasing health insurance via an app, and almost half of these would pay a small premium.
  • 60% would prefer to take out an education loan directly from their academic institution rather than a bank.
  • 86% would be interested in purchasing groceries from a cashier-less store.

How these capabilities are delivered and consumed is changing constantly. Consumers want to use intuitive and fast financial services via online and mobile banking channels. Digitalization and cloud services are reinventing back-office functions, automating and streamlining processes and decision-making. At the same time, legislation, open banking and APIs are driving new ecosystems. These changing markets and increased competition make it more difficult for banks to meet evolving customer demands, prevent churn and sustain growth.

We are living in the world of the continuous next. Customers expect financial service providers to anticipate and meet their requirements — sometimes even before they know what they want — and package those services in a highly contextual and personalized way. At the same time, new digital players are setting up camp in the bank space. Tech giants are inching ever closer to the banking market, putting bank relationships and revenue pools are at risk. On an absolute basis, this could cost the industry $3.7 trillion, according to our research.

Incumbent banks need to adopt a foundation oriented toward continuous innovation to keep pace with changing customer preferences. Embracing innovations such as embedded finance is one way that banks can unlock new opportunities and raise new revenue streams.

3 Ways to Drive Radical Efficiency in Business Lending

Community banks find themselves in a high-pressure lending environment, as businesses rebound from the depths of the pandemic and grapple with inflation levels that have not been seen for 40 years.

This economic landscape has created ample opportunity for growth among business lenders, but the rising demand for capital has also invited stiffer competition. In a crowded market, tech-savvy, radically efficient lenders — be they traditional financial institutions or alternative lenders — will outperform their counterparts to win more relationships in an increasingly digitizing industry. Banks can achieve this efficiency by modernizing three important areas of lending: Small Business Administration programs, small credits and self-service lending.

Enhancing SBA Lending
After successfully issuing Paycheck Protection Program loans, many financial institutions are considering offering other types of SBA loans to their business customers. Unfortunately, many balk at the risk associated with issuing government-backed loans and the overhead that goes along with them. But the right technology can create digital guardrails that help banks ensure that loans are documented correctly and that the collected data is accurate — ultimately reducing work by more than 75%.

When looking for tools that drive efficiency in SBA lending, bank executives should prioritize features like guided application experiences that enforce SBA policies, rules engines that recommend offers based on SBA eligibility and platforms that automatically generate execution-ready documents.

Small Credits Efficiencies
Most of the demand for small business loans are for credits under $100,000; more than half of such loans are originated by just five national lenders. The one thing all five of these lenders have in common is the ability to originate business loans online.

Loans that are less than $100,000 are customer acquisition opportunities for banks and can help grow small business portfolios. They’re also a key piece of creating long-term relationships that financial institutions covet. But to compete in this space, community institutions need to combine their strength in local markets with digital tools that deliver a winning experience.

Omnichannel support here is crucial. Providing borrowers with a choice of in person, online or over-the-phone service creates a competitive advantage that alternative lenders can’t replicate with an online-only business model.

A best-in-class customer experience is equally critical. Business customers’ expectations of convenience and service are often shaped by their experiences as consumers. They need a lending experience that is efficient and easy to navigate from beginning to end.

It will be difficult for banks to drive efficiency in small credits without transforming their sales processes. Many lenders began their digital transformations during the pandemic, but there is still significant room for continued innovation. To maximize customer interactions, every relationship manager, retail banker, and call center employee should be able to begin the process of applying for a small business loan. Banks need to ensure their application process is simple enough to enable this service across their organization.

Self-Service Experiences
From credit cards to auto financing to mortgages, a loan or line of credit is usually only a few clicks away for consumers. Business owners who are seeking a new loan or line of credit, however, have fewer options available to them and can likely expect a more arduous process. That’s because business banking products are more complicated to sell and require more interactions between business owners and their lending partners before closing documents can be signed.

This means there are many opportunities for banks to find efficiency within this process; the right technology can even allow institutions to offer self-service business loans.

The appetite for self-service business loans exists: Two years of an expectation-shifting pandemic led many business borrowers to prioritize speed, efficiency and ease of use for all their customer experiences — business banking included. Digitizing the front end for borrowers provides a modern experience that accelerates data gathering and risk review, without requiring an institution to compromise or modify their existing underwriting workflow.

In the crowded market of small business lending, efficiency is an absolute must for success. Many banks have plenty of opportunities to improve their efficiency in the small business lending process using a number of tools available today. Regardless of tech choice, community banks will find their best and greatest return on investment by focusing on gains in SBA lending, small credits and self-service lending.

What Does a Tech-Forward Bank Look Like?

You wouldn’t think Jill Castilla would have trouble getting a bank loan. After all, she’s the CEO of Citizens Bank of Edmond, a $354 million institution in Edmond, Oklahoma. But as a veteran of the U.S. Army married to retired lieutenant colonel Marcus Castilla, she figured they would qualify to get a VA home loan from a bank other than Citizens, which doesn’t offer VA loans.

After 60 days stretched to more than 90 days, the big bank still hadn’t said yes or no, and the seller was getting increasingly anxious. To get the house they wanted, the couple switched gears and got a loan from Citizens instead.

After abandoning the attempt to get a VA loan, Castilla vowed to help other veterans. Her bank has partnered with several technology companies, including Jack Henry Banking, Teslar Software and ICE Mortgage Technology to start a lending platform on a national basis called Roger.

Bank of Edmond hit on a problem the market hadn’t solved: How to make the process of getting a VA loan quicker and easier, especially in a hot real estate market where veterans are more likely to lose bids if they can’t be competitive with other buyers. As Managing Director Sam Kilmer of Cornerstone Advisors put it at Bank Director’s FinXTech Experience conference recently, borrowing from Netflix co-founder Marc Randolph, “the no. 1 trait of an innovator is recognizing what causes other people pain.” Many banks like Castilla’s are trying to solve customer problems and remake themselves with the help of technology, particularly from more nimble financial technology, or “fintech” partners.

In fact, investors already view banks differently based on their approaches to technology, said William “Wally” Wallace IV, a managing director and equity analyst at Raymond James Financial, who spoke at the conference. Wallace categorized banks in three groups: the legacy banks, the growth banks and the tech-enabled banks.

The legacy banks aren’t growing and trade close to book value or 1.5 times book, Wallace said. The growth banks emphasize relationships and are technologically competent. They trade at 1.5 to 2.5 times book. But the tech-enabled banks use technology offensively, rather than defensively. Tech-enabled banks look to create opportunities through technology. Their stocks command a median tangible to book value of 2.5 times. They have more volatile stock prices but they have outperformed other indexes since 2020, with an average return of 104%, he said. Wallace predicts such banks will out-earn other banks, even growth banks, in the years ahead. He estimates their earnings per share will enjoy average compound annual growth rates of about 24% over a five-year period starting next year, compared to 7% for small-cap banks on average.

Take the example of banking as a service, where a bank provides financial services on the back end for a fintech or another company that serves the customer directly. Wallace said those banks have a fixed cost in building up their risk management capabilities. But once they do that, growth is strong and expenses don’t rise at the same rate as deposits or revenue, generating positive operating leverage.

But, as banks try to remake themselves in more entrepreneurial and tech-forward ways, they’re still not tech companies. Not really. Technology companies can afford to chase rabbits to find a solution that may or may not take off. Banks can’t, said Wallace. “You have to be thoughtful about how you approach it,” he added. But, he suggested that tech-enabled banks that invest in risk management will have large payoffs later. “If you guys prove you can manage the risks, and not blow up the bank, investors will start to pay for that growth,” he said.

Customers Bancorp is positioning itself as one of those tech-forward banks but it’s already seeing results. The West Reading, Pennsylvania-based bank reported a core return on common equity of 24% and a return on average assets of 1.63% in the first quarter of 2022.

Jennifer Frost, executive vice president and chief administrative officer at $19.2 billion Customers Bank, spoke at the conference. “We had some pretty sophisticated platforms, but we didn’t have a way to unlock the power with the people who knew how to use them,” she said. Since the Paycheck Protection Program proved the bank could pivot to providing digital loans quickly, the bank began ramping up its capabilities in small business and commercial lending. Instead of limiting itself to buying off-the-shelf platforms from technology providers, its strategy is to carefully pick configurable programs and then hire one or two developers who can make those programs a success.

“Take what you’ve learned here and start a strategy,” she warned the crowd of some 300 bankers and fintech company representatives at the conference. “If you’re not starting now, it’s going to be a dangerous season.”

The Key to Creating Transformational Financial Products, Services

Banks need to offer products that address unmet needs of current and prospective customers to gain a meaningful competitive advantage and retain market share.

But upgrading the “front end” experience is just one piece of the puzzle when it comes to competing in this increasingly crowded financial services landscape. Still, this can often be a nearly impossible step for banks with legacy delivery and core systems; these dated technologies typically don’t enable banks to customize products and services or have the combination of capabilities that they require to meet niche needs of customers.

To truly launch impactful products and services, banks must first fully understand who their customers are and where the gaps lie. This doesn’t just mean creating generic customer segments, such as Generation Z, urban dwellers and mass affluent, among others. It means determining niche groups based on their unmet needs. It’s time to look beyond traditional demographics like age, household income, gender and life cycle to uncover narrow customer behaviors.

Executives can ascertain such insight from mining many data sources, including the bank’s delivery channels, payment systems and core banking systems. However, it’s often necessary for banks to identify and use previously untapped data sources as well, such as payroll, assets or even health insurance. To effectively do so, banks must have the proper infrastructure and technology in place. But facing existing challenges like constraints on resources and tech talent shortages, many financial institutions instead rely on trusted fintech partnerships to collect, organize and analyze the data.

Once banks or their partners analyze the data, they can form niche groups based on what unique user needs are not being met with traditional financial services. This segmentation gives banks the opportunity to provide new value for those customers by offering meaningful, relevant features or products that can fill the gaps. This is a stark contrast to the generic mass mailing offer for a debit card or auto loan that some institutions send out on a regular basis.

For example, some customers value sustainability as one their core principles. These customers might drive hybrid cars, only shop at small businesses or prefer organic produce. Banks can use this insight to create empathetic products and services that support these customers’ lifestyles and beliefs. Maybe the bank decides to provide loans for purchases that directly support clean energy. Such innovative products and services show that the bank understands and shares their customers’ values, building stronger customer relationships.

Or, consider that a bank uncovers a niche group of young adults that tend to take advantage of buy now, pay later (BNPL) services. To meet this group’s specific needs, a bank might develop a feature within its digital banking interface that notifies the user when a new BNPL charge appears on their statement. The bank could provide a more holistic view of the customers’  BNPL purchases and upcoming payments by tracking and categorizing each purchase. Or, perhaps the bank could recommend credit cards to help build the user’s credit instead of using BNPL programs. In these scenarios, the bank is offering products and services that meet this niche group’s specific situation and needs.

In both examples, the new products and services resonated with customers because they demonstrate the institution’s empathetic understanding of the niche group’s unmet needs. These are the types of digital transformations banks need in order to remain competitive in a landscape full of disruptors. Those banks that are carefully evaluating their data, launch products and services designed for niche groups and are tapping trusted, proven consultants and fintech partners for analysis and development when needed will be well positioned to increase wallet share and increase and deepen customer loyalty.

Busting Community Bank Credit Card Myths

Credit card programs continue to be among the most significant opportunities for the nation’s largest banks; is the same true for community banks?

After a slowdown in 2020, credit card applications grew back to pre-pandemic levels in 2021. It is projected that credit cards will experience strong growth in 2022, particularly in small business and commercial segments. While a few community banks recognize the business opportunity in credit cards, according to Federal Deposit Insurance Corp. reports, over 83% do not own any credit card assets on their books.

The potential rewards of issuing credit cards are huge. Customers who have more financial products with their bank show improved retention, with more activity across the products, leading to higher profitability. It can help community banks serve their local community and improve their customers’ financial health. And community banks can realize a high return on assets (ROA) from their credit card program.

Despite these benefits, community bank executives hold back their institutions from issuing credit cards due to several myths and misconceptions about the space. Credit card issuing is no easy task — but with available technology and servicing innovations makes it possible to bust these myths.

Myth 1: The Upfront Investment is Too High
While it would be a significant investment for a financial institution to put together a credit card program from scratch, there is no need to do that. A bank can leverage capabilities built and offered by companies who offer credit cards as a service. In fact, community banks need to make little to no upfront investment to add innovative solutions to their offerings.

Myth 2: Customers are Well Served by Agent Banks
In the past, many community banks opted to work with an agent bank to offer credit cards because it was the only option available. But participating in an agent bank referral program meant they essentially lost their customer relationship to the issuing bank. Additionally, the community banks cannot make their own credit decisions or access the credit card data for their own customers in this model. Alternative options means that banks should consider whether to start or continue their agent bank credit card offering, and how it could affect their franchise in the long run.

Myth 3: Credit Card Programs are Too Risky
A handful of community banks have chosen to issue subprime credit cards with high fees and interest rates — and indeed have higher risk. However, sub-prime lending is not the focus of vast majority of community banks. Relationship lending is key; credit cards are a great product to deepen the relationships with customers. Relationship-based credit card portfolios tend to have lower credit losses compared to national credit card programs, particularly in economic downturns. This can provide comfort to conservative bankers that still want to serve their customers.

Myth 4: Credit Card Programs are Unprofitable
This could not be further from the truth. The average ROA ratio overall for banks increased from 0.72% in 2020 to 1.23% in 2021, according to the Federal Deposit Insurance Corp.; credit cards could be five times more profitable. In fact, business credit cards and commercial cards tend to achieve an ROA of 8% or higher. Commercial cards, in particular, are in high demand and expected to grow faster due to digital payment trends that the pandemic accelerated among businesses. Virtual cards provide significant benefits to businesses; in turn, they increase spend volume and lead to higher interchange and lower risk to the bank.

Myth 5: Managing Credit Cards is Complex, Time-Consuming and Expensive
Banks can bust this myth by partnering with a organizations that specialize in modern technology and program management of credit cards. There is technology available across all card management disciplines, including origination, credit decision making, processing, sales/servicing interfaces, detailed reporting, integrated rewards, marketing and risk management. Partners can provide expertise on policies and procedures that banks will require for the program. Community banks can launch and own credit card programs in 120 days or less with innovative turnkey solutions — no new hires required.

Considering the past challenges and perceptions about credit cards, it is no surprise that these misconceptions persist. But the future of credit cards for community banks is bright. Community banks armed with knowledge and foresight will be positioned for success in credit cards. Help from the right expertise will allow them to enhance their customer experiences while enjoying high profitability in the long run.

Use Cases, Best Practices For Working With Fintechs

Bank leadership teams often come under pressure to quickly establish new fintech relationships in response to current market and competitive trends.

The rewards of these increasingly popular collaborations can be substantial, but so can the associated risks. To balance these risks and rewards, bank boards and senior executives should understand the typical use-case scenarios that make such collaborations appealing, as well as the critical success factors that make them work.

Like any partnership, a successful bank-fintech collaboration begins with recognizing that each partner has something the other needs. For fintechs, that “something” is generally access to payment rails and the broader financial system — and in some cases, direct funding and access to a bank’s customer base. For banks, such partnerships can make it possible to implement advanced technological capabilities that would be impractical or cost-prohibitive to develop internally.

At a high level, bank-fintech partnerships generally fall into two broad categories:

1. Customer-facing collaborations. Among the more common use cases in this category are new digital interfaces, such as banking-as-a-service platforms and targeted online offerings such as deposit services, lending or credit products, and personal and commercial financial management tools.

In some collaborations, banks install software developed by fintech to automate or otherwise enhance their interactions with customers. In others, banks allow fintech partners to interact directly with bank customers using their own brand to provide specialized services such as payment processing or peer-to-peer transactions. In all such relationships, banks must be alert to the heightened third-party risks — including reputational risk — that result when a fintech partner is perceived as an extension of the bank. The bank also maintains ultimate accountability for consumer protection, financial crimes compliance and other similar issues that could expose it to significant harm.

2. Infrastructure and operational collaborations. In these partnerships, banks work with fintechs to streamline internal processes, enhance regulatory monitoring or compliance systems, or develop other technical infrastructure to upgrade core platforms or support systems such as customer onboarding tools. In addition to improving operational efficiency and accuracy, such partnerships also can enable banks to expand their product offerings and improve the customer experience.

Although each situation is unique, successful bank-fintech partnerships generally share some important attributes, including:

  • Strategic and cultural alignment. Each organization enters the collaboration for its own reasons, but the partnership’s business plan must support both parties’ strategic objectives. It’s necessary that both parties have a compatible cultural fit and complementary views of how the collaboration will create value and produce positive customer outcomes. They must clearly define the roles and contributions and be willing to engage in significant transparency and data sharing on compatible technology platforms.
  • Operational capacity, resilience and compatibility. Both parties’ back-office systems must have sufficient capacity to handle the increased data capture and data processing demands they will face. Bank systems typically incorporate strict controls; fintech processes often are more flexible. This disparity can present additional risks to the bank, particularly in high-volume transactions. Common shortcomings include inadequate capacity to handle customer inquiries, disputes, error resolution and complaints. As a leading bank’s chief operating officer noted at a recent Bank Director FinXTech event, improper handling of Regulation E errors in a banking-as-a-service relationship is one of the quickest ways to put a bank’s charter at risk.
  • Integrated risk management and compliance. Although the chartered bank in a bank-fintech partnership inevitably carries the larger share of the regulatory compliance risk, both organizations should be deliberate in embedding risk management and compliance considerations into their new workflows and processes. A centralized governance, risk, and compliance platform can be of immense value in this effort. Banks should be particularly vigilant regarding information security, data privacy, consumer protection, financial crimes compliance and dispute or complaints management.

Proceed Cautiously
Banks should guard against rushing into bank-fintech relationships merely to pursue the newest trend or product offering. Rather, boards and senior executives should require that any relationship begins with a clear definition of the specific issues the partnership will address or the strategic objective it will achieve. In addition, as regulators outlined in recent guidance regarding bank and fintech partnerships, the proposed collaboration should be subject to the full range of due diligence controls that would apply to any third-party relationship.

Successful fintech collaborations can help banks expand their product offerings in support of long-term growth objectives and meet customers’ growing expectations for innovative and responsive new services.

5 Key Factors for Fintech Partnerships

As banks explore ways to expand their products and services, many are choosing to partner with fintech companies to enhance their offerings. These partnerships are valuable opportunities for a bank that otherwise would not have the resources to develop the technology or expertise in-house to meet customer demand.

However, banks need to be cautious when partnering with fintech companies — they are subcontracting critical services and functions to a third-party provider. They should “dig in” when assessing their fintech partners to reduce the regulatory, operational and reputational risk exposure to the bank. There are a few things banks should consider to ensure they are partnering with third party that is safe and reputable to provide downstream services to their customers.

1. Look for fintech companies that have strong expertise and experience in complying with applicable banking regulations.

  • Consider the banking regulations that apply to support the product the fintech offers, and ask the provider how they meet these compliance standards.
  • Ask about the fintech’s policies, procedures, training and internal control that satisfy any legal and regulatory requirements.
  • Ensure contract terms clearly define legal and compliance duties, particularly for reporting, data privacy, customer complaints and recordkeeping requirements.

2. Data and cybersecurity should be a top priority.

  • Assess your provider’s information security controls to ensure they meet the bank’s standards.
  • Review the fintech’s policies and procedures to evaluate their incident management and response practices, compliance with applicable privacy laws and regulations and training requirements for staff.

3. Engage with fintechs that have customer focus in mind — even when the bank maintains the direct interaction with its customers.

  • Look for systems and providers that make recommendations for required agreements and disclosures for application use.
  • Select firms that can provide white-labeled services, allowing bank customer to use the product directly.
  • Work with fintechs that are open to tailoring and enhancing the end-user customer experience to further the continuity of the bank/customer relationship.

4. Look for a fintech that employs strong technology professionals who can provide a smooth integration process that allows information to easily flow into the bank’s systems and processes.

  • Using a company that employs talented technology staff can save time and money when solving technology issues or developing operational efficiencies.

5. Make sure your fintech has reliable operations with minimal risk of disruption.

  • Review your provider’s business continuity and disaster recovery plans to make sure there are appropriate incident response measures.
  • Make sure the provider’s service level agreements meet the needs of your banking operations; if you are providing a 24-hour service, make sure your fintech also supports those same hours.
  • Require insurance coverage from your provider, so the bank is covered if a serious incident occurs.

Establishing a relationship with a fintech can provide a bank with a faster go-to-market strategy for new product offerings while delivering a customer experience that would be challenging for a bank to recreate. However, the responsibility of choosing a reputable tech firm should not be taken lightly. By taking some of these factors into consideration, banks can continue to follow sound banking practices while providing a great customer experience and demonstrating a commitment to innovation.

Powering the Web of Partnerships to Make Innovation Easy

The right platform can help banks accelerate innovation, navigate the changing tech landscape and offer next generation solutions to customers. Public clouds are the platform to achieve these outcomes.

The cloud has moved from an ambiguous and amorphous buzzword to the platform that powers much of the innovation happening in the financial industry. Clouds, like Microsoft’s Azure, serve as the modern foundation banks, digital cores and other fintech firms use to build, develop, house and host their solutions. Participating in the cloud eco-system allows these players to seamlessly integrate with each other to expand their customer reach, take advantage of pre-built accelerators, and access third party fintech solutions. This ecosystem, with its multiple connection points, when housed on the same cloud means innovation can happen faster — at every level.

That accelerated innovation is crucial to small and mid-sized banks like Hawthorn Bank, a subsidiary of the Jefferson City, Missouri-based Hawthorn Bancshares. Banks must balance providing high-quality customer service and relevant products to customers while keeping up with nonbank and big bank competitors, but have limited staff and capacity for adding new tech projects and offerings. Hawthorn wanted to add more services and solutions for its business customers, like expedited online and in-person payments, which didn’t always fit into its traditional suite of offerings.

Hawthorn didn’t realize it at the time, but belonging to the right cloud network helped it address a number of their business customer’s pain points. The $1.7 billion bank relies on Jack Henry’s Banno digital banking platform, which now offers embedded invoicing and digital payment acceptance functionality through a partnership with Autobooks, as well as the full Autobooks small business solution as a seamless add-on to Banno platform users.

Both Autobooks and Jack Henry reside in Microsoft Azure, which made it easy for Banno to incorporate Autobooks as an additional service, as well as for Hawthorn to flip a switch to enable the service. And Autobooks proved to be a complementary, revenue-generating solution that Hawthorn Bank could bring to its business customers.

Examples like this show how coexisting in a cloud ecosystem can remove friction at all levels of development, deployment and integration. This has several benefits for banks and the end user. Being in the same cloud means that fintechs like Autobooks and service providers like Jack Henry can roll out new features and updates to their banks faster. It also helps banks control their third-, fourth- and fifth-party risks, which regulators have highlighted as a way to manage operational and cyber risk.

Selecting that cloud provider, however, starts with trusting the tech company as a secure partner who can meet regulatory expectations. Azure’s developers engage with more than 200 global financial regulators to meet compliance and security requirements, including hosting an annual summit to discuss new regulations and threats. Microsoft also accompanies regulators during audits at financial institutions. And Microsoft works with banks at the platform level to help them navigate projects with other partners, including audit, analytics and other digital banking overhauls and core integrations.

A relationship that close requires shared values — and increasingly, banks are noticing that some of their vendors may not be true partners. A number of large tech firms providing cloud, analytics and platform services to banks are also developing financial products on the side that could compete directly for the bank’s customers. Banks may find that their big-tech cloud provider doesn’t share their values or definition of partnership or compliance; they may treat private customer data differently. The ultimate risk for banks is that they partner with a firm that could one day become a competitor. Banks should look for cloud providers with a proven track record of staying focused on delivering value to the institution.

Community banks like Hawthorn are constantly looking for ways to serve customers better through innovative products and services, while keeping a close eye on costs and managing employee workloads. The right digital platform, powering their service providers and fintech partners alike, is key to unlocking and accelerating their digital transformation.

Five Fintech Solutions Every Bank Should Have

If Money 20/20 was any indication, it seems like banks are finally ready to really embrace fintech. Small and medium-sized banks have realized that their technology budgets can be used for things other than building and managing technology in-house to keep up with large financial institutions with big budgets and neobanks with brand new tech stacks. A tech stack is the combination of technologies a company uses to build and run an application or project, and typically consists of programming languages, frameworks, a database, front-end tools, back-end tools and applications connected via APIs.

For banks starting to explore fintech partnerships, we’ve compiled a list of the top five fintech solutions every bank should have in its tech stack today.

1. Account Opening Platform
New customer acquisition is one of the most important components of a successful financial institution. An online account opening platform powers an omnichannel interface to onboard new customers quickly and seamlessly. A good account opening platform should also provide a customizable user interface, increased account conversion rates and detailed reporting.

2. Identity Decisioning Platform
An identity decisioning platform, or IDP, automates identity and risk decisions across the lifecycle of your customer. IDPs power smart decisions that can reduce risk for your business while providing a frictionless customer experience for identity verification and onboarding, ongoing transaction monitoring and credit underwriting.

IDPs are the decision engine behind the account opening platform that helps banks determine whether to accept or reject an applicant. It continues to monitor that client’s account activity and powers underwriting decisions. Your IDP should connect to multiple data sources through application programming interfaces, or APIs, allowing you to add and change data sources as needed. By bringing all of your identity and risk decisions into one platform, you’ll see a holistic view of your customers and automate more decisions.

3. Open Banking Platform
Your customers expect to be able to access their financial data across various apps. Open banking platforms make it easy for banks to securely share data with third-party businesses through an API that allows customers to connect their banking data. Open banking platforms are the key component connecting your bank to popular apps like peer-to-peer payments, financial management and cryptocurrency investments.

4. BaaS Platform
You’ve probably noticed the trend of non-bank businesses beginning to offer financial products. This trend is powered through BaaS, or banking as a service, platforms. BaaS platforms enable a third-party business to integrate digital banking or payment services directly into their products by connecting them with a bank. This model allows non-financial institutions the ability to offer a financial product without getting a banking license. Unlike open banking platforms, which share the financial data within a bank account to a third-party business, BaaS platforms transfer the complete banking services into a third-party business’s product.

5. Know Your Transaction Solution
If your bank is starting to think about how to approach cryptocurrency and digital assets, one of the first things you’ll need is a Know Your Transaction, or KYT, provider to complement your Know Your Customer (KYC) procedures. KYT solutions help you remain compliant with anti-money laundering laws when monitoring crypto transactions. A KYT solution allows banks to track crypto funds and ensure they are not coming from mixers (a service that mixes streams of cryptocurrency to improve anonymity and make it more difficult to trace), foreign exchanges or blacklisted addresses.

Fintech companies can provide a lot of value to banks. Many of them are built to plug into your existing infrastructure and be up and running in weeks. They can help banks be more agile and adapt to new customer needs faster, save banks money on engineering resources and bring focused expertise to their category. Alloy also has resources available to help banks select fintech partners and build out their tech stacks.

A Seller’s Perspective on the Return of Bank M&A

Any thoughts of a lingering impact on mergers and acquisitions as a result of the 2020 economic downturn caused by Covid-19 should be long gone: 2021 bank transaction value exceeded $50 billion for the first time since 2007.

Continued low interest rates on loans and related compression of net interest margin, coupled with limited avenues to park excess liquidity have made many banks consider whether they can provide sustainable returns in the future. Sustainability will become increasingly difficult in the face of continued waves of change: declining branch transactions, increasing cryptocurrency activity and competition from fintechs. Additionally, the fintech role in M&A activity in 2021 cannot be ignored, as its impact is only expected to increase.

Reviewing 2021 M&A transactions, one could argue that the market for bank-to-bank transactions parallels the current residential home market: a finite amount of supply for a large amount of demand. While more houses are being built as quickly as possible, the ability for banks to organically grow loans and deposits is a much slower process; sluggish economic growth has only compounded the problem. Everyone is chasing the same dollars.

As a result, much like the housing market, there are multiple buyers vying for the same institutions and paying multiples that, just a few years ago, would have seemed outlandish. For sellers, while the multiples are high, there is a limit to the amount a buyer is willing to pay. They must consider known short-term gains in exchange for potential long-term returns.

For banks that are not considering an outright sale, this year has also seen a significant uptick in divestures of certain lines of business that were long considered part of the community bank approach to be a “one-stop shop” for customer needs. Banks are piecemeal selling wealth management, trust and insurance services in an attempt to right-size themselves and focus on the growth of core products. However, this approach does not come without its own trade-offs: fee income from these lines of business has been one of the largest components of valuable non-interest income supporting bank profitability recently.

Faced with limited ability to grow their core business, banks must decide if they are willing to stay the course to overcome the waves of change, or accept the favorable multiples they’re offered. Staying the course does not mean putting down an anchor and hoping for calmer waters. Rather, banks must focus on what plans to implement and confront the waves as they come. These plans may include cost cutting measures with a direct financial impact, such as branch closures and workforce reductions, but should entail investments in technology, cybersecurity and other areas where returns may not be quantifiable.

So with the looming changes and significant multiples being offered, one might wonder why haven’t every bank that has been approached by a buyer decides to sell? For one, as much as technology continues to increasingly affect our everyday lives, there is a significant portion of the population that still finds value in areas where technology cannot supplant personal contact. They may no longer go to a branch, but appreciate knowing they have a single point of contact who will pick up the phone when they call with questions. Additionally, many banks have spent years as the backbone of economic development and sustainability in their communities, and feel a sense of pride and responsibility to provide ongoing support.

In the current record-setting pace of M&A activity, you will be hard pressed to not find willing buyers and sellers. The landscape for banks will continue to change. Some banks will attack the change head-on and succeed; some will decide their definition of success is capitalizing on the current returns offered for the brand they have built and exit the market. Both are success stories.