Sergio Barbosa, CEO, FutureBank
Co-founder and CIO of enterprise software development house, Global Kinetic, Sergio directly heads its open banking platform, FutureBank. A skilled software engineer, innovative product developer, and keen business strategist, he has participated in several notable fintech milestones, including building the southern hemisphere’s first digital-only bank all the way back in 2002.
Back in October, I made an argument for open banking’s relevance to regional American banks and credit unions. I listed several ways that open banking platforms could benefit institutions like these – specifically those with under a billion dollars in assets.
My focus in this post is on the enormous potential banking-as-a-service (BaaS) and banking-as-a-platform (BaaP) have for helping traditional banks reach new customers, including those that were uneconomical, unreachable, or unheard of in a physically restrictive and data deficient banking paradigm.
Platforms that leverage APIs and facilitate integration can enable banks to benefit from fintechs’ data-driven and customer-centric approach to innovation by offering them the embedded finance foundation that fintechs need in return for greater customer acquisition on the bank side.
They can also enable banks to develop highly engaging new offerings faster, more efficiently, and with far less risk than before. Both fintechs and banks could leverage a combined customer data set in various ways – with their approval, of course.
Let’s look at three broad opportunities banks and credit unions have to gain new customers or members through open banking partnerships.
What bank is the best fit for serial house restorers? And for TikTok entrepreneurs? Convenience store franchisees? Everything counts in large amounts, as the song goes, and the economies of scale that digital technologies can provide could bring millions of potential customers within reach of the smallest bank. Sifting through them, you’re bound to find a market, even a very niche, geographically distributed one.
Going “niche”, as they say, means targeting market segments and communities united by emotional or cultural bonds, personal concerns, and unmet financial needs that have little to do with geography.
US banks and credit unions have long focused on the needs of narrowly-defined communities, but their geographical footprint has almost always been limited by cost considerations related to their physical branch and ATM networks, if not by their charters too.
No more. Digital channels have freed them – and their competitors – to market to prospects and serve customers far beyond their home county, state, or region without much additional outlay. To get a good return on investment, however, they have to hone their value proposition carefully – and that may require further specialization.
Going “niche”, as they say, means targeting market segments and communities united by emotional or cultural bonds, personal concerns, and unmet financial needs that have little to do with geography. These groups may always have been there – ethnic, racial, or sexual minorities, for example – or could be entirely new – think of crypto-asset traders and gig economy workers.
It’s an approach that many smaller financial institutions see as a way to differentiate themselves from competitors large and small, gain customers, and profit from value-added services delivered through low-cost channels – even as banking infrastructure and traditional banking products are commoditized.
All of these businesses reflect something profoundly different about the open banking paradigm: banking is increasingly conceived of as something rooted in everyday life, occasioning a far wider range of interactions at many more moments in the day.
High-context recommendations – product and service cross- or up-sell, meaningful communication and useful advice, shortcuts to the next step on any given journey – these all depend on knowing your customer intimately and understanding the motivation behind their transactions.
Fintech partnerships help these financial institutions:
The US federal Community Reinvestment Act obliges financial institutions to serve neighbourhoods across a range of incomes in their catchment, but industry consolidation, commercial imperatives, as well as patchy enforcement have seen low-income communities – urban as well as rural – hit disproportionately hard by branch closures spanning decades. It’s a leading cause of financial exclusion, together with lack of government ID, insufficient credit history, and unaffordable or unpredictable service fees.
Open banking platforms can go a some way to addressing financial exclusion while helping mid-sized banks and credit unions reach new customers at reduced risk.
According to the US Federal Reserve, 6 percent of adults in the United States are unbanked, while 16 percent are under-banked (the FDIC has similar figures). These millions of Americans represent frustrated human potential and an untapped market. Digital service provision is not a cure-all, as the Fed pointed out just before the onset of the pandemic, but open banking platforms can go a some way to addressing the problem while helping mid-sized banks and credit unions reach new customers at reduced risk.
Partner-provided data concerning devices, payments, online and social media interactions, etc., combined with third-party AI systems help manage risk and improve efficiency, so that the market can be served more cheaply and effectively.
Fintech partnerships help these institutions:
Open banking – BaaS in particular – has opened many senior executives’ eyes to the exciting potential in distributing financial services over third-party channels, essentially reaching and making money from people and businesses with which their institution does not have a direct relationship.
With embedded finance, the bank brand may take a back seat to another – a racing car maker, a global charity, even a Kardashian or two – but the opportunities to extend your reach are immense.
These third parties are often fintechs, but they could be any enterprise looking to leverage banks’ money-moving infrastructure, rich troves of data, and competencies in areas like fraud detection and prevention, identity and access management, and regulatory compliance. Banks, in turn, either gain revenue directly from the fees they charge or benefit from their products’ relatively cost-effective exposure to a wider, captive audience.
Embedded finance is an especially promising development. It allows financial services providers and an almost limitless number of non-bank brands to integrate financial services seamlessly in websites, apps, games, and the point of sale for greater convenience and deeper engagement. The bank brand may take a back seat to another – a racing car maker, a global charity, even a Kardashian or two – but the opportunities to extend your reach are immense.
BaaS partnerships help these institutions:
You don’t have to be a fintech startup to be excited by the future these partnerships will help build. Regional banks and credit unions have as much to gain as any other stakeholder, and with the right partners and a few good ideas, they will.
FutureBank is a fintech marketplace and technology platform enabling banks and credit unions of all sizes to test a wide range of third-party products at scale. There is minimal upfront cost and significantly less risk involved in making an investment. Compatible with over 6000 financial institution back-end systems, we offer a single integration point for fintech technologies for rapid time-to-market.
Looking to explore new opportunities in open banking?
Contact FutureBank for a presentation.