Welcome to TreasurUpdate for Banks, the LinkedIn newsletter from TreasurUp that explores the ever-evolving relationship between banking and FinTech. In a world where technology is playing an increasingly important role in the banking industry, it’s essential to understand whether banks and FinTech are partners or rivals and what that means for the future of finance.
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Technology has become a crucial enabler, disruptor, cost center, and growth engine for banks of all stripes. Whether using RegTech to facilitate regulatory compliance or the development of advanced product capabilities for the digital front-end, technology is playing an increasingly important role in banks’ long-term growth and profitability.
In this edition of #TreasurUpdate, we delve into the intricacies of FinTech, examining how banks are partnering with FinTechs for innovation, the rise of digital banks, and the emergence of ‘New Utilities,’ companies offering cutting-edge solutions to transform the financial services industry.
As the banking industry progresses, new technologies are being adopted, and software and technology outsourcing companies are rebranding themselves as FinTechs and Cloud Solution Providers to remain up-to-date. However, the definition of a FinTech is vast, and it’s crucial to comprehend where their competitive or value proposition stands. Do they pose a competition to conventional banks, facilitate innovation, or both simultaneously?
#OpenBanking is driving rapid change in the industry, and the C-Suite is paying close attention to what can provide a competitive edge and partnering accordingly. The Economist Survey results illustrate that most executives believe partnering with FinTech companies is the way to go.
Source: The Economist Intelligence Unit
The most prominent competitive examples of legacy banking businesses include alternate payment platforms; Stripe, PayPal, Square, ALIPAY, Payoneer and Zepto, just a small fraction of the hundreds of firms active in this space. They provide services to individuals and merchants through both online and physical POS capabilities. These firms have an extended footprint in the global market and while their offering is narrow, they generate cash flows that dwarf the bulk of the bank-only payment businesses they compete with.
A slightly different picture has formed in the Alt-Lending space. The BIS published an informative piece last year highlighting how FinTechs can more accurately price credit risk. They also found that FinTechs are more likely to provide cost-effective debt finance to businesses that have struggled to access credit from traditional banking firms. For now, the two sources of credit for business complement each other, probably given that the Alt-lenders have been drawn to where the demand for their services is keenest. Over time, having the ability to price credit with a far sharper quantitative pencil will enable the FinTechs to move stealthily across the turf of the incumbents.
#NeoBanks, or digital banks or challenger banks, are financial institutions that operate entirely online and offer a range of banking services, such as checking and savings accounts, loans, and credit cards.
“They differ from traditional banks in that they do not have physical branches and instead rely on technology to provide their services. “
Neo banks are often first to market with streamlined and user-friendly banking experiences with features such as mobile banking apps, real-time spending notifications, and budgeting tools. Many traditional banks have been quick to follow with equivalent functionality.
As technology continues to shape the financial industry, the line between traditional banking and FinTech can sometimes become blurred. This begs the question, is a NEO Bank considered a FinTech? The answer is not always straightforward, depending on factors such as the technology stack utilized and whether the institution holds a banking license.
A more precise definition may be the term “Challenger Bank,” referring to firms that can build and quickly implement solutions from the FinTech community, resulting in a more extensive selection of customer-centric digital services. As the industry continues to evolve, we anticipate that the lines between traditional banking, NEO Banks, and FinTech will continue to blur, making it crucial to stay informed on the latest developments in this dynamic field.
Suppose you look through to the broader market. In that case, countless companies with a more niche focus white-label their capabilities to banks while competing directly in a subset of jurisdictions. These hybrid competitors like OFX, StoneX, Banking Circle and others can help a bank establish broader global payments capability at a cost significantly lower than what would be required from an internal build. As these types of firms continue to develop, they gain plenty of focus from the Venture Capital arms of banks. They typically deliver a higher customer value proposition (sharper UX and pricing) for end users than banks have historically offered.
#WealthTech is another segment that has risen quickly compared to traditional Asset Management and Brokerage Businesses. Some of these new investment platforms depend on strategic partnerships with legacy businesses and act more as a distribution channels. In contrast, others bypass legacy infrastructure altogether, providing clients with gamified interactions and a new way of visualizing investment performance in real time. Robinhood is the poster child for this, with several similar companies in the De-Fi universe attracting close attention from regulators.
The emergence of innovative companies offering cutting-edge solutions sold directly to banks, known as “New Utilities,” is transforming the financial services industry. These companies specialize in filling gaps in legacy systems, accelerating firms’ delivery of competitive digital solutions, and providing services at significantly lower costs than traditional banks, thanks to the latest technological advancements. From innovative payment platforms to customer service tools, risk management, and compliance solutions, the solutions offered by these companies are diverse and help address a wide range of industry challenges.
One of the most intriguing aspects of #NewUtilities is their ability to establish valuable partnerships with larger banks. These partnerships are formed when a larger bank becomes a cornerstone client of one of these companies, and other financial institutions follow to become part of a growing user community. This approach helps to build credibility and scale for these companies, allowing them to compete with traditional banks in the highly competitive FinTech industry. By working with The New Utilities, banks can benefit from advanced technology solutions without spending precious resources building out services that the entire ecosystem needs.
Furthermore, as the banking and finance sector becomes more integrated with technology, The New Utilities play an increasingly critical role in driving innovation and change within the industry. By providing shared economy utilities to banks and financial institutions, these companies allow the sector to stay ahead of the curve and meet the evolving needs of customers in a digital-first world.
In today’s digital age, data has become an essential asset for businesses across industries, including the financial sector. Access to the output from Data Science models, which was once exclusive to a select few, has become more accessible in recent years, thanks to technological advancements. With API connections into a cloud environment, firms like FairXchange can now run complex analyses over transaction data without the need to build an ecosystem from scratch.
This is especially beneficial for electronic trading businesses with constrained resources, as they can diligently scrutinize the behavior of clients and liquidity providers. By analyzing this data, they can take steps to balance their service proposition into a win-win for all participants in the value chain. For instance, they can use data to identify any trading patterns that may put client returns at risk or cause liquidity providers to increase spreads, enabling concise data-driven decisions that ultimately benefit everyone involved.
#OnlineBanking is an area where data analytics plays a significant role. Banks increasingly use data analytics to personalize their services and improve customer experiences. For example, banks can analyze customer data to identify spending patterns, preferences, and other behaviors. With this information, they can tailor their products and services to better meet the needs of their customers. Additionally, data analytics can be used to detect fraudulent activities, such as unusual transactions or account behaviors, in real-time.
Data analytics is transforming the way the financial sector operates. Access to data has become more accessible, allowing businesses of all sizes to leverage it for their benefit. By utilizing data analytics, banks can make better-informed decisions, personalize their services, and improve customer experiences while improving risk returns.
To stay ahead of the curve, it’s important to keep up with the latest trends in analytics. That’s why we recommend checking out the previous edition of our LinkedIn newsletter for more information on “The Leading Analytics Trends for Banks in 2023.”
The relationship between banks and FinTech companies is complex and multifaceted. While there are areas of competition, such as in payments and lending, there are also many opportunities for partnership and collaboration. As technology continues to shape the industry, we can expect to see a further blurring of the lines between traditional banking, NEO Banks, and FinTech.
It is crucial for banks to stay informed on the latest developments in this dynamic field and consider partnering with FinTechs to drive innovation and growth. The emergence of new utilities and hybrid competitors is transforming the industry and accelerating the delivery of competitive digital solutions. The future of banking and FinTech is exciting and full of possibilities, and it will be interesting to see how the industry evolves in the coming years.
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James Dalton is an accomplished Relationship Manager at TreasurUp, with expertise in strategic partnerships, business development, sales management, and FinTech. He has a wealth of experience in Electronic Sales & Trading, Algorithmic Execution, International Payments, Change Management, and Financial Markets Technology, gained from his time as an early mover in FX Algorithmic Execution & Head of Digital in the banking industry.
James is particularly skilled in Trading Systems, Foreign Exchange (FX) Trading, and Electronic Platform Strategy & Sales. He possesses a deep understanding of market micro-structure and has established strong relationships with the global Investor community. With his extensive experience and knowledge, James is well-equipped to provide valuable insights and analysis as a newsletter author.
TreasurUpdate for Banks is a monthly newsletter from TreasurUp that provides valuable insights and knowledge to their partnering banks. This newsletter covers various topics related to online Commercial Banking, such as innovation, market trends and new technologies.
TreasurUp is a leader in advanced product capabilities for online Commercial Banking partners. We’re at the forefront of the industry’s transformation from a standalone to a platform operating model. Through years of customer-centric research and development, we’ve honed our expertise in providing cutting-edge solutions for the digital front-end of online Commercial Banking. Our platform is designed to bring advanced capabilities to our bank clients and their SMBs, streamlining processes and improving overall efficiency.
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