Digital Banking
Banks, in one fashion or another, have been central to functioning societies for hundreds of years. It’s estimated that in the U.S. nearly every single citizen (92%) has an account with a traditional bank. One reason these institutions hold a majority of consumers’ accounts is because of their longevity: No matter what’s happening in the world, they tend to come out on the other side. Another reason so many people rely on traditional banks is that, until fairly recently, the only other options they had were other banks with fairly comparable offerings.
When digital challenger banks and fintechs (think: Chime, Ally Bank, SoFi) began arriving on the scene, consumers had more banking options than ever before. These new banks have been able to appeal to consumers in ways that traditional banks have not–with low or no fees, a mix of low-interest borrowing and high-interest saving options, digital interfaces, fresh, user-friendly features and a more transparent approach to banking. Because they’re not tied to clunky legacy IT systems or bound by the same regulatory requirements as traditional banks, digital banks and fintechs have also been able to innovate at a pace that traditional banks simply cannot.
While traditional banks still hold consumers’ trust and the lion’s share of their accounts, they’re lagging behind their digital-first competitors when it comes to customer experience. According to a December 2022 Prosper Insights & Analytics survey, 34% of consumers say they interact with their bank/financial institution most often on a mobile app, compared to only 21% who prefer going into a physical location. This gap will only continue to widen as challenger banks make digital banking more appealing, accessible and mainstream.
Prosper - Interact With Bank/Financial Institution Most Often
According to Sopra Banking Software CEO Eric Bierry, rather than oversaturate the market with banking options, traditional banks are considering options for diversifying their business models to work with digital banks.
“Fintechs can innovate faster than traditional banks, but they don’t have the backend infrastructure and industry experience necessary to go beyond basic banking. This leaves banks with an opportunity to provide digital banks with what they need to be fully functioning banks, through a new model: Banking as a Service (BaaS).”
I spoke with Bierry on the heels of the company’s U.S. expansion about how he sees traditional banks and challengers working together, and why this will result in an entirely new breed of banks.
Gary Drenik: Traditional banks and fintechs have long been competing for market share. Why would they suddenly want to work together?
Eric Bierry: Traditional banks have a 100+ year head start on their competitors. This gives them unrivaled experience and expertise. It also means they run on legacy systems that stand between them and their ability to innovate at the same rate as fintechs. But the reality is, they don’t have to.
The banking industry has been so tunnel-visioned on banks’ need to replicate the experiences that fintechs are creating, that they haven’t even considered the opportunities for them to work together.
Shifting from competitors to collaborators won’t happen overnight. Banks will have to change their mindset about fintechs. We recently surveyed banks around the world for our annual Digital Banking Experience (DBX) report, and found that 74% of them still view these new entrants as a threat to their existence. What’s interesting, though, is that they also recognize the potential for working with them.
Drenik: You seem to have high expectations for banks and fintechs working together. How do you see both benefiting from this “coopetition”?
Bierry: Digital banks and fintechs are not only growing at an exceptional pace they’re shifting consumers’ expectations of their banking experiences along the way. But, they’re limited in what they can offer to these hard-won customers, considering that they’re in no position–now or in the future–to deliver a full set of banking services, like mortgages, personal loans and credit cards. These things require banking licenses that are timely and expensive to acquire, and backend infrastructure and industry experience they don’t have–not to mention capital and regulatory requirements. Fintechs are nowhere near stacking up to traditional banks in these areas.
This is where Banking as a Service comes in. Through BaaS, traditional banks would provide fintechs with what they need to be fully functioning banks, including their banking licenses, infrastructure, and expertise. This would let digital banks and fintechs continue focusing on innovation and customer experience, rather than having to navigate funding, lending and regulation. For banks, BaaS offers lucrative new revenue streams.
Drenik: There are a number of fintechs out there that are focusing on equipping traditional companies with financial capabilities, like payments and financing. Does Banking as a Service have implications outside of banking as well?
Bierry: Yes, there are a number of potential revenue streams here and we’re seeing that over half of banks (52%) are already offering their capabilities to third parties.
With a BaaS model in place, banks can “bankify” companies in traditional industries, such as automotive manufacturing, real estate and insurance.
The banks essentially enable companies to interface directly with their customers and wholesale partners to offer bank-like services, such as financing. This opens up companies to completely new revenue opportunities.
Drenik: Can you share an example of what ‘bankifying’ a traditional company might look like?
Bierry: Take an auto manufacturer. Rather than having its wholesale dealers getting financing from a bank to purchase their fleets, the manufacturer could instead extend the financing to dealers directly. Not only does the manufacturer benefit from the interest generated from the loans, but they can also better predict their future inventory needs.
Payment and financing capabilities also get auto companies one step closer to the consumer, so they can process transactions directly and take advantage of emerging trends like cars-on-demand.
In real estate, companies can directly finance mortgages for their home buyers. And so on. This is just the beginning of the possibilities of BaaS – we’ll continue to see more use cases emerge over time.
Creating this new breed of banks is one of our main focuses as we continue to expand into the U.S.
Drenik: There are no lack of companies in the U.S. looking to transform banks in one way or another. What do you see as the opportunity for Sopra Banking Software stateside?
Bierry: We’ve worked with 1,500 banks in more than 100 countries–including Barclay’s, Santander, Credit Suisse and Bank of Africa–to digitize their offerings and innovate the banking experiences they offer to their customers. This has given us a ground-floor understanding of what these banks have in common, their challenges and the opportunities ahead of them.
The U.S. has nearly 10,000 commercial banks and credit unions, and is home to nearly 45% of the world’s fintech unicorns. It also has thriving automotive, insurance and real estate industries, all of which are undergoing digital transformation.
While there are plenty of companies that specialize in overhauling legacy systems, there are few that do what we do, which is provide banks and other companies with the digital interfaces and tools they need to unify the systems they’re using and bring new banking and financing options to their end users. And to be clear, the U.S. is not a testing ground for us. We already have more than 500M people worldwide using our software via the banks we work with.
By introducing Banking as a Service to banks, we’ll course correct their journeys and reimagine their relationships with fintechs. This will have the added benefit of setting the stage for banks to power the ‘bankification’ of traditional companies.
As part of the Sopra Steria Group, we’re in the unique position of being an agile fintech with a large enterprise backing to support our U.S. expansion.
Drenik: With consumers’ concerns about finances currently at an all time high and more than half of consumers (51%) without “rainy day” emergency funds (source: Prosper Insights & Analytics survey, December 2022), it’s reassuring to know that banks aren’t going anywhere.
Prosper - Rainy Day Emergency Fund
Thank you, Eric, for sharing a look at how Sopra Banking Software is working to change how banks bank and companies finance the people who buy from them.
