Published by Jessica Weisman-Pitts
Posted on October 11, 2022
Traditional banks and fintechs are currently vying for the same customers with different approaches to banking. Rather than oversaturate the market with too many banking options, according to Sopra Banking Software CEO Eric Bierry, there’s an opportunity for incumbent banks and fintechs to enter a symbiotic relationship.
“The way the industry sees it now, traditional banks will only survive if they replicate the experience offered by fintechs or launch neobanks of their own. But that’s not necessarily the case. There’s a real opportunity for banks and fintech to move beyond competition, and actually complement each other, by each doing what they’re good at. For banks, this means transforming the aspects of banking that fintechs can’t offer, such as backend infrastructure, into new revenue streams and a new business model: Banking as a Service (BaaS),” said Eric Bierry.
Sopra Banking Software has a decade of experience working with more than 1,500 financial institutions in 100 countries worldwide, including Barclay’s, Santander, Credit Suisse and Bank of Africa, to digitize their offerings and reimagine their role in today’s evolving industry. A subsidiary of the Sopra Steria Group, the company now brings this expertise to the U.S. as it drives the bankification of digital and neobanks—as well as traditional companies like automotive manufacturers, real estate companies, and other non-bank institutions.
Global Banking & Finance Review spoke with Eric Bierry about how fintech’s deficiencies can become legacy banks’ opportunities—and vice versa, and how Sopra Banking Software is fueling a new breed of banks through a new business model: Banking as a Service.
Traditional banks and fintechs are currently fighting for market share. Is there enough business to go around, or will we begin to see clear winners and losers?
We’re currently seeing consumers gravitate toward the more transparent and digital-first approach that fintechs are offering, making many fear for the future of banks. But if banks do a necessary course correction, I think we’ll see that the clear “winner” will ultimately be banks—just not as we currently know them.
Right now, fintechs are providing new capabilities at a much faster rate than banks. They’re bringing innovation, new use cases, and more agile ways of meeting consumer expectations. They’re also delivering a more desirable user experience.
What they aren’t able to deliver are many of the critical financial services that will always be a part of consumers’ everyday lives. For example, consumers might use a fintech application or neobank for things like payments, BNPL or basic checking and savings. The day that they want a mortgage or need to set up an account that their children can access while traveling in different countries, however, the newer digital banks can’t help.
In the end, banks have lending, security and regulation in their DNA. This presents a huge opportunity for those that are willing to step back from trying to replicate fintechs, and instead diversify into a new service model. By helping fintechs—and traditional companies across industries—expand their offerings, banks will ultimately dictate the trajectory of finance.
It sounds like banks have the upper hand, then, but they may require some adaptation in order to coexist with fintechs. How can they do this without simply trying to be more like fintechs or introducing challenger banks of their own?
First, banks need to change their mindsets. Fintechs are already cornering the market in innovation and consumer experience, but they can’t continue doing this without capital, regulatory compliance and secure infrastructures. This is where fintechs offer an enormous opportunity to banks to provide these capabilities for them. But banks have to be willing to work with them—not against them.
Take security, for example. Today’s fintechs and neobanks aren’t required to comply with the same regulations as traditional banks, making them less secure when managing large amounts of money or personal data. Legacy banks are the only companies with the infrastructure to provide complete peace of mind that these properties are secure for major financial moments in a consumer’s life, like buying a house or saving for retirement. Leveraging this positioning is key for banks’ future success.
Banks can then lend their capabilities to fintechs through a Banking-as-a-Service (BaaS) model. Through this new relationship, banks will be able to focus on things like security that they are already good at, and fintechs will be freed up to continue driving innovation and customer experience.
The end result is a secure, user-friendly interface for consumers.
Does all of this put traditional banks at risk of eventually being eliminated from the financial value chain?
No, BaaS is a scalable approach that is not limited to fintechs, challenger banks or any other financial institution. With this infrastructure in place, banks will be set up to “bankify” other industries outside of finance as well. In other words, banks will fuel companies’ ability to offer bank-like services directly to their business and consumer customers.
In doing so, banks will future-proof their models and be on the front lines of the next era of finance.
What are some of the other industries that are ripe for “bankification,” and what does that look like?
Banks have the potential to power companies in any industry to offer financing.
Today, consumers are not dedicated to using a traditional bank to finance all of their everyday—or even big ticket—purchases. This is because traditional companies—automotive, real estate, insurance and beyond—can now offer their own specialty financing options that consumers can take advantage of at the point of purchase through Banking-as-a-Service.
For banks to be a part of tomorrow’s financial ecosystem, they need to put themselves at the center of consumers’ lives. This means expanding into industries that haven’t been able to offer financing directly to consumers before. Banking-as-a-Service will be a way for them to expand the reach of their core services and challenge the traditional definition of what it means to be a ‘bank.’
If BaaS/bankification can answer some of banks’ biggest challenges, why haven’t they been more eager to embrace it?
For the first time in their history, banks are having to adapt their models to prepare for the future. Fifteen years ago, banks were the sole operators in the financial ecosystem and did not have market pressures forcing them to make changes to their offerings.
Now, increased competition in the financial sector is forcing banks to be faster, more agile, and bring more features to market. This realization has taken time for banks to come to terms with, and while some are coming on board, there is still a change in attitudes towards Banking-as-a-Service that needs to happen for many.
In addition to shifting their attitudes towards Banking-as-a-Service, there’s also a technological roadblock. Banks that are still working on decades-old tech systems won’t be able to partner with fintechs through BaaS even if they want to. Their core systems are outdated and incompatible with third-party integrations, which is critical to connecting with other companies’ systems.
In order to profit from a BaaS service model, banks have to change their mindsets, accelerate their digital transformation strategies, and modernize their existing architecture.
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