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.
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.
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“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.
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.
FAQs
What benefits does fintechs have over the traditional bank? ›
Traditional banks usually have strict collateral requirements for customers applying for a loan. But fintech doesn't typically have such strict requirements, which can make it easier for customers to obtain funding and financial services through these smaller, web-based platforms.
What is the difference between traditional banking and fintech? ›4. Fintech vs Traditional Banking: Comparison Table. Banks are the institutes that are licensed to carry out financial services and focus on client security. Fintech firms improve and automate the delivery of financial services by focusing on customer requirements.
How has fintech disrupted the traditional banks? ›Improved service. While traditional banks rely on hooking customers into an entire ecosystem of services and products, fintechs narrow their focus towards doing the small things well. Fintechs target specific problems and build trust with customers through referral-based acquisitions.
How should the traditional banking industry compete with fintech companies? ›- Incentivize Culture Change. ...
- Combine Security With Blockchain Technology. ...
- Lean Into People-Centric Customer Service. ...
- Provide Improved Transparency In Lending. ...
- Expand Mobile Banking Capabilities. ...
- Divert Resources To Enhance Digital Banking. ...
- Enable Better Connectivity Between Various Services And Tools.
Fintech companies are disrupting the traditional banking industry, offering new and innovative financial services that are challenging banks' dominance in the financial sector.
How fintech is changing the future of traditional banking? ›Furthermore, the expansion of Fintech is providing ways to improve the services banks provide to their customers through the use of mobile apps, which enable customers to view their bank accounts in real-time; reducing fraud risk with the help of enterprise platforms; and with the use of digital tools such as chatbots ...
Why is fintech better than traditional banking? ›Fintech is making short-term borrowing simpler and more efficient, with consumers able to access loans in just 60 minutes. Peer-to-peer (P2P) lending. Fintech online platforms match lenders with credit-worthy borrowers, offering individuals seeking smaller loan amounts a viable alternative to legacy banks.
How has fintech changed banking? ›Being supported by advanced technologies and investors' funds, Fintech products are able to speed up transactions, reduce their cost, and also assist banks in gathering the necessary funding resources, opening and managing more savings and current accounts, gaining access to emerging markets, and so on.
Why do banks need fintech? ›FinTech financial services is transforming the entire banking system from a branch-specific process to various digital channels such as online, social, and mobile. It also reduces the bank's dependency on its brick and mortar branches to function.
What are the challenges of fintech to banks? ›Some of the key challenges that the FinTech industry faces today include data and payment security, compliance, lack of awareness of end-users, working alongside legacy systems like banks, and ensuring user retention and user experience.
How do fintech companies affect banks? ›
The fintech revolution has provoked important changes among banks. They have responded to the emergence of peer-to-peer lenders and fintech rivals by adopting digital innovations such as smart chips, biometric sensors, branchless banking, artificial intelligence and machine learning to protect against fraud.
What are the biggest risks fintech poses to banks? ›Data Thefts and Cyber Attacks
One significant disadvantage of fintech is its ability to actively increase the risk to current financial institutions: the more systems linked by fintech, the more possible incursions for cyber assaults to exploit.
FinTechs make complex financial processes more accessible to people, particularly millennials and younger generations, by streamlining them. FinTech companies can also offer products and services that are up to ten times less expensive than traditional banks due to a more optimized corporate structure.
What strategies should a traditional bank adopt due to growth of FinTech companies? ›...
What are the four survival strategies?
- Modernize core capabilities.
- Successfully collaborate with Fintechs.
- Create customer-centric products and services.
- Construct nimble organizations.
- They charge higher fees and have a wide variety of them.
- Loans and other products may cost more.
- They pay lower yields on savings and other deposit products.
- Visiting a branch takes longer than banking online.
Considering all this, if banks become active FinTech or any type of tech acquirers they will have to accept bullets in their regulatory capital ratios. Generally, capital adequacy rules for goodwill and intangibles restricts banks from spending money on any business which sells for a high price to book value ratio.
What is the future of traditional banking? ›Traditional banks may not exist by 2025
A new report from PwC suggests that, by as soon as 2025 – 2030, a market economy could readily exist without banks of the traditional kind.
- More access to cash and check services. ...
- Specialty banking services are available. ...
- Wider range of financial products. ...
- In-person service offers a personal touch.
Traditional bank pros
Greater range of financial services: Traditional banks sometimes offer financial services that aren't available to customers on digital platforms. The ability to deposit cash, for example, is an advantage of traditional banking.
Pros of Traditional Banking
The banking team often gets to know their customers for more personalized and friendly service. Easy to manage cash deposits by going to a local branch. Fast cash withdrawals from branch ATMs, drive-thru, or inside the branch with few limitations.
How fintech is making banking more accessible? ›
Application-based smartphone solutions like Tala or Branch International are helping bank unbanked people by providing them with first-time access to a range of digital products, like instant loans, money transfers, bill payment, high-yield investments, and savings.
Will fintech replace banks? ›He, however, directed them to be more diligent while adopting technological changes. “It's a misconception to view fintech entities as a possible replacement to banks,” Sankar said, while addressing an event organised by the Indian Banks' Association in Mumbai.
What competitive advantages do fintech companies have against banks? ›Fintech companies and traditional banks are using new technologies to redefine banking in a digital world. They focus on seamless delivery, speed, personalization, and customer service. Fintech companies also focus on streamlining complex financial processes, thus making themselves more accessible to customers.
Is fintech good for bank performance? ›Based on the above analysis, we find that Fintechs has both positive and negative effects on the profitability of commercial banks, but the overall impact of Fintechs on the profitability of commercial banks has different performance in different stages of Fintechs development.
What are the pros and cons of fintech? ›- Pros: it brings money. ...
- Pros: Fintech democratizes the economics. ...
- Pros: Fintech promotes clearness. ...
- Cons: some personalities are left behind. ...
- Cons: it can provide to a global imbalance. ...
- Cons: it can ruin privacy.
By streamlining complex financial processes, fintech companies are more accessible to people, particularly millennials and younger generations. Also, due to a more optimized business structure, fintech companies can offer products and services that are up to 10 times less expensive than traditional banks.
Why Digital banks are better than traditional banks? ›The difference between neobanks and traditional banks is that neobanks operate completely online, offer no-fee accounts and bundle financial software with financial services; whereas traditional banks require you to visit a physical branch, have high account fees and focus mostly on offering as many financial services ...
What are the benefits of fintech? ›- Zero barrier applications and faster approvals. Remember the time when it took a week or even longer to open a personal bank account. ...
- Higher efficiency. ...
- Automated customer service. ...
- Highly regulated and risk-averse. ...
- No compromise on security.
FinTech companies can offer their products and services at a lower cost than traditional financial institutions. This is an attractive option for people looking for ways to save money on their financial services. Along with increasing access to financial services, this marks a serious change in the finance landscape.
What are the biggest risks FinTech poses to banks? ›Data Thefts and Cyber Attacks
One significant disadvantage of fintech is its ability to actively increase the risk to current financial institutions: the more systems linked by fintech, the more possible incursions for cyber assaults to exploit.
Is FinTech good for banks? ›
New digital financial technologies have the potential to shake up banking. Fintech services offer potential benefits to consumers and have made inroads into online lending and payment services. But the sector remains small and does not yet pose an existential threat to banks.
What are the challenges faced by banks due to FinTech? ›Some of the key challenges that the FinTech industry faces today include data and payment security, compliance, lack of awareness of end-users, working alongside legacy systems like banks, and ensuring user retention and user experience.
Are traditional banks more secure than Internet banks? ›Online banks with standard security measures are just as safe as traditional banks. Look for features such as encryption and fraud monitoring, and before you open a bank account, make sure the money is insured by the Federal Deposit Insurance Corp.
What is the difference between traditional and modern banking? ›Where traditional banking has control of its customers' money, modern banking gives more power to its customers. Modern banking is largely digital, remote, transparent, and efficient.
What is the difference between online and traditional banking? ›How Is an Online Bank Different From a Traditional Bank? The major difference between an online bank and a traditional bank is that online banks offer primarily mobile and online access. You won't meet a banker face to face, but with a mobile device or computer, you can access your account anytime.
Why do banks need FinTech? ›FinTech financial services is transforming the entire banking system from a branch-specific process to various digital channels such as online, social, and mobile. It also reduces the bank's dependency on its brick and mortar branches to function.
What is the main goal of FinTech? ›Key Takeaways
The goal of fintech is to improve financial services and cybersecurity and make finance more accessible.
FinTech companies have played a major role in improving access to the gamut of financial services like AePS, Aadhar Pay, Remittances, and Recharges for the masses. It has democratized digital payments and increased access to digital payments and online banking.