How Fiserv facilitates bank-fintech collaboration with embedded fintech
- Embedded fintech might emerge as the next 'big thing', but are incumbents ready to ride this wave of digitization?
- Banks and fintech startups are becoming collaborators – if not exactly partners – to facilitate technology shifts.
The pandemic and its global lockdowns forced banks to accelerate their digitization efforts. In order to maintain existing customers and attract new ones, and more importantly, stay relevant to younger consumers, banks are embracing digitization more than ever.
For banks and FIs to keep up with this transformation, they turn to a new core competency: embedded fintech, which is the integration of fintech products and services into financial institutions’ native product sets, digital channels, and business processes. It might emerge as the next big thing, but are the incumbents ready to ride this wave of digitization?
While banks can expect customer expectations for convenient digital services to last, the specifics of their needs will change over time. This will require banks and fintechs to shift from competition to collaboration and leverage their expertise for the way forward, according to David McIninch, who is the head of next generation solutions at Fiserv.
“Banks are becoming aware that unless they can be really confident in their business models, they need to have their tendrils extended out into the digital sphere in order to attract new clients,” he said.
Speaking at Tearsheet’s DataDay Conference, McIninch reflected on how banks perceive the next generation of banking, use cases of embedded fintech, and how banks and fintech startups are becoming collaborators – if not exactly companions – to facilitate technology shifts.
The interchange between banks and fintechs
Banks interact with third parties and fintechs through three channels, according to McIninch. The first one is embedded fintech, in which a bank embeds fintech solutions into its technology stack. These include bill negotiation services, subscription management, data breach and identity protection, wealth transfer management, and cryptocurrency investing.
The second channel is the provisioning of banking products and services by integrating non-banking businesses with regulated financial infrastructure and bringing them faster to market via APIs – known as Banking-as-a-Service. Google Pay, Uber, and GrubHub all have embedded banking capabilities, for example.
The embedded finance model is the third channel of interaction between banks and fintechs, which is the integration of financial solutions by sellers, resale platforms, or employers that traditionally were only accessible through a financial services provider. Paying for ride share via the Uber app is a simple example of embedded finance in action.
Fiserv is seeing a great deal of interest in embedded fintech to help incumbent financial institutions integrate money management services into their existing offerings.
“We've never seen the demand and the interest of embedded fintech as high as it's been in the last 12 months or so – I feel like we've turned a corner,” said McIninch.
Of late, the traditional banking model of people walking into a branch to open an account and make deposits has been dwindling. For the most part, banks have become used to meeting their customers in virtual meetings, serving them with attractive apps and digital tools, and are actively partnering with fintechs to offer functionality at a speed that customers expect.
Embedding financial products
Banks that are tech-savvy, have innovation labs, and possess tech-trained staff can fuse digital channels natively into their existing traditional business model, while banks that are not well-equipped cannot. The key is to understand how embedding financial products fits into the consumer’s journey and meets their needs.
That’s where companies like Fiserv come in and play their part – from serving the smallest bank or credit union all the way up to significantly large institutions worth billions of dollars.
“From our point of view, we've tried to classify [banks] into three categories: do it with me, do it for me, do it myself – the degree to which we can help service banks,” said McIninch.
Embedded fintech requires a digital product platform – a technology platform that enables financial institutions to quickly and cost-effectively design, create, plug in, and deploy new digital products and services. The digital product platform should be component-based, API-driven, and cloud-native.
McIninch explained that banks that can manage their own user experiences or just need the APIs can use a packaged software that can be deployed into their environment right away, like mobile banking, while Fiserv runs and manages the whole experience.
However, if a particular institution wants to deploy a crypto wallet into an online banking experience, that would fall into the “do it with me” category. In that case, both organizations work together to facilitate those use cases.
When partnering with fintechs for embedded solutions, banks should be introspective to develop a clear understanding of their goals around what they’re particularly good at and what they’ll need from their fintech partners.
“It's really about being laser-focused, whether the bank is trying to grow low-cost deposits, get its loan-to-deposit ratio to a different level, needs more credit business, needs to diversify, or requires a product for millennials – whatever it is that they think they need to accomplish has to be nailed down first,” he said.
Fintech-bank collaborations are driven by the rise of digital ecosystems. To build an ecosystem, third parties like a systems integrator or a BaaS provider can help marry fintechs and banks in a way that makes everything run well, according to McIninch.
How banks perceive embedded fintech
Banks are accustomed to sending their proactive sales force out into the field to hunt for new deposits and opportunities – but now, the best place to take advantage of those prospects is via digital channels through embedded fintech.
“Banks are still fairly immature in terms of understanding how the whole value chain works,” said McIninch.
Embedded fintechs incorporating vertical cloud software can get up to 8 times lower acquisition costs compared to traditional banks, due to their data support and highly targeted cloud software that is specifically designed for a narrow audience of a niche industry.
Additionally, vertical SaaS companies help to acquire customers that would otherwise have been too expensive, by increasing the CAC-LTV (Customer Acquisition Cost and Lifetime Value) ratio. This ratio helps to determine how much should be spent on acquiring customers. For example, a ratio of 1:4 indicates that the customer's value is four times the cost of acquisition, whereas a low value of this ratio means burning money in the long run.
“Banks should recognize that if they're not good at doing something, they probably shouldn't do it – they should let the fintechs acquire customers, which could oil the wheels of a lot of banks,” he said.
Vertical SaaS companies can adapt to their user-base demands more quickly and can develop tailored features for a specific industry. Ultimately, this flexibility translates into decreased churn and leads to more opportunities with its current customer base.
“Vertical SaaS companies are allergic to anything that injects friction, and banks are very happy about things that inject safety,” said McIninch.
Embedding fintech in customer experiences might soon become table stakes. Customers’ growing expectations will likely push banks and fintechs to partner more frequently and deeply in B2B.