The following was produced by Tearsheet Studios. We worked with Q2, a digital banking software company, to create a four part podcast series on the interplay between banks and fintechs.
We no longer view them as diametrically opposed. With new embedded finance and banking as a service technology, banks and fintechs can work together to serve customers better. Banks and fintechs can collaborate to give customers what they’re best at delivering.
Jonathan Price runs emerging businesses at Q2. It’s an organization set up in late 2019 that brings together the fintech ecosystem with the bank and credit union ecosystem that Q2 has always served. Jonathan joined Tearsheet editor in chief, Zack Miller, on the podcast to discuss how technology firms, brands, and financial institutions are increasingly finding ways to partner.
Jonathan Price, Q2: There’s really four legs of the stool to the emerging businesses group at Q2. The first two are the enterprise wide functions of corporate and business development: how we think about and execute M&A, as well as partnerships.
And then the other two legs of the stool are incubated startups inside the company. One called Q2 BaaS, which is our banking as a service business. And then what we announced just a couple of weeks ago, Q2 Innovation Studio. That’s an interesting new business we launched in 2020 and just went GA last month. We’re letting the third party ecosystem ride the rails of our digital banking platform, our core product of the company, and opened up that SDK to third parties, allowing them to access the channel of banks and credit unions that use our digital banking platform. That includes over 18 million end users, as well as approximately 2 million small businesses.
Many early fintechs took banks on, head on. They saw themselves as substitutes for traditional FIs. This created an us vs. them paradigm which probably negatively affected both parties, as they viewed themselves as competitors.
Jonathan Price, Q2: I think historically both sides viewed each other as competitors. I think banks have certainly had to face the reality that they were after similar customers, threatening market share and position that the banks had had an incumbency on, dating back a very long time. From the fintech or the brand perspective, I think they viewed the traditional financial services players as more of a set of commoditized services, and felt that they, as these next generation fintechs or brands, were better able to acquire customers efficiently. And probably more importantly, they were able to solve for some key pain points around the experience, convenience and personalization that they felt were all superior to what a traditional bank or credit union could offer.
The banks vs fintech story is changing. It’s evolving, as new entrants and existing players pivot to work with banks to help accelerate their digital journeys.
Jonathan Price, Q2: It’s changing in real time. What I’ll say here is doesn’t apply to all banks and credit unions in terms of their mindset around how this has changed, but I can tell you that there are new business models that are facilitating a different level and type of interaction between these players, the banking as a service space, broadly. And even what I talked about with Q2 Innovation Studio — models like that are bringing these two segments together as partners. The more forward leaning and technology forward financial institutions are definitely recognizing that to be adversarial, competition, is not going to be the better outcome for the traditional FI.
So, banks and fintechs are learning to work together. These partnerships aren’t easy — it takes experience and collaboration to get them right. When they work, they work well by best playing to banks’ and fintechs’ strengths.
Jonathan Price, Q2: You’re starting to see partnerships deepen over time. And really, both segments are finding their niche in the market and understanding that they can be channel partners to one another and add value in ways that put the right people in the right place to do what they do best. And so I think that’s really what’s changing — the specialization that makes the relationship work — what banks do well, their historical infrastructure, the regulatory experience, their understanding how to launch and manage banking related products. That’s a very deep domain expertise as a traditional advisor that banks have that most of these fintechs and brands don’t.
And similarly, everything that the fintechs and brands are doing on the experience side — how they’re solving for key customer pain points around convenience and personalization. That’s really what they’re good at. And so we’re seeing the puzzle pieces fall to the right folks to do what they do well, and at the end of the day, that’s benefiting the end customer, whether the end customer is you or me as a consumer, or a small business or even a corporate. You’re putting out the best product to that end customer.
I asked Jonathan to go deeper into why bank/fintech or bank/brand partnerships are being formed, to answer explicitly what each partner gets from one another that they couldn’t necessarily get themselves by going at it alone.
Jonathan Price, Q2: For a fintech, outside of a few exceptions where we’ve seen a couple in the country go and get a charter and own the bank, most of these folks are focused on the experience and the technology that they’re delivering, and have not gone and solved for all of the challenges around getting the charter, understanding the regulatory paradigm and being able to solve for that the same way a traditional financial institution has. So, for the fintech or brand, it’s really around that infrastructure and that history of understanding how to run and operate banking services — that’s what the traditional FI can bring to them.
We talked earlier about how you launch and manage banking products — managing that latter point is not a trivial point. This is a big organizational effort for both the FI and the fintech. And so for the fintech, to have to stand up an organization around these offerings, and then also figure out how to actually manage it, when that’s not what their core business is, it’s a real challenge. So the bank is really bringing that to the fintech.
Banks are catching up to where technology is leading. Instead of looking at fintechs as competitors, they’re seeing the bigger picture of ecosystems forming and the important and central role traditionally chartered institutions play.
Jonathan Price, Q2: For the bank (it’s interesting seeing at Q2, because we have so many banks and credit unions that are on our digital banking platform), today, and I couldn’t have said the six or four months ago, they’re starting to recognize how this ecosystem is converging, and they want to participate. They view this whole opportunity, whether it’s banking as a service, or the example of Innovation Studio, as a way to participate in this ecosystem, not just economically, but also because of the engagements that they get from their users that’s incremental to what they’re doing as their core business. For banks and credit unions, you have a lot of reasons to play the space and partner with fintechs, because it brings them into this market that’s happening all around them. It also gives them new opportunities for engaging with their customers, deepening those relationships..
One of the byproducts of technology moving into financial services is the pressure to compete, to launch new products, to better serve customers. With more options, it’s easier for them to leave. This dynamic has accelerated everything.
Jonathan Price, Q2: One other point I’d add that I think is important is to this idea of each party delivering the value prop that they excel at this entire market, whether we’re talking about banking as a service, whether you’re talking about Innovation Studio and bringing these apps internal to digital banking, it’s all about speed, right? It’s about how quickly you can launch new products, get them to market and be efficient in offering them to end customers. And if you put each constituent, and let them focus on what they do well, you enable speed and innovation to happen faster.
Ironically, if technology is providing a disruptive force to banking, it’s also providing the tools to help mitigate the disruption. More modern tech stacks enable banks and fintechs to more easily integrate. So partnerships and new launches can happen more quickly.
Jonathan Price, Q2: Ultimately, what enables them to do it is a shared tech stack that’s open and allows the parties to collaborate to solve for whatever that use case may be. In our BaaS business, not being limited by legacy core and having a real time next generation cloud based core has certainly allowed us to go down that route. If you think about our Innovation Studio business, we built an SDK and opened that up to our customers several years ago, back in 2017. But we never opened that up to third parties. And as soon as we opened that SDK up to third parties, we allowed them to build their experiences interior to digital banking, facilitating this partnership model that wasn’t there before. It’s a combination of the market around this space opening up and allowing players to do what they do well, connecting the different pieces of the puzzle in ways that wasn’t done historically.
So, from what Jonathan is saying, it definitely sounds like partnerships are a path forward for the future. And that collaborating together, banks and fintechs can better serve their customers. But I asked Jonathan, given Q2’s relationship with thousands of banks and fintechs, what’s really in it for each party? What is the value for banks and fintechs to work together from their perspectives? And what should the end user expect from these tie-ups?
Jonathan Price, Q2: We’re probably talking mostly about the end user and why the end user would care. This is all about democratizing access to the services. You have the best of both worlds, where you can get the optimal costs, but also speed and the best solution (usually those things are binary — you’re often sacrificing cost for quality or vice versa). The goal here for the end user, whether a consumer, a small business, or a corporate, is to democratize access at the best possible cost and the highest level of quality. For a bank or credit union, this is about customer retention and diversification of their revenue stream and their business and ultimately, end user engagement. They can enhance all of those by participating in this partnership with these folks on the fintech or brand side.
And then on the fintech or brand side, it varies a little bit depending on whether we’re talking about BaaS or a model like Innovation Studio. But when you combine the efficiency that they gained from focusing on what they do well, combined with the distribution or customer acquisition cost efficiency that a model like Innovation Studio can bring, giving them access to a large network, especially for a lot of the earlier and mid stage fintechs…If you give them access to 18 to 20 million end users through a single point of integration, that’s a pretty attractive channel for a fintech or brand that’s trying to build their business that can avoid some of the costs of setting up a large distribution sales network and accessing something that’s so captive, like the banking/credit union landscape in the United States.
If technology is helping speed the industry’s maturation process along, it’s also helping to speed up the models for the future. Money is also pouring into the sector, particularly to those fintech solutions that make banks do what they do better. That’s making it clearer that partnerships are a way forward for banks.
Jonathan Price, Q2: As the market starts to realize how these things are all coming together, I think the cost of not doing so is very high for any one of those players in the market. This is about how we engage and solve for convenience as efficiently as possible for each of those constituents. It’s going to become more and more widespread — it might be early days, especially if you compare it to some of the more mature financial services offerings, like our digital banking solution, for example. But this is happening rapidly. And there’s a lot of money that’s funding all sides of this market — whether it’s the fintechs or brands that you see in the market right now; whether it’s being funded by VC or growth equity; or taking public from SPACs or traditional IPO methods — there’s a lot of focus and dollars going into this space.
And similarly, on the FI side, this isn’t a secret anymore. If you had this conversation with a bank or credit union a couple of years ago, you probably would have had a somewhat adversarial view, maybe even dismissive, of the whole role that these fintechs and brands are going to play in the financial services market. You have that conversation with any bank CEO now, and no one’s dismissing it. Everyone’s figuring out how they solve for those same challenges with their traditional business as well.
So, as a model for the future and greased by technology, banks and fintechs can find opportunities to work together. Some are already doing it. But what about the ones that decide to go it alone? What happens if they don’t decide to collaborate?
Jonathan Price, Q2: For firms who don’t collaborate, I think that would lead to driving less revenue, which ultimately leads to less investment and less innovation and potentially, to customer leakage. There’s been a talk track for years about the unbundling and rebundling of a bank. In many ways, this is analogous — if the market is solving for these problems by putting these constituents together, getting better quality innovation faster, and putting that in the hands of the end users — not participating in that market and letting others do it is just going to result in harm to those businesses, whether that’s a bank or credit union making that decision, or a fintech not wanting to sort of take advantage of the benefits that a traditional FI can bring to them, whether that’s the charter and the regulatory paradigm and knowledge that they bring, or perhaps the channel that they offer. Ultimately, that’ll drive consumers to alternative platforms.
Banks retaining customers and revenue sounds like a positive step forward. And for fintechs, these collaborations give them an opportunity to focus on what they do best: creating innovative products and services enabled by tech. It also means they don’t have to put as much resources into building, managing and retaining banking programs.
Jonathan Price, Q2: It’s going to make better products that are faster and cheaper to develop. We have a very large fintech customer, one of the largest in the country, that we’re working with to help scale their business. And one of the messages they keep delivering to us is that any money that they don’t have to spend on operations, bank readiness, investing in the actual program management and infrastructure of their banking offering, will all be spent on CAC, customer acquisition costs, and marketing and product. That’s all they care about. If we’re efficiently putting the role of the financial institution and fintech together in the right way, then all of that excess money and focus is going to go towards optimizing the product and spending like crazy on marketing and efficient customer acquisition.
If we get this right — if fintechs and banks learn how to partner better — Price sees benefits beyond financial services. He sees positive spillover to the economy at large.
Jonathan Price, Q2: We talked earlier about democratization and how that betters financial services access for all. I think that’s what this is about. Whether it’s the underbanked or non banked communities, whether it’s access to a broader set of choice and competition for both the consumer and the SMB landscape — at the end of the day, competition will drive better innovation for all the end users. That’s obviously an investment and an outcome that’s positive for the economy. Financial services are obviously a very important piece of the broader economic picture. And as these events unfold, I think it can have a big impact on all of that.
We talked earlier about the unbundling and rebundling. Often there’s a dichotomy between best of breed and one throat to choke or one single point vendor that allows you to simplify the world, in terms of how you’re operating with third parties. We think that Innovation Studio is rebundling the FI with both: you can have best of breed, but you can also have a single trusted point with your financial institution. If you think about banks or credit unions coming together with fintechs and solving for that best of breed along with a single point that’s easier for the consumer or small business, I think that that has a big impact on the economy at large and on how consumers and small businesses are getting access to traditional financial services and all of these related applications that are running businesses today.
When we made the case to our board to fund and invest in this initiative around Q2 Innovation Studio, the data we saw was that the average small business in the United States was spending $200,000 a year on 20 disparate applications to run the small business around the FI. I’m talking about apps that are related to running the business that have a financial component to them. Think about CRM on the front end or payables and receivables on the back end, accounting and finance, invoicing applications. The average small business was doing that from 20 different providers and spending a couple hundred grand a year. And so our vision was why do these two things have to be separate? Why can’t we drive the bank and these fintechs together, which can benefit both parties, but more importantly, benefit the small business that’s right now having to manage these 20 separate vendors.
There’s no reason that the FI can’t also be part of these adjacent offerings and bringing those two things together. And that’s really what the mission of the Innovation Studio is all about.
This framework of bank/fintech collaboration isn’t theoretical and it isn’t reserved for the far-flung future. It’s happening now. FIs and fintechs are using Q2’s ecosystem to partner and integrate, launching new products into the hands of interested customers.
Jonathan Price, Q2: It’s still early days in our Innovation Studio. We’re sitting at around 100 FIs that are live and another dozen or so partners that are in the Innovation Studio. But I think one example that comes to mind is we recently went live with Experian in the Marketplace. And in doing so, the idea was, how do we put that capability, that credit score and credit monitoring capability, in the hands of more consumers in the United States? We had one example — really two or three examples right out the gate — but one particular FI that went live with Experian recently, and just in the first few weeks, it saw thousands of members adopt Experian usage inside the FI.
When you think about the value proposition to all of the different constituents there, the FI obviously was able, with our participation, to bring on a fintech related technology application that otherwise they would have no relationship with, and bring that adoption model interior to the digital banking effort that their users are logging into, bring their users or members a really value added service. And for these members, they got access from their trusted financial provider. They got it quickly and cost effectively, giving both an engagement model that they didn’t have before. It was not a product that a member would have gone to their traditional FI for and for the FI, that engagement, that incremental usage and login activity that they will now see and display within digital banking, that wasn’t there before. So it’s really a win win for all involved.
That was Q2’s Jonathan Price on how technology is ushering a new era for banks and fintechs to collaborate. It’s part 2 of a 4 part series Tearsheet Studios is running with Q2. Go to the Tearsheet website to listen and read the other parts of the series.