Traditional card-acquiring
independent sales organizations (ISOs) are evolving into independent software
vendors (ISVs)—aka fintechs—by providing merchants with a single destination
for payments and financial services. While this may alarm traditional financial
institutions, which have historically viewed fintechs as industry competitors,
it doesn’t have to. In fact, banks can benefit through the formation of
partnerships with fintechs.
To learn more about the evolution
of the fintech market and how fintechs and banks alike can come out on top by
forming partnerships, PaymentsJournal sat down with Cliff Thompson, VP of
Business Development at Avidia Bank and Tim Sloane, VP of Payments Innovation
at Mercator Advisory Group.
What services do fintechs
provide?
To understand the value a
bank-fintech partnership can offer, one must first understand what types of
services fintechs deliver. The terminology used to describe fintechs is vague,
and many tech-savvy organizations are eager to label themselves as one.
Further, the lines between an ISO and ISV (or fintech) are blurred.
The following matrix, cited in a
review published by the Journal of Financial Intermediation, delves into the
range of services that fintechs offer:
As shown in the matrix, there are a
range of services offered by fintechs. In general, “fintechs are all about APIs
and making financial services available so other companies can consume them,
use them, and make them available to their own customers,” explained Sloane.
Partnerships between fintechs
and banks are mutually beneficial
While historically competitive with
one another, fintechs and banks can work together in a way that benefits both
parties. For banks, “composing a solution using fintech business partners is a
unique opportunity that’s expanding in the market, increasing the depth of
friction and connectivity a company has to its customers and providing new
revenue opportunities,” added Sloane.
“Banking as a Service (BaaS) is
paramount to fintech efforts, and that is sourced at the sponsor bank level.” -
Cliff Thompson, VP of Business Development, Avidia Bank
Traditional banks can offer API
access and a bundle of payment and financial services to fintech organizations
making market moves. “Banking as a Service (BaaS) is paramount to fintech
efforts, and that is sourced at the sponsor bank level,” said Thompson.
On the flip side, partnering with
banks to gain access to financial service APIs and payments capabilities allows
fintechs to amplify their offerings to their downstream merchant clientele.
The wider breadth of services that
fintechs are beginning to offer enable them to become a one-stop shop,
immediately benefiting their customers through convenience. Banks can also help
fintechs navigate the highly regulated nature of financial services, which
makes it necessary for fintechs to tread carefully when expanding their
footprint into the financial industry.
Market demands drive fintech
innovation
ISOs are growing and diversifying
their revenue streams by leveraging existing merchant platforms to provide
additional software services. E-bills, direct biller options, shopping cart
gateways, and traditional online mobile banking services are just a few of the
many ways that ISOs are doing so.
Market shift is driven by the need
to meet the expectations of today’s on-demand society. Accordingly, ISOs and
ISVs are heavily focused on offering a broader menu of capabilities to remain
competitive. “Independent software vendors are all about understanding the
market that they’re supporting and distributing software that is right on
target for that market segment,” said Sloane.
Companies’ in-depth knowledge of a
particular segment allows them to layer financial services on top of their
existing solutions, providing better overall business processes and resources
to customers. One such example is Zillow, which has begun offering home loans
and closing services through its real estate database.
Now is the time for banks to
break tradition and partner with fintechs
According to a survey conducted by
the Double Diamond Group, there are at least 10,000 companies in the U.S. that
are either ISOs or fintechs. These businesses currently represent approximately
$1.6 trillion in domestic payment volume, which is noteworthy in itself. Beyond
that, growth is anticipated to continue in upcoming years; the compound annual
growth rate (CAGR) of payment volume effectuated by ISVs is expected to soon
exceed 80%.
“This is certainly a favorable
trend that is beneficial to banks willing to break their traditional role by
becoming an integrated channel partner of ISVs,” noted Thompson. While the number of banks willing to support
ISVs is limited today, additional fintech-friendly banks are likely to emerge
as demand increases at the fintech market level.
What should fintechs look for in
a bank partner?
In general, fintechs are trying to
meet certain market benchmarks at rapid rates and need to have the ability to
pivot quickly. Yet traditional banks have been notoriously slow to act or
react. For that reason, it is crucial that fintechs prioritize partnering with
banks that can support expansion efforts in a timely fashion.
Flexibility is also key. Whether it
is offering compatible APIs, delivering payment facilities, or working through
how a fintech’s program will meet market demand, it is important for banks to
have the willingness to bob and weave with their efforts according to their
fintech partner’s needs. Ultimately, fintechs can benefit the greatest by
choosing a bank partner that offers consistent, ongoing support and nurtures
the relationship for the long haul.
The takeaway
Banks and fintechs don’t always
have to be head-to-head. Rather, there are many opportunities for fintechs and
banks to form mutually advantageous partnerships. Fintechs can leverage bank
partnerships to drive forward innovation and add value to their customers,
while banks can benefit by offering APIs and regulation-compliant financial
services to fintechs. Choosing the right bank partner depends on the particular
needs of a fintech, but speed, flexibility, and consistency should be
top-of-mind considerations.
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