In banking, trends and their related buzzwords pop up with
increasing rapidity. Not all of them turn out to be impactful, but enough do
that banks and credit unions not only have to track them, but — more
importantly — grasp their significance.
It’s true, what you don’t know can hurt you. And yes,
definitions matter.
No one wants to look uninformed. So, when terms such as
“decentralized finance” and “digital transformation” are thrown around, it’s
the rare banker who raises their hand to ask, “What exactly does that mean?”
Let’s face it: it’s difficult to keep up. As Cornerstone
Advisors points out, “Industry buzzwords appear and spread faster than a
wildfire.”
We’ve selected nine of 16 terms that Cornerstone flags in
its new report, sponsored by Nymbus: “The Definitive Guide to Potentially
Misunderstood Fintech Trends and Terms (and What They Mean to the Banking
Industry).” The condensed descriptions below can help bank and credit union
executives not only understand what these terms mean but gain insights into the
impact they could have on their financial institutions.
1. Banking as a Service (BaaS)
A strategy where financial institutions partner with
fintechs or non-financial firms to provide financial services to the partner’s
customer-base, leveraging the financial institution’s charter.
Banking-as-a-Service, a descendant of Software-as-a-Service
and the inclination of vendors to label everything “as-a-service,” is a term
we’ve all heard, but few banking executives understand it enough to do anything
about it. Only about 10% of financial institutions are currently pursuing a
BaaS strategy. The majority are on the fence, according to a Cornerstone
Advisors survey.
Think of BaaS as “fintech banking” in which the bank
provides white-labeled products or services to customers indirectly through a
fintech.
Bankers often worry that BaaS turns them into “dumb pipes.”
Guess what, an institution can generate more revenue and profits by being a
“dumb pipe” than as a “smart provider,” says Cornerstone. Being a dumb pipe
doesn’t seem so bad, after all.
2. Buy Now, Pay Later (BNPL)
A payment mechanism that enables someone to spread their
payments for a product or service over a specified period of time for either a
fixed fee or a set interest rate.
Wait, BNPL sounds a lot like old-school installment payments
but with a fancy new name. Yes, and no. What’s different about BNPL is that the
offer is made earlier in the buying cycle and can influence buying behaviors.
Instead of booking that trip six months from now. BNPL is the nirvana of
instant gratification.
Merchants are all over BNPL since it encourages consumers to
buy immediately and buy more. It’s attractive to consumers as well: the
percentage of Gen Zers using BNPL grew six-fold between 2019 and 2021, says
Cornerstone.
Consumer advocates are also all over BNPL, saying it
encourages consumers to take on debt that they can’t afford. There’s truth to
that claim: Cornerstone research found that 31% of consumers who use BNPL say
their financial health is “dire” or “struggling” versus 20% of those who don’t
use BNPL.
Bankers aren’t so crazy about BNPL either since it means
less interchange revenue and consumer engagement. Expect financial institutions
to push back, probably playing the “it’s-bad-for-consumers” regulatory card.
3. Cryptocurrency
A digital form of payment that can circulate without the
need for a central monetary authority. Bitcoin is the best-known example, but
is just one of hundreds.
15% of consumers already own some form of cryptocurrency and
11% plan to purchase it in the next year, says Cornerstone. Consumers
increasingly see crypto as legit. Banks, not so much. Risk aversion and
compliance fears stand in the way.
But consumers would be happy to fill their digital wallets
with cryptocurrency from their bank. Of those already holding crypto, 92% say
they would definitely or maybe use their bank to invest. More than two thirds
(68%) are very interested in Bitcoin-based debit or credit card rewards.
Banks and credit unions can’t ignore cryptocurrency and hope
it goes away. It’s time to get educated on the compliance factors and product
options.
Falling back on moral excuses that crypto is too risky isn’t
going to cut it, says Cornerstone. Do you deny a loan to a customer because
they are using the money for a trip to Vegas? Do you refuse to bank a customer
because they buy lottery tickets? Crypto is becoming mainstream, and refusing
to play is a bad business decision, says Cornerstone.
4. Decentralized Finance (DeFi)
Financial products and services that anyone with an internet
connection can access.
Do consumers really want a decentralized financial system?
Highly doubtful. Sure, DeFi provides independence, transparency and is global
in nature. Some consumers are using DeFi apps (dapps) for peer-to-peer
financial transactions, creating non-fungible tokens (NFTs), and for flash
loans, which Cornerstone describes as basically decentralized arbitrage.
DeFi isn’t likely to take off, the consultancy maintains.
There are liquidity issues and the chance for things to go very, very wrong.
Banks can breathe a collective sigh of relief on this one.
5. Digital Transformation
Integration of digital technologies into all areas of a
financial institution, fundamentally changing how it operates and delivers
value. It’s a culture change that continually challenges the status quo and
gets comfortable with failure.
If bankers drank a beer or a whisky for every time someone
in a meeting said, “digital transformation,” there would be an acute increase
in liver problems. The good news is that Cornerstone predicts that bankers only
have to hear about digital transformation for another 18 months or so until a
new buzzword takes its place.
But the concept of digital transformation at banking
institutions — which is not only real, but vital — will slowly march forward.
Cornerstone found that only about one-quarter of financial institutions had
embarked on a digital transformation strategy before 2019. Only 36% say they
are at least halfway done. Of those:
Four out of 10 haven’t even deployed cloud computing or APIs
(application programming interfaces).
Only about one-quarter have implemented chatbots.
Just 14% have deployed machine learning tools.
Less than one-third have achieved a 5% improvement in any of
nine KPIs.
We’ll be on to our next buzzword before digital
transformation is even half-way done at most banks and credit unions.
Delusions of digital transformation aside, here’s how
Cornerstone says you’ll know you are digitally transformed. You can:
Open checking accounts in five minutes or less.
Instantly approve unsecured loan applications through
digital channels.
Have a holistic view of consumers’ financial lives.
Deploy new digital products and services with a digital
product factory.
6. Embedded Finance
The integration of financial services into non-financial
websites, mobile apps, and business processes.
Embedded finance is an umbrella term for all types of
products including payments, lending, banking, and insurance. But the thought
of integrating banking services into a provider like Lyft or Chime makes many
bankers break out in a cold sweat. Cornerstone encourages banks and credit
unions to instead look at non-financial companies as distribution channels that
will enable financial institutions to reach a broader range of consumers.
Lightyear Capital estimates that embedded finance revenue will grow to nearly
$230 billion by 2025.
Fueling this growth is an interconnected ecosystem of
providers like Lemonade and Affirm, enablers like Green Dot and Plaid, and
sponsors like Amazon and Uber.
Cornerstone’s verdict: Capitalizing on these new
distribution channels is a wise choice.
7. Embedded Fintech
Basically, the reverse of embedded finance, this is the
integration of fintech products and services into financial institution’s
product sets, websites, mobile applications, and business processes.
It’s easy to confuse embedded finance with embedded fintech
as they are two sides of the same coin. Embedded finance distributes banking
services through non-banks while embedded fintech puts fintech products and
services into banks.
Embedded finance may be out of the reach of smaller
institutions, but embedded fintech is not since banks and credit unions can use
products and services provided by fintechs to create new revenue streams.
Cornerstone offers some options:
Bill negotiation services: Partner with a fintech
like Truebill or Billshark to create new revenue streams and drive consumers
back to financial institutions’ bill pay platforms.
Subscription services: Partner with a fintech like
WalletFI to help consumers manage their dozen or more subscriptions.
Data breach and identity protection services: Partner
with a fintech like Breach Clarity (part of TransUnion) to analyze data
breaches and provide consumers with recommendations on what they should do.
8. Financial Health
The ability to manage expenses, prepare for and recover from
financial shocks, have minimal debt and build wealth.
You may wonder why “financial health” makes a list of
misunderstood financial terms. It’s because the vast majority of bankers
confuse financial health with financial literacy. Financial health is
behavioral, integrated and measurable, and will become the basis of competition
in banking, notes Cornerstone. Financial institutions need to use technology to
help consumers change their financial behaviors and influence their financial
decisions.
Financial institutions already do a decent job of promoting
financial literacy, defined as having the knowledge and skills to make informed
decisions. It’s analogous to dieting in that we all know what we should be
eating, but changing our behaviors is what’s so dang difficult.
Expect the financial health fintech space to grow.
Cornerstone predicts that an Amazon of financial health — or a Fitbit of
banking — will emerge. To be clear, the new financial health is AI- and
API-driven. And don’t be surprised if Congress starts requiring financial
institutions to monitor and improve consumers’ financial health.
9. Platform Banking
Plug and play business model that allows multiple providers
and consumers to connect, interact, and create and exchange value.
Bankers think they know platforms. They’ve got a lending
platform, an online banking platform, and a mobile banking platform. But that’s
not what we’re talking about. A platform is not just a technology construct but
a business model as well.
Becoming a platform is hard, notes Cornerstone, pointing at
Amazon as an example. It took Amazon about 20 years before it became a
platform. As far as transforming business models, most bankers simply don’t
have the appetite for that level of change.
Financial institutions may not become platforms, but they
can collaborate with platforms. There are core integration platforms that allow
financial institutions to integrate with third-party systems and analytics
platforms that allow financial institutions to use data from multiple sources.
As an aside, platform banking and open banking are not the
same. A bank can pursue a platform strategy and not be open, and an open bank
doesn’t need a platform.
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