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Z's Corner

Commercial banks and fintech companies have an equal stake in the future of banking

When Apple and Google move into a new area, consumers pay attention. In August, Apple rolled out a consumer credit card with the tagline “Created by Apple, not a bank.” Its customers jumped at the offering: by the end of September, they had taken out credit lines worth $10 billion. Those numbers don’t come from an Apple press release, however. They come from regulatory filings from the actual issuer of Apple’s card—Goldman Sachs.

Consumers clearly respond well to the idea of banking with a non-bank entity. This is slowing becoming the new reality in the consumer segment and will eventually move into the business and commercial space. Also known as, Banking as a Service (BaaS), which allows tech companies to build on an existing bank infrastructure. A concrete way for commercial banks to increase market share and exposure by infiltrating into an already established or emerging tech company. Driving both growth and revenue forward exponentially. The Apple Card is by no means a business or corporate card, this may change with time when key features include centralized billing and reporting. However, beyond the laser-etched titanium card and corresponding iPhone app, financial institutions still own the underlying infrastructure. Technology companies clearly aren’t going to supplant banks entirely anytime soon. But that doesn’t mean financial institutions can’t learn a thing or two from their historical frenemies in big tech.

Ready or not, change is coming

The early positive response to Apple’s offering, alongside reports that Google is working on its own checking account product, suggests “non-bank” consumer banking will get a lot of attention in the coming months and years. The trend likely won’t be driven solely by consumers’ apparent desire for the convenience of these products. For companies like Apple and Google, having access to consumers’ earning, saving and spending information, along with their credit scores, looks like a potential gold mine for advertisers, even if the tech companies don’t care to admit it this early in the game. That combination of consumer and tech company interests will exert a strong gravitational pull on the banking industry.

Tech companies need banks - and vice versa

The allure of cutting traditional banks out of the equation may be strong, but doing so is harder than it looks. Fintech companies tend to be reluctant to pull off projects in areas where they have little experience and don’t understand the underlying infrastructure. Consider Robinhood, the no-fee investment platform startup that announced its entry into the no-fee, high-interest checking and savings account world in late 2018. A day later, regulators sent the company back to the drawing board. It took until October 2019 for Robinhood to return to the market with its new “cash management” account—this time, in partnership with a host of big-name banks including Goldman Sachs, HSBC, Wells Fargo and Citibank.

It may not be sexy to provide the plumbing for these types of operations but doing so gives financial institutions access to the tech companies’ superior visibility, social media presence and experience in technology innovation. Left to their own devices, financial institutions have become accustomed to technological innovation as a slow, tedious process. As a result, they’re ill-prepared to keep up with the increasing pace of technological change in the industry.

It’s time for commercial banks to get ahead of the curve

Traditionally, financial institutions and fintech companies have taken an “us versus them” approach toward each other. Given the larger transaction sizes in the business banking space, balancing the convenience of innovative technology solutions with stringent risk and compliance practices will be a critical part of any new offering. Sooner or later, the technology in use on the consumer side of the banking industry will make its way into the business banking space. As the technology saturates retail banking, its growing convenience and familiarity will drive business adoption. Financial institutions have the knowledge and experience to make secure transactions happen in ways the regulatory agencies understand and accept. But financial institutions will be hard-pressed to match the speed of innovation produced by fintech companies.

Unless both sides work together, neither is likely to make it to the finish line ahead of the rest of the industry. When a Google or an Apple launches a business banking platform, financial institutions that haven’t found a strong fintech partner risk losing market share. The choice at this point isn’t whether to locate a suitable partner—it’s whether financial institutions feel more comfortable in the driver’s seat, deploying technology with their own name on it, or in the passenger’s seat supporting a fintech company’s solution. Standing on the side of the road could mean being left in the dust.

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Read Zoya Lieberman’s most recent article here.

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