Banks that fall behind in the embedded banking space face the threat of becoming obsolete, said payments expert Peter Davey earlier this week during the Upper Midwest Automated Clearinghouse Association payments conference in Brooklyn Park, Minn.
Davey, founder and CEO of Rebolt Financial Technology, said fintechs utilizing open banking are already taking customers away from traditional financial institutions. Community banks are losing both interest and non-interest income along with customer insight and stickiness. “This isn’t going away,” he said.
Financial institutions should provide merchant services for small businesses and overlay customer services, Davey said. More customers are desiring money movement, same-day ACH and real-time payments, he added. “We need to meet customers where they are,” Davey added.
His comments came after nearly half of community bankers responding to a recent Bank of New York survey reported being innovative within their communities. One-quarter said they were perceived as constrained. Nearly 30 percent said innovative technology services focused on security and efficiency — automated loan processing and instant payments — were crucial to keeping a competitive edge.
A venture partner at bank consortium Alloy Labs, Davey sees FIs as being a decade behind in tap-to-pay technology. Mobile wallets are much safer than physical wallets, he added, and nearly all mobile users have more than one payment card. Sixty-two percent of customers feel comfortable leaving their wallets at home, Davey noted, while more than half use digital wallets over traditional payment methods.
Embedded payments are expected to grow 84 percent in volume to $59 billion by 2027, Davey said. Thirty-five percent of that growth is expected to be driven by business-to-business payments. The embedded finance market for small- and medium-sized businesses is expected to expand to $124 billion by next year. Nearly half of those businesses would pay more for embedded financial services, Davey said.
Banks must employ flexible cloud-based technology with open application programming interfaces, work with other vendors that are more flexible in offering APIs, and enable programmable instant and real-time payments, Davey said. They must also educate regulators that a connected fintech is not a threat and instead benefits the industry, he added.
According to the Bank of New York survey, 20 percent of community banks were considering collaborating with fintechs over the next five years as a potential solution. Nearly 30 percent identified collaborations with businesses outside of the fintech sector — retail, education and traditional banking — as an equally crucial opportunity over the next five years.
“This represents a strategic move to meet diverse customer needs more effectively,” according to the Bank of New York.
Nearly 40 percent of community banks include artificial intelligence and machine learning in their strategic vision to address risk management and customer service, according to the survey. Twenty-seven percent listed cybersecurity threats as a top-three challenge, followed by 26 percent that cited customer acquisition and/or retention and 24 percent that listed data management and analytics. While the vast majority of banks were prepared to start digital changes, more than half already considered their data analytics capabilities as advanced.
All of the surveyed banks were interested in external opportunities to provide real-time wealth management payments. Forty percent faced challenges in providing competitive loan rates, and more than one-third wanted to offer advanced investment and high-yield savings options.
