Embedded finance and the rapid rise of fintechs pose major threats to banks, according to a recent report from the global business intelligence company Morning Consult.
The survey, which included responses from more than 50,000 adults worldwide during the first quarter of this year, found that credit card ownership among adults in their mid-20s and younger is down 17 percent from July, while ‘buy now, pay later’ use has jumped 9 percent. According to the report, more than 40 percent of customers have already used nonfinancial apps Apple Pay, Google Pay or Shop Pay to make a payment.
“The more consumers interact with companies without thinking about how their money travels from one place to the next, or without having to go through onerous processes to finance a purchase, the more their interactions with their traditional financial services providers will feel outdated — or worse, they’ll stop interacting with them altogether,” according to the report. Another possible complicating factor for banks is that fintechs don’t face the regulatory hurdles they do in creating a super-app to allow for transactions to occur in one place.
Fintechs have already diverted $8 billion to $10 billion in annual revenue away from banks, according to a report from consulting firm McKinsey & Co. Credit originated at point of sale is expected to increase from about 7 percent of U.S. unsecured lending balances three years ago to 13 to 15 percent next year. “Only a few banks are responding fast enough and boldly enough to compete,” McKinsey said. “Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers. To avoid that outcome, US banks need to understand the landscape for point of sale financing and choose from among the emerging models.”
Despite this, many banking leaders aren’t open to adopting BNPL: More than 80 percent of banking leaders said they had “little or no interest” in offering that service, according to a recent IntraFi Network survey of CEOs, CFOs and presidents from 426 banks. Still, recent surveys have indicated that customers would reward banks for adopting BNPL: Seventy percent of consumers said in early November that they would be interested in using the option if it was available at banks they have long known and trusted, according to a recent report from the data firm PYMNTS.com. The PYMNTS.com report, based on a survey of 2,237 U.S. consumers, found the percentage of current fintech users who would be more interested in bank-issued BNPL even higher among the largest current providers: 79 percent of Afterpay users, 84 percent of those who have PayPal’s Pay in 4, and 82 percent of Klarna users.
According to Morning Consult, banks will need to abandon their business-to-consumer branding to focus on developing more B2B vendor partnerships with companies already embedding their services. “The latter will require a reimagining of the role [traditional FIs] play in consumers’ lives — beyond providing the utility of accounts to servicing the ends to which those accounts are a means,” the report stated. Also, Morning Consult called on financial institutions to provide consumers with “actionable insights based on a hyper-detailed understanding of their financial goals and well-being, and to provide tools to help them achieve their aims.”
At $3 billion, Fort Wayne, Ind.-based STAR Bank, administrators have included digital transformation as a component of its growth plan. Administrators have begun bolstering analytical resources, focusing on developing digital skill sets and refining roles to develop the bank’s digital structure. The bank has a Digital Insiders team to study and internally pitch digital innovation.
Kristin M. Marcuccilli, executive vice president and chief operating officer, said embedded finance poses risk to community banks, “If they fail to intentionally embrace digital transformation, fall short in driving innovation through all delivery channels and lack focus in what, why, where and to whom they target their services,” she said.
“Strategically, community banks have to choose what specialized area will be their greatest strength and perform at a high level within that segment,” she said. “Further, they have to determine a strategy that embraces the power of embedded finance while not losing their identity as a community bank, one that has been built upon decades of relationships, rapport and human interaction.”