The Future of Banking: Where Does the Bank End, and Fintech begin?

The banking industry is in the midst of a steep transition, with the market being digitized at an unprecedented rate. In 2023, there are multiple venues for digital payments—whether it be digital wallets, cryptocurrency, or online banking—and as a result, the financial ecosystem is looking much different than it did even a few years ago. 

This is a shift from the traditional means of money where banks were the dominant players in monetary services, commencing a whole new era of transactions. In fact, the global digital payments market is escalating, anticipated to grow from $96.19 billion in 2022 to $111.11 billion in 2023 at a compound annual growth rate (CAGR) of 15.5%.

Following suit, financial technology (fintech) is quickly gaining prominence to help this market transition along. Although fintech has a microcosm of its own within the larger ecosystem, increasingly there are new niches emerging as this innovation starts to blend with other financial players. One example of this is what is known as banking as a service (BaaS) where multiple stakeholders come together to provide a variety of financial resources to customers in one centralized place. 

This technological paradigm shift is disrupting the business models seen in financial services. Let’s take a look at what BaaS is exactly, how it is changing the approach of businesses in the financial sector, and what the future of monetary services is being built to look like.

BaaS Gaining Prominence

Among traditional financial organizations, 82% plan to increase collaboration with fintech companies in the next three to five years. As banks transition to the online interface, there is a myriad of options available, but most of them are made possible by what is known as an API.

An API is an acronym for Application Programming Interface, and they provide a single point of access for different systems in the financial sector creating what is known as “open banking”. Open banking allows different players to interconnect, and the API does the work by defining what information should be shared between the two systems, only communicating what is necessary. 

For older institutions, such as traditional banks, this interface is critical as it acts as a liaison between their legacy systems with newer systems as seen within the fintech sphere. By bridging the gap between the new and the old, APIs allow the two players to cross-function without having to change their code and operating procedures—mitigating the risk of making costly mistakes.

McKinsey recently conducted a global survey of IT executives at leading banks and their perspective on APIs, which revealed that 88% of respondents believe APIs have become more important over the past two years. Furthermore, 81% think APIs are a priority for business and IT functions, and large banks launching API programs are allocating about 14% of their IT budget on average to them.

BaaS providers, by leveraging the power of an API, can take collaboration in the financial ecosystem to the next level. Businesses that deploy BaaS can give account holders more alternatives for financial transparency by opening their APIs to outside developers to provide new and more customized services. This ultimately allows organizations to connect with their users’ banks so that money movements are easy, with more options as to how to move that money.

By launching its own BaaS platform, a legacy institution such as a bank can advance in the industry while also creating new revenue streams. Customers can pay a monthly charge to access the BaaS platform, or, they can pay separately for each service they utilize. Either way, banks will glean an edge over their competitors in the new digital marketplace through APIs and BaaS.

Market Strategy vs. Ecosystem Strategy

This transition has put banks into a survival of the fittest situation because the digital experience is critical when it comes to people and their money. According to consumer research by Salesforce.com, 80% of consumers say the digital experience is just as important as its products or services. 

But banks are still in the early stages of customer-oriented solutions, at least in comparison to what fintechs are bringing to the game in 2023. Only about half of the respondents from the banking sector (53%) believe they are consumer-centric, compared with over 80% of fintech survey participants.

A market strategy essentially means building a platform that makes a bank available to the digital transaction market. A platform is any product or company that helps to reduce market friction, but in order to qualify as a platform, it must permit transactions between two parties with the value being generated by the transactions themselves. 

On the other hand, a bank must work with other businesses to generate value if it wants to become an ecosystem. According to McKinsey, a data ecosystem is a platform that combines data from numerous providers and builds value through the usage of processed data. A successful ecosystem balances two priorities: Building economies of scale and cultivating a collaboration network.

An ecosystem brings buyers and sellers together for transactions across several linked industries by offering a shared solution, within the context of a specified value proposition. For example, this could be a financial lifestyle proposition in the context of banking, where the bank acts as an orchestrator of the ecosystem and brings together companies that assist customers with all aspects of their financial life. This could be things such as insurance, renovation loans, or helping with budgeting, all of which are integrated into the bank’s platform. 

In this context, a consumer is more likely to stick with a bank that offers embedded banking through an ecosystem because services or loyalty programs are much more personalized. If banks are able to subscribe to this strategy, they can start to level up with fintech—offering niche solutions to their customers.

The Future of Financial Collaborations

Technology can increase a bank’s contribution as well as influence in the financial ecosystem, and there are many companies that are designed specifically to smooth over this transition for legacy institutions. One such company is Infinant, which just recently became a part of the Jack Henry & Associates, Inc. family. 

An S&P 500 firm and comprehensive provider of financial technology, Jack Henry™ improves ties between financial institutions and the individuals and companies they serve. They help to provide banks and credit unions with access to a dynamic ecosystem of internal capabilities as well as the opportunity to interact with top fintech. The collaborative network manifested by Jack Henry™ is helping businesses develop more quickly, differentiate themselves from the competition, and successfully and strategically compete while meeting the changing needs of their account holders. 

Infinant naturally fits into this diverse financial ecosystem and will be a main driver for banks’ digitization by offering the technology platform and power tools they need to do so. Infinant’s “Interlace” platform offers a single cloud-native infrastructure to power both community banks embedded finance and BaaS programs. The platform can offer direct links to the back-end systems of records used by financial institutions, or it can be deployed to utilize the virtual account system, offering an end-of-day settlement to Jack Henry core systems.

Interlace sets itself apart by allowing banks to choose the features, fintech, and processors that best suit their needs, which gives banks the confidence to easily integrate banking and fintech into partner applications. This is significant because when banks fully control their whole ecosystem, they have the opportunity to flourish with their clients, fintech, and brands. 

Innovation and collaboration-driven solutions will help banks and fintech to come together to provide a better future of financial services focused on openness, cooperation, and user-centricity. This will ultimately lower the obstacles to financial health for every person who makes transactions in the increasingly digital market. 

Disclosure: This article mentions a client of an Espacio portfolio company.