Dimitri Dadiomov is CEO of San Francisco-based payments company Modern Treasury.
Over the past few years, fintech proponents have positioned new technologies as competing with — even threatening — traditional banks. We’ve heard about how fintech is an “unstoppable trend” that is redefining financial services and providing new competition for banks.
And it’s not just fintech evangelists saying these things. JPMorgan Chase CEO Jamie Dimon goes so far as to state that banks today face “extraordinary competition” from all sides, as their role in the global financial system diminishes.
While banks undoubtedly face competition from payments companies, fintechs, exchanges, big tech, even retailers like Walmart — that’s all changing.
Rather than competing with one another, banks and fintechs are increasingly partnering.
Disruption in financial services shows no signs of slowing down, hastened by the pandemic that boosted the already powerful shift toward digital payments, online wealth management, and online banking. Many banking products, such as payments, lending and certain forms of deposits, are moving out of the traditional banking system. In 2021 alone, $130 billion was invested in fintech, allowing upstarts to speed things up — at scale. In the U.S. and Canada, the biggest fintech segment is digital payments, valued at over $1.2 trillion in 2021.
The most impactful future innovations in financial services and fintech will come from close partnerships between banks and tech companies.
Riding the new wave
Banks have switched from simply viewing fintechs as a threat to one of partnership and collaboration — all with the end objective of adding value for clients, Citi noted in a 2020 report.
No doubt, each offers what the other wants: Fintech firms need scale and client relationships, while banks seek innovative technologies and adaptive approaches. Examples of partnerships include global bank ING’s partnership with Minna Technologies to launch a single digital platform for managing digital subscriptions. Bank of America and Zelle teamed up to launch a digital mobile transaction software-integrated payment solution. And my firm, Modern Treasury, has partnered with banks such as Silicon Valley Bank to offer payment ops services to the fastest growing, tech-enabled startups emerging today.
Pairing software with payments
Moving forward, fintech companies are well positioned to partner further with banks to deliver software as a beachhead to financial services. In the past, a company might default to their bank’s transaction processor, who would then bundle in lending and corporate banking services.
In fact, payments, once a stand-alone product, now begin and end in software. Payments are embedded within software applications, such as vertical software, digital marketplaces, retailer applications, gig-economy platforms, digital lenders and more.
This transition has emerged over two decades, starting with nonbank providers, such as PayPal, developing digital fraud solutions. A decade later, other nonbank providers, such as Square and Stripe, took off to onboard merchants efficiently to process credit card transactions online.
Most recently, software-integrated payments have accelerated with software developers embedding payments within industry specific vertical software or marketplace applications. The result: More useful, stickier products, providing financial services to customers where they are and where they seek them. The new bank “branches” are inside the apps we live in every day — and embedded payment capabilities bring banking services to where the “foot traffic” is.
At their core, software-integrated payment flows have distinct characteristics and needs, chiefly:
- High-frequency, requiring coded business logic to communicate directly with the bank through programmatic channels (typically over application program interfaces or secure file transfer protocol).
- Advanced internal payment tracking, real-time reconciliation, and ledgers for external visibility.
- Identity and compliance solutions heavily integrated with software to guide the end-to-end payment workflow — everything from user-onboarding, counterparty management, checkout, reconciliation, etc.
In sum, software-integrated bank payments are about more than just the payment. They leverage software tools and workflows that manage the entire payment journey at scale.
With that said, most banks still deliver a discrete payment experience. As such, companies with software applications that move money have to either build complex software infrastructure to support their software payments or outsource to a nonbank provider that has built this software infrastructure for them.
That’s why banks are increasingly partnering with fintechs to do the heavy lifting, freeing them from having to build their own infrastructure to enable software-integrated payments. By sitting outside the flow of funds, fintechs don’t have to compete with banks, they can instead complement them.
Banks have enormous strengths, including their relationships with customers, scale, profitability and brand. When those strengths are paired with best-in-class cloud-based software to complement existing systems, customers win. The ideal outcome for all is one where banks can better serve their clients by giving them the tools to seamlessly build products, go to market faster and grow revenue.
Working with a bank gets a fintech’s solution to market and enables them to grow rapidly. And providing a solution in partnership — either co-branded or as a solution to which bank clients are referred — provides the fintech with a stamp of approval from a known brand.
The good news is that all of this competition and collaboration will result in better products and services for customers, reduce costs and continue to open up new product investment opportunities. Together, fintechs and banks can grow more as they better serve customers.