Protect Against the Downside, Prepare for the Upside: ONci at Bank Director Experience FinXTechMichael van Miert & Collier Wright
May 15, 2023
We recently spent time at Bank Director’s leading fintech conference, ‘Experience FinXTech’, which sees banks and fintechs connect with their peers and industry leaders to explore cutting-edge financial technologies, discuss the implications of technology on the banking landscape and debate what the next 12 months may bring.
What were our key takeaways? Well, there were plenty, but we’ve summarized the highlights here:
Bank / fintech partnerships gather momentum
The banking community continues to show an increasing appetite for fintech partnership, as they seek competitive advantages through the greater efficiencies and accuracies that leading fintech can offer. Fintechs that can provide banks with a truly unique proposition to help solve their multiple pain-points at all stages of their lending processes, through from origination to monitoring, will no doubt come out on top.
Invest in tech partnerships, not solutions
Too often banks treat investing in technology like buying an off-the-shelf product, believing that the only thing necessary to realize the returns promised by their tech partners is to write them a check. Instead, banks need to treat investments in technology as just that, an investment. This means evaluating technology providers based on who will be the best partner to help the bank direct their resources effectively and efficiently to realize the greatest return.
Small fintechs make great partners
Small fintechs are often seen by banks as more risky, because they have fewer references and shorter track records. But the truth is that small fintechs often represent the best partnership opportunities for banks precisely because of their size. Small fintechs will often invest tremendous time and resources into making their bank partners successful to establish their reference base. This often means that early bank partners have considerable influence on the technology roadmap to solve problems that provide the best return to the bank. Banks should look for creative ways to de-risk partnerships with small banks for access to white-glove treatment and outsized returns.
Commercial credit is still the heart of banking
Banks should think about tech investment in terms of business models and distribution models. Business models guide core products and services the bank offers and more than 70% of banks still identify their core business model as commercial banking. Distribution models define how banks deliver products and services more effectively and efficiently. Fintech partnerships are about improving distribution models, not business models. When evaluating tech partners, banks should look for fintechs that align with their business model and transform their distribution model.
A consolidation of banks is on the horizon
In the wake of bank failures and the continued uncertainty across the US banking landscape, expect to see more consolidation in the market – however not quite right away. After the current banking crisis clears, banks need to make themselves look as attractive as possible to potential buyers. To do this, they need to invest in technology to improve their efficiency ratios and reduce costs and time taken up completing manual processes that can easily be automated.
What bank regulators are going to be looking at in regard to scenario analysis and stress testing over the next 12 months, given the recent bank failures and continuing volatility, will be critical for the entire industry moving forward. In terms of introducing more regulatory frameworks, these may not come as ‘hard regulations’, rather it may just be through exams under the “safety and soundness” requirement. Furthermore, a top priority for central bankers globally remains to organize new stress tests to better understand the asset allocations of banks and the difficulties that may emerge as higher interest rates alter the value of bank-held investments and their returns.
To finish up
Looking ahead to the rest of 2023, banks need to continue thinking longer-term in terms of securing strong and stable growth throughout 2024 and beyond, however, they need to also concentrate on their current portfolio and how they can better understand where risk is withing portfolios and action these insights. The use of data will be critical in achieving this, as historical data is helpful due to it being based on collected statistics of events, but information such as revenue projections can bolster this data by analyzing possible outcomes based on certain scenarios. By adopting this forward-looking approach, banks can make more informed lending decisions based on foresight as well as insight.