Fast-Moving Fintechs Challenge Financial Institutions

Category: Featured
Author: NXTsoft

Banking is changing at the frenetic speed of technology. Such as with evolving fintech firms that are muscling into essential financial services, and frequently taking on more risk than traditional banks. For financial institutions, fintech drives them to innovate faster to stay up to date with consumers wanting better access to financial products and services.

The latest International Monetary Fund (IMF) “Global Financial Stability Report” suggested such transformations not only challenge financial institutions and fintechs but regulators as well. The rise of fintech services and digital banking could spur financial risks and potentially a crisis over the long term.

Michael Hsu, Acting Comptroller of the Currency, a major U.S. bank regulator, also warned recently. "I believe fintechs and big techs are having a large impact and warrant much more of our attention," noting the encroachment of fintech companies into the traditional financial sector, including via partnerships with financial institutions, was creating more complexity and "de-integration" across the banking sector. "My strong sense is that this process, left to its own devices, is likely to accelerate and expand until there is a severe problem, or even a crisis," Hsu said.

Banks and tech firms, in an effort to provide a seamless customer experience, are teaming up in ways that make it more difficult for regulators to distinguish between where the financial institution stops and where the tech firm starts, said Hsu. And with fintech valuations falling as financing costs rise, bank partnerships with fintechs are increasing, he held.

Fintech Focus 2022 Issue

Closing the Gap

IBM.com focused on “Closing the Gaps Between Fintechs and Legacy Banks.” The article by John David (J.D.) Penner pointed out fintechs are not a new phenomenon. The first version of PayPal’s digital wallet and payments system launched in 1999. “In the last two decades, countless other fintechs have entered the financial services arena. Larger companies — such as Apple, Google and Amazon, who started out as innovative tech companies and were not traditional financial services players — also entered the field, offering competing platforms that threatened the banks’ traditional dominance in some areas,” Penner said.

The arrival of fintech, along with financial changes and regulatory effects, transformed financial services. For some financial institutions, according to the IBM piece, it meant an erosion of revenue as clients opted for different financial services from other providers, while for some, it meant a reluctant partnership with newer entrants as traditional banks sought new tech models.

While they can undertake some changes — either alone or in cooperation with each other — none of the traditional players are less prone to taking risk with depositor and shareholder funds. The challenge cited by some traditional FIs is that fintechs often do not have to meet the same regulatory and compliance requirements they do, and consequently, fintechs move more nimbly into some fields of business. 

“While this may be true, this is not the only reality,” according to the IBM article. “While traditional FIs are governed closely: deposit-taking in most jurisdictions is limited to financial institutions that comply with a host of regulatory and legislative requirements to ensure that deposits are only accepted from, or loans made to, legitimate parties and business activities.” Fintechs, on the other hand, do not usually take deposits or do any lending themselves, so the same rules do not always apply.

This does not mean, however, that FIs cannot innovate. Many can and do, but they are careful to do so on an incremental degree so that a tech fiasco does not have a broader effect. 

Fintech and Financial Institutions Match Up

While fintechs play a valuable role, in effect serving as research and development arm of the financial services economy, traditional banks and credit unions, and even their service providers must gauge if a fintech is a potential partner, acquisition target or competitive threat.

Fintechs need financial institutions or the service providers that serve the financial services industry mainly to access client relationships and the related activity volume. The FI and fintech need each other’s proficiencies to meet the desired result of enhanced and expanded market access and growth.

To adapt and integrate fintech services, legacy financial institutions need to have some agility and flexibility not offered by their traditional platforms and systems suggested Penner in the IBM report. He added, financial institutions have already started harnessing platforms that use newer code bases, deployment models and application programming interfaces (APIs), that don’t rely on traditional mainframes with their batch jobs and files.

Financial institutions can make the transition by deploying platforms that can accommodate the old methods while providing and migrating to the new; and allowing the service provider to integrate fintech capabilities into the platform’s ecosystem.

Safely and Securely Connecting

Ultimately the financial institution wants the ability to integrate more often and quickly to a flexible core banking and payments platform as well as to an accommodating ecosystem. 

As financial services undergo a metamorphosis what emerges is entirely up to FIs and fintechs that seek out partners that meet their strategic goals. Closing the gaps between fintechs and legacy banks and credit unions relies on both planning and collaboration among banking institutions, service providers and fintechs to ensure their joint success.

However, deploying a comprehensive platform in financial services requires the utmost in security and compliance. 

The key to fintech partnerships and API usage to connect systems lies with a proper integration. NXTsoft’s OmniConnect Platform, for example, employs cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensuring a safe and reliable integration, and providing an open banking marketplace for all API needs. NXTsoft also provides connectors for as many as 40 different banking core accounting systems including systems from Fiserv, Jack Henry and FIS, with many of them requiring connectivity to multiple core versions.

NXTsoft's API connectivity provides a best-of-breed connectivity solution for financial institutions and fintechs. With the solution, financial technology suppliers can close deals quickly with pre-built API integrations into so many existing applications. Financial institutions and vendors can take advantage of NXTsoft's experience connecting fintech solutions securely to banks and credit unions, using the strongest technology foundation and the most cutting-edge cloud-based technology; and following the uppermost industry and regulatory standards.

Fintech Focus 2022 Issue

September 14, 2022
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