September 17, 2019 | 5 min read

Fintech innovators turn to digital banking

The battle for deposits is at full tilt. Checking accounts, long the anchor product that traditional banks relied on to retain customers, are now the target of aggressive Fintechs. Looking to become the next challenger bank, or ready to diversify into new services that promote higher engagement and card usage, Fintechs are partnering with modern card issuers to design digital banking services. These accounts do everything a checking account does, but without the checks. Deposit your paycheck, hold funds, swipe a card anywhere or grab cash from an ATM, and every time, see the brand of the Fintech on the card instead of a bank. In this first post of our new digital banking series, we look at the forces behind today’s surge in Fintech growth.

Pushing to become the most used card in our wallets, a wide spectrum of Fintech companies, under the heading “Digital Banking,” are adding digital banking services in their search for the right mix of services to fuel customer growth and grow revenue. The investment community believes in their potential. Global Fintech investment topped $39B in 2018 according to CB Insights, saying: “One of the biggest trends in Fintech today is the rise of digital banking products like mobile checking accounts and new debit cards.”

So, why the surge towards digital banking? Where are the opportunities, and what are the success factors for Fintechs who are ready to make their move? We’re going to explore all three in this blog series, starting now.

Crises Catalyzes Growth

After the global financial crisis hit in 2008, consumers were ready for change. Many of us lost faith in traditional financial institutions and opened up to new brands with applications for the smartphones that we couldn’t put down. Mobile technology exploded and consumers pushed for more convenience in every aspect of daily life, from shopping and socializing to travel and education and even banking. Younger generations in particular accelerated change by choosing brands that offered the best experience, one that is fast, convenient, and frictionless. As traditional banks were slow to evolve, Fintech companies stepped in to meet consumer expectations, especially for services that were complicated and/or expensive to execute with banks. Peer-to-peer exchanges, getting a small business loan, opening a checking account, even obtaining your credit score, were all successful Fintech niches that have produced unicorns like Square, Kabbage, SoFi, and Credit Karma. Today, the collective force of those niche applications is beginning to have a real impact on traditional banking.

Regulators Revise their Rules

After the financial crises, consumers weren’t the only ones rethinking traditional financial institutions. Regulators around the globe realized the impact of concentrating all of that financial power and influence with relatively few banks and began introducing new rules that forced traditional banks to open up to challenger banks. For example, in the UK, open banking standards and the Payments Services Directive (PSD2) require the UK’s nine largest banks to implement open standards for application programming interfaces (APIs). These APIs empower third parties like Marqeta to securely access account data, be it at a bank, lender, wealth management or insurance company at their request, opening new doors for Fintechs to power new applications for consumers and SMBs.

The Fintech Impact is Real

An Accenture Study of 20,000 banking and payments institutions across seven markets showed that from 2005 to 2017, the number of banking institutions decreased by nearly 20%. Today, one in six (17%) of current institutions are companies who have entered the market after 2005. Those new entrants are commanding a growing share of the market. According to Accenture, “While few of these new players have raised alarm bells among traditional banks, the threat of reduced future revenue growth opportunities is real and growing.”

In our next post we’ll explore the landscape of Digital Banking and dive into the opportunities that Fintechs are pursuing to:

  1. Become challenger or digital-first bank in their own right, or

  2. Integrate digital banking services with existing financial services to diversify for growth

  3. Partner with a digital banking payments platform

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