Editorial Team

Editorial Team

Embedded finance as a competitive advantage for FI’s rather than a threat

Community Financial Institutions are facing an uncertain future with the combined threat of Big Brand Banks and Fintech’s taking customers attention and deposits from them at an increasingly accelerated rate.

But much like a good fighter might stagger at the first punch in the face they recover and take on the fight using their strengths and their competitors weaknesses.  And believe it or not, Community Financial Institutions have distinct advantages and opportunities to evolve at a speed and cost that Fintech’s and Big Brand Banks cannot match - not even close.

The complexity and cost of running highly customized technology creates a natural drag on innovation and change - even in Fintechs. This is especially true in cases where growth has been exponential, driven by massive marketing budgets and rich incentives. Legacy decisions made in haste and rapidly evolving demands and pivots creates a legacy technology cost very quickly. This makes adding additional functionality and features increasingly harder and more expensive.

With the recent sudden crash in crypto prices many of those most aggressive Fintech’s are now laying off staff and attempting to regroup - taking their attention away from innovation and growth and giving community FI’s a chance to catch up and even over take them.

The same is true of Big Brand Banks - with a technology gap built up over 50+ years rather than the 5-10 for a typical Neobank or Fintech App.  The cost of maintaining legacy systems and building upon them is very high, but the cost of replacement and the risk is much greater in replacement.

In comparison Community Financial institutions have relatively simple technology stacks with the majority outsourcing all online banking functionality to their core provider. This means that there are substantial economies of scale to investments in innovation and infrastructure. A single tech stack serving hundreds of FI’s means that changes to the platform can quickly and easily be pushed into the market. Cores like Jack, Henry, Alkami, Q2 and DCI are all rapidly building out their Fintech Marketplaces - curating companies that embed fintech functionality in a bank rather than seeking to supplant them.

It's not unlike Apple pushing updates to its phones rather than having each and every update manually made by each end user and device by themselves.

This market structure has traditionally been seen as a weakness for Community FI’s - not controlling the user experience and user interface is the absolute opposite of the approach in Fintech. Most Fintech’s have a great website and app before the product even works. It's fake it til you make it to attract funding and customers.  Community Banks and Credit Unions have lamented their technology deficit and inability to compete against Big Brand Banks and Fintechs but what may seem to be a weakness could actually be a great strength.

Innovations in user experience/user interface are held to great esteem in Fintech circles but the value to consumers is less clear cut. The fact is the vast majority of consumers use outdated and poorly featured apps and websites for their money management and investing and do so quite happily. So whilst UI/UX is important it's not the most important at least for consumers.

Community Financial Institutions SWOT

Innovations in features and functionality however do move the market - the tens of millions of consumers who have signed up for 3rd party investment apps like Robinhood and Coinbase is a case in point. In less than 5 years the total retail trade volume has increased from 10% to over 30% of total traded volume. This is a mass change in culture and behavior and whilst meme stocks and crypto are a part of this it is not the whole story. Innovation in access, especially mobile, fractional trading and lower or no fees have all combined to drive this change.

Up until now FI’s offering wealth management services have done so with traditional advisory wealth management services. The cost of these means that the assets under management needed to support a customer are typically $500K-1m per account.  So it's a great solution for those customers who are already rich and want traditional advisory services but do nothing for less affluent customers or those who do want access to alternative assets or just like to run their own trades on occasion. By not serving the needs of these customers FI’s are forcing them to create accounts with 3rd party investment apps. This erodes the relationship with the bank and drains deposits to fund trades - deposits that are highly likely never to return.

Fintechs and Big Brand Banks are running hard to roll out digital wealth management services - they recognize the consumer demand, they want to attract and retain deposits and they need the incremental revenue.  They do not typically have a reputation for nurturing the long term interests of their consumers wealth preservation and growth unlike Community Financial Institutions who have made that a cornerstone of their business for generations.

The cost of this though in terms of investment, time and resources is staggering and progress is slow.  A small number of Fintechs (including Robinhood) are offering a handful of cryptocurrencies but it's hardly competitive to the likes of Coinbase. Some are offering access to commission free trading of equities.  Coverage of alternative assets is low.

It typically takes Fintechs 2+ years and tens of millions of dollars to launch these services. By comparison a Community FI could launch a more comprehensive digital wealth management service in a few days and at less than 1% of the cost.

This is the technology dividend that is available to Community FI’s through the most progressive platforms on the market like Jack Henry Banno.  Open banking is not just a threat but an opportunity. It means Community FI’s can enhance and extend their offerings very quickly and at low cost giving them a significant advantage over their traditional competitors in the market.

We have had the first wave of embedded finance and open banking and it's been mainly a story of how startups are solving for the gaps in the market and the slow innovation of incumbents.  That's a natural result of FI’s being slow and startups by definition seeking the white space opportunities in the market, embracing risk and exploiting any and every new opportunity. For every Plaid hundreds of thousands of startups never made it. That's not an option for a Community Bank or Credit Union.

But the market has caught up and now what was cutting edge 10 years ago is available off the shelf from your core or online banking provider. The technology deficit is now a competitive advantage. How Community Banks and Credit Unions respond to this opportunity will, in our opinion, define the future of the market and separate the long term winners from the losers.

*Important information and disclaimers

The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.