Our bank and credit union friends are braving one of the most transformational shifts in the history of the financial industry. Technological advancements fueled by a massive change in social behavior and consumer demand have accelerated the arrival of a new age for community banking – the era of fintechs. The traditional financial institution can view these new challengers as either friend or foe. Regardless, banks and credit unions have been coerced to make a pivotal decision – digitally transform now, or go extinct. As we work alongside financial institutions (FIs) to adapt and excel in this new environment, we’ve identified the top six trends we’re addressing together via new partnerships and fresh product ideas.
This year’s theme in the financial industry could be “open banking.” It’s a popular subject for our clients and the starting point for many of the topics to follow, but what does it mean? Our team is working on an in-depth look at the exciting changes this movement will introduce in the industry, how it affects financial institutions and end consumers, and the solutions we’re building to help fintechs reduce the friction of connecting to financial institutions. Here’s a sneak peek for now.
We are developing new ways to streamline these connections by minimizing hosting costs, deploying properly connected APIs to financial institutions, and leveraging our knowledge and skill from years of connecting banking cores and various applications. Additionally, we are exploring new methods to standardize the deployment process so that our solutions significantly reduce the time-to-market for a financial institution partnering with a new fintech. Our goal is to develop this solution so that fintechs can build the functionality into their application directly, enabling them to reach more customers faster.
API Infrastructure for Financial Institutions
We help FIs build the infrastructure they need to digitally transform their organization and change how their applications interoperate. We have consistently heard feedback that FIs are hamstrung by their own internal resources, hindering the organization’s ability to operationalize integrations with existing enterprise applications and external fintech solutions. If you want to learn more, read our case study on how Solarity Credit Union reduced its core integration cycles by up to 18 months.
We designed the PortX platform as the one-stop-shop for every integration an FI will need to do. Additionally, we are adding vital process management tools into PortX to help FIs optimize and productize their connections to applications and fintechs. PortX allows them to deploy integrations without any dependency on external vendors. And, built-in data management best practices allow FIs to build reusable assets that they can leverage for future applications, expediting development time with access to a nearly unlimited supply of resources from ModusBox.
An ever-expanding wave of payment options
In response to a growing surge of payment options available, our customers have a strong desire to become leaders in innovative products and services. However, FIs were historically incapable of connecting directly to payment channels. And, today, integration with new services remains difficult and expensive with contracts that are laden with strings attached.
We’ve expanded the scope of our product stack to enable unified payment channels across a single administrative plane. Our API-led approach empowers FIs to participate more effectively by standardizing and automating legacy payments such as ACH and Fedwire. The functionality also simplifies the process of connecting to exciting new technologies like Zelle, cryptocurrencies, and new real-time payment networks. Additionally, the platform enables FIs to maintain the highest level of service to their customers by future-proofing the FI’s access to these networks.
Sponsor banking and “Niche neo banks”
Exposing banking services as digital assets, like APIs, is one of the competitive capabilities that FIs must address in today’s digital financial services world. We have experienced a huge increase in the percentage of our clients that are considered “niche neo banks” – fintechs that offer specialized banking solutions focused on a narrow subset of consumers like kids and teens, gig workers, couples, and more. However, despite their ability to develop and offer the killer app, banking regulations require fintechs to be sponsored by a chartered FI.
Sponsor banking is the congruence of open banking and innovative payment and non-traditional financial technologies. The next generation of products and services provided by banks and credit unions will be more related to infrastructure and less around traditional financial services. Sponsor banking is a capability only possible for those FIs that can abstract their banking core and expose services in an API that consumer fintech services can leverage. That’s why we help FIs gain banking core independence and developed PortX as the integration platform that makes it easy for FIs to securely create, expose, and manage new services as APIs for external partners.
The combination of open banking, newly available technologies, and sponsor banking culminates in embedded finance. At ModusBox, we think this is the most exciting greenfield opportunity in technology today. Modern financial services are deploying into capacities that have historically been considered unorthodox.
We recently partnered with QCash, a technology company enabling small-dollar loans for “when life happens.” We added its proprietary Life Event Loan Decision Engine to PortX so that any credit union on our platform can automatically enable the loan origination platform with the click of a button. However, embedded finance extends far beyond linking modern financial services to the banking industry.
For example, in the supply chain industry, in particular, smaller suppliers are creating products that can reduce NET payment terms and automate marketplace access. Embedded finance has made this possible because a traditional bank can provide a debt facility that a logistics company is able to purchase through its supply chain. Products like this are able to offer NET terms of 10 days instead of a typical 30-60 day timeframe, enabling companies to get cash faster.
The possibilities are endless once you start to digitize financial services. We are working on several opportunities to add other new partnerships this year with solutions that could streamline processes such as purchase financing, supply chain financing, healthcare payments, new methods for creating accessible accounts, issuing and originating card payments, and others.
Blockchain technology will continue to change how we think about financial products and services. We aren’t only thinking about this in the context of cryptocurrencies like Bitcoin. FIs should be asking, “How can we capitalize on the persistent nature of blockchain by tokenizing assets that allow us to lower our costs?”
One solution we are exploring would help FIs reduce the inherent risk of holding a valuable portfolio of debt assets. Transforming these assets from paper contracts into digital properties would introduce multiple benefits to the FI. First, since the contract is stored in code, it could simplify access for faster reviews during audits. Simplified access also unlocks new functionality such as building dashboards and other tools on top of the tokenized contract rules.
Additionally, this technology allows the FI to create subdivisions on that asset that would not be feasible outside the context of a blockchain. For example, an FI could choose to sell off a small percentage of a given portfolio without surrendering the entire asset base. This would allow the FI to balance its risk against individual debt assets while simultaneously generating cash flow by providing services to a broader range of customers.
Let us know what you think
These are exciting trends that will prove transformational for FIs and the financial industry this year. We’re always up for a conversation about how FIs can position themselves to embrace this new era. What are the biggest challenges in front of your team? Feel free to leave us your comments below.
If you would like to learn more about how we partner with fintechs, community banks, and credit unions, check out our banking core integration and digital transformation pages. Or, start up a conversation with our team today.