FinTechs Must Have A Specific Niche To Remain Relevant
Application programming interfaces (APIs) and all kind of modernised technological infrastructure have made it feasible for almost any business to integrate payments and banking-like services into mobile applications.
Chris Dean, co-founder and CEO of Treasury Prime, said in an interview with Karen Webster that FinTechs are swimming against the current in a sea of sameness. And they are encountering speed bumps.
And time is running out for smaller banks to steal deposits and checking accounts from bigger institutions.
Dean said, “There’s about $75 billion in deposits controlled by FinTechs these days, and that’s a tiny drop, a fraction of the $20 trillion in total deposits in the U.S..”
Given that FinTech-held assets totaled $50 billion at the end of the previous year, the growth pace is undoubtedly brisk.
But what about this ceiling? Dean projected that FinTechs will “top out” around $1 trillion since most of what they provide is comparable to commodities, with nothing to differentiate one supplier from another. The available APIs are replicas of the code that Dean and his colleagues created at Standard Treasury, which was ultimately bought by Silicon Valley Bank.
39% of respondents agreed that a digital bank might be their main bank, but fewer than half were prepared to move. And less than 10% of customers consider them to be their main bank.
To assist customers cross the Rubicon, so to speak, FinTechs and neobanks must recalibrate what they do and how they do it to ensure that they are meeting consumers’ individual demands. It is no longer sufficient to provide bank accounts or access to earned wages. Dean said that just possessing a bank charter was insufficient (adding that in the U.S., there are roughly 4,800 charter banks, which is evidence that there are too many out there).
Transcending the Consumer
He said that for digital-first businesses to flourish, they should position themselves as Software-as-a-Service (SaaS) organisations that handle commercial applications, not simply consumer-facing apps. That entails assisting businesses with operational difficulties while maintaining a bank account. Managing schedules, suppliers, and payments are interwoven in a manner that makes the client firm’s services vital.
“They don’t think of the provider as a bank; they think of it as an operating system for their business,” said Dean, who added that “there are 10,000 deposit institutions in the U.S. There are not many software companies that help, for example, manage construction job sites.”
And here is where the competitive edge of the technologically savvy upstarts resides, since neither a tiny community bank nor a household brand such as Goldman Sachs can provide a customised software to solve these particular business responsibilities.
While banks have typically excelled at risk management and customer connections, FinTechs are closing the gap by establishing direct partnerships with banks. And by forming alliances, everyone benefits.
“The FinTechs and the banks are different kinds of companies, but they can be complimentary to one another,” he said.
The complementary nature of both businesses is shown by the fact that banks excel at risk management and ensuring the secure transfer of funds, while FinTechs provide the innovation that banks need.
Dean projected that the Office of the Comptroller of the Currency (OCC) would issue a series of letters with dozens of bullet points building a coherent structure for the regulatory framework managing this complicated relationship. And it will take a number of years until everyone is on the same page.
He said, “Bureaucracy moves slowly.”
And banks themselves are wary of forming new ties or enrolling new technology service providers. This affords providers like Treasury Prime the opportunity to collaborate with banks and FinTechs to handle know your customer (KYC) and anti-money laundering (AML). In this context, he explained, businesses can focus on their core competencies.
“If you want to be a bank, be a bank,” he said, “and if you want to be a software company, be a software company.”
Ahead of us, he said, are the days when investors and institutions would simply write large checks to FinTechs. Companies with fundamentally robust niche businesses will survive and prosper.
