Technology giants have been expanding their financial services — and portfolios — vertically and horizontally for years, creating new payment and financial innovation that is pressuring banks to change.
Recently, they’ve targeted the banking industry. Last year, Apple debuted a credit card, and this year Google plans to launch consumer banking. Instead of registering as banks, however, they are partnering with banks in order to avoid tight regulations and expensive licenses — Apple with fintech bank Green Dot coupled with Goldman Sachs, Google with Citibank. Digital lenders such as SoFi and Lending Club will often look to expand and collaborate with banks to avoid the growing regulations that make it difficult for small services to grow, and consumers will win by having more services to choose from.
Globalization and increased accessibility via web and mobile apps have touched every industry and banking is no different. Opportunities and challenges exist as economies become more intertwined, forcing the sector to continue to evolve and transform. This transformation has led to mdany changes, and challenges, for banks to deliver for customers through the banking-as-a-service (BaaS) software.
Banks of all sizes, from de novo to money center giants, are investing less and less in branch and in-person services, and partnering more closely with the fintech innovators to deliver digital banking options. As technology evolves and grows, the choices for consumers accelerate, forcing banks to stand out and support their customers better than, or at least as good as, their competitors. For this reason, the market is constantly finding new ways to win customers and stay secure within the bounds of safety and soundness requirements.
During the first half of 2019, Cytelligence reported that the banking industry saw a 50% increase in attacks by mobile banking malware compared to 2018. As 5G networks expand and mobile devices connect across ZIP codes and borders, the opportunity for security breaches and vulnerabilities for customers and banking organizations grows exponentially. As the types of devices we use to store our information grow, too, with wearables and home devices, risk intensifies. The financial sector will need to address these issues swiftly and smartly,beforeserious events occur.
A decade ago, the world witnessed an unprecedented financial collapse. Now we’re living through the COVID-19 pandemic and economic systems again sit on the edge of an historic recession. Governmental banking regulations have increased since the 2008 recession, and they will continue to adapt and grow to address changing market dynamics and systemic risk.
With big tech and fintech becoming players in the banking industry, the government will continue to seek ways to regulate them at both state and federal levels. In late 2019, the House introduced a bill to keep big tech out of finance. These regulations attempt to make it more difficult for fintech innovators to disrupt and bring new services to the financial banking sector, enabling incumbents to maintain a comfortable status quo. The OCC and other regulators, aware of this, are now proposing regulations to make it easier for entrepreneurs to reshape banking, and many forward-thinking financial institutions are seizing on the opportunity to provide BaaS to these new firms.
The fintech ecosystem is starting to evolve with the development of services for alternative assets such as private securities and cryptocurrency. Additionally, services for next-generation Alternative Trading Systems (ATS) are rising, which provide holders of alternative assets with the ability to match buy and sell orders, to be settled on the bank custodian’s custody systems. BaaS custodians such as Prime Trust are creating systems that enable ATS, crypto exchanges and other innovators with the systems and automated processes to accomplish these things.
The customer group is changing: Gen Z now controls $45 billion in annual spending, which makes them a top priority for the banking sector. With nearly 60 million Gen Z members in the U.S., how they bank sets the tone for the banking-as-a-service market. The Center for Generational Kinetics reports that today 48% of their generation have a mobile banking app and 54% have not stepped inside a bank in the last month. Millennials are even less likely to visit a bank branch, at just 30%.
Younger generations demand online access for multiple asset classes in their banking needs, and are not scared of banks that are untraditional and disruptive. Banks will experience future success only if they reevaluate older proclivities and processes and rethink traditional banking. These types of decisions for marketing and insight on customers will be driven by data on their lifestyles, not just their generation.
API-driven banking-as-a-service platforms provide banks and their partners an end-to-end digital process for modern banking needs. As the world expands, so does the way that we rise to meet the needs of consumers. The fintech industry, facing new challenges and regulations, provides the most opportunity for growth and stability for customers and banking companies alike.
