Episode 37: Banking Industry Trends in 2023 (pt. 2)
As the release of the FedNow Service approaches and new business models like Banking as a Service gain steam, there’s much for traditional financial institutions to consider in 2023. In this second part of our conversation with Shane Ferrell, CSI’s Vice President of Product Strategy and Innovation, we discuss these technological opportunities and ways to get the most from them, along with more key takeaways from CSI’s 2023 Banking Priorities Executive Report.
Saxon Prater (SP): CSI’s 2023 Banking Priorities Executive Report revealed that technology in the financial services landscape is continuing to advance, bringing even more attention to innovation in the space.
Laura Sewell (LS): So, we spoke to Shane Farrell, CSI’s Vice president of Product Strategy and Innovation, about today’s technology trends and the innovations he’s seeing on the market.
SP: If you missed part one, we invite you to listen to that episode on whichever platform you’re accessing today. We cover topics like the overall tech landscape, responding to employee churn and digital technologies.
LS: In the second half of our conversation, we’re setting our sights on developments in open banking, Banking as a Service and payments with more perspective from our 2023 research report.
SP: Here’s what’s in store.
Shane Ferrell (SF): We’re kind of in the middle of this transition where some fintechs are still seen as competitors, and other fintechs are now seen as partners to help expand market opportunities. And I think that we’ll really see the drive towards the second over this next year.
LS: I’m Laura Sewell.
SP: I’m Saxon Prater. Welcome to Fintech Focus from CSI.
…So, another hot topic this year, it’s not necessarily new, but we’ve certainly seen a resurgence or growth in this area is open banking. So, what all does that encompass and why is open banking important?
SF: Yeah, I agree with you. You know, we’ve been talking open banking for, I don’t know, five or six years now at least. I think we first rolled out some of our early solutions in 2016 or 2017. I think, again, COVID played a little bit of a pause here because “open” entails that you’re working with other parties to bring solutions to market.
And I think people focused internally, they focused on the right things to help their customers. And now we’re growing out of that. And all of a sudden, it’s a hot topic again. The things that the open banking entails vary quite a bit, and it’s really powered on the concept of open APIs, that open ability for software applications to interact and talk with each other and that powers lots of pieces.
And on one end of the spectrum, I would say is tools that help create the operational efficiency we referred to a few times. And they’re kind of an easy place for a financial institution to dip their toe in and get started and understand how to work with vendors around open APIs and open banking.
And then on the other end of that spectrum is where you find banking as a service payments, as a service, embedding banking, those sorts of concepts. And that’s where banks can start driving revenue opportunities, line of business expansion opportunities, ways to create growth within the institution. And there’s lots of kind of things in between that all kind of fall under the general open banking umbrella.
LS: So, one aspect or application that’s rising in popularity regarding open banking is platform banking. Can you tell us a little bit about what that is? And also, why do you think that’s floating up to the top.
SF: Yeah, so platform banking I think sometimes we hear it referred to as embedded fintech and that’s really the idea of a financial institution bringing in third party software. And generally, that comes from fintech inside of their banking ecosystem. So, if there’s some sort of solution that I want to put inside of my digital banking as a bank so that my customer gets the benefit of that added solution inside of their digital banking, that’s really what we’re really talking about when it comes to platform banking.
I think what drives that is the need and the desire that our banks see from their customers of expanded financial opportunities. You know, we talked about financial wellness earlier. That’s a perfect example where a bank may see the need in their customer base to help bring them up to speed on the right ways to budget, the right ways to save all those pieces that encompass financial wellness.
And they find a great fintech partner, but they need to embed that solution inside their banking platform for their customers to take advantage of it. There’s many great use cases out there, whether it be embedding credit score or putting chat services or the ability for a customer to make an appointment to come into the branch, embedding that inside of their digital banking to just make life a little bit easier on the customer and give them some digital interactions that improve the interactions and engagement between the customer and the bank.
SP: Out of curiosity, how widespread is platform banking? My understanding was that that is really what the vast majority of banks are doing, that they’re using digital lending or digital account opening, whatever it happens to be, that they are plugging in from a fintech. Is that accurate?
SF: Yeah, I think it really is, Saxon. Again, when I think about the spectrum of open APIs and open banking usage, you know, you you’ve seen banks naturally kind of start with operational efficiencies and then the very next kind of steps that they do are in platform banking. It’s solutions that they see that can make the offering from the bank a better offering for their customers that can improve their customers lives.
So, we see a lot of investment happening there. In this case, if it’s digital lending, your digital account opening, it kind of checks off both of those boxes because it makes it easier for the customer and creates a better experience for the employee. Overall, everybody kind of wins there, and that’s why I think we see the investments that we see.
LS: Not to further muddy the waters, but you mentioned Banking as a Service and that’s also seen as a huge opportunity. This year. About a quarter of our respondents saw banking as a service, as an opportunity to open new revenue streams. So, in that open environment that we’ve been discussing for the last couple of minutes, what is that banking as a service look like in practice?
SF: What I’ll start with is a little bit less in practice then we’ll move there. But banking as a service is really about banks empowering other companies to have banking services in their application or experience. So, you know, a third-party company that may be offering a checking account, a third party company that may be offering payment service tools, but those are really offered on top of a sponsor bank or a bank that sits underneath that that’s actually powering those services.
In practice, we see that happening quite a few different ways. Some of the easiest that we see is with a bank is the underlying let’s say, checking account for a prepaid debit card and the customer that self may not even know what bank that sits with, but the bank is providing that service through another third-party company. So, the customer at that point feels like they’re a customer of that third party, that fintech or that non-banking institution.
But the banking services are actually coming from the bank. We see that offered many times in ways where a bank can help a a third-party company may have four or five different payment options that they offer to their customers. But all of those payments are really flowing back through the single bank in that single bank’s services.
SP: So, I assume that would be payments as a service, right?
SF: Yeah, there’s kind of a blurred line when it comes to banking as a service and payments as a service in the sense of the orchestration of it and the way that it looks is very much the same. And often they blur over because many times, even if you’re offering a banking as a service, maybe a loan or a checking product, payments as a service goes right along with it.
So, oftentimes in reality, you see them both together. But in the case of the last one that I spoke about, it is purely a payments as a service type offering.
SP: And it’s interesting trying to navigate all of the jargon and all of the “blank as a service” names. The other day we were in our conference room and looked at the conference machine (to Laura) you know what I’m talking about?
SP: Anyway, it said CRaaS – conference room as a service. I thought that was pretty funny.
SF: Everything sells better if it’s “as a service,” right?
This is Fintech Focus. We’re talking with CSI’s Shane Ferrell, about what bankers are prioritizing for 2023.
SP: Pivoting from payments as a service. Let’s talk payments in general. Looks like it’s going to be a big year for real-time payments that has grown in priority over the past couple of years. So real time payments, what are they and what are they not?
SF: Yeah, so I think real-time payments is any sort of money movement, money transaction that updates the balance of the account in real time, and that would be the balance to be cut on both ends of that transaction. So, whether I’m paying a business or a business who’s paying me or I’m paying a friend back or a friend’s paying me back, I think it’s the real-time nature that we see in the funds movement so that my balance is immediately updated as well as the counterparties balance is immediately updated.
SP: How is this related or different from P2P?
SF: I think P2P is one use case of real time payments. It’s probably the most popular and easier easiest to understand because we’ve all gotten used to services, whether it’s from our bank or from a third-party vendor, which technically is payments as a service, because any of those third parties have to have a bank sitting underneath them to actually process the transaction.
So, great usage of payments as a service example right there. But P2P is just kind of the most commonly known use case of real time payments.
SP: That make sense. And that was another really highly rated topic. And in fact, fraud on the risk and cybersecurity side was by far (especially P2P fraud) the biggest concern. So, it’s easy to kind of see the correlation there as there’s faster payments, you have to shore up risks.
SF: Definitely have to shore up risk there. And that’s kind of a two-part process. There’s technology side to that, especially the things that can be done to help see if things look abnormal on an account before some sort of P2P transactions taking place. You know, there’s technology that can help you see if a password was recently changed and now, they’re trying to do P2P and they’ve never done P2P before those sorts of technology pieces.
But on the P2P side, one of the biggest things I think that can make an impact is how we try to educate customers. For the vast majority of P2P fraud that we see, and we read about the experience at our institutions, it’s actual customers that are getting tricked into either doing these transactions or giving away their credentials.
So, you know, I think educational campaigns that help customers understand how they’re being targeted and ways that they can detect if they’re being targeted or just as powerful as the technology solutions to help prevent that type of fraud.
SP: Yeah, a few months ago, I tried to sell a couch on Facebook Marketplace and had half a dozen fraudulent requests within the first 24 hours. So fortunately, I knew what to look for. But I can certainly take your point. That education piece is huge.
SF: Yeah. Luckily you work in the industry, right? So, a lot of us oftentimes have a little bit more knowledge than some of our friends who don’t work anywhere close to the industry we work in.
SP: So bringing it back really quickly to real time payments, how does the FedNow service fit into all of this? Presumably that had some effect on why that was ranked so highly this year.
SF: Yeah, I would think it would have to correlate. When I look out there, what FedNow is going to do. I think what we’ll see is this huge increase in the number of people that can actually be impacted by real time payments. You know, it’s interesting because we all think about those third-party services and how huge they are.
SF: You can pay and interact with anyone, but they don’t cover all the banking accounts in the country. And when now rolls out, it really will. And so, we’ll see this this impact in ways that people who may not have adopted the newest app or the newest way to pay somebody immediately, they’ll have those at their fingertips available within their banking apps.
SF: And we may see a shift in an increase in the adoption of real-time payments really fast in comparison to how some of the other technologies have worked. I think as we move a little further, our FedNow is going to enables really cool things when we’re interacting and paying even our bills or other types of companies in ways that we really haven’t been able to do except maybe through a credit card. But now we can do interact with them directly using our banking accounts in a real time data chain.
LS: Will the FedNow service have anything whatsoever to do with how secure real time payments are or payments overall?
SF: Yeah, I think Fed now will definitely help. Again, if I point back to a couple of things we’ve spoken about, one, I think it will it increases kind of the security around how we tokenize accounts and how we interact with those from a technology perspective, from the education of the end customer perspective. I really think it’s a huge opportunity as financial institutions introduce real time payments in a new way with FedNow that they take the time to educate customers on the most common ways that customers are defrauded, the most common ways that customers are targeted. It’s just another opportunity not just to introduce new technology and new technology that helps prevent the fraud, but to impact customers on how we talk to them about safe and secure ways to use these services.
LS: Gotcha. And in preparing for the FedNow service to be live, is there anything that financial institutions should be doing now?
SF: You know, I think making sure that they’re up to speed on what’s going to be offered, what’s going to be offered from their various vendors, because, you know, every financial institution has a whole set of vendors starting to understand what the contracts are going to look like from that, starting to understand what regulations are going to look like from that.
We’re already seeing regulators speaking publicly about issues that they want to be seen handled differently by financial institutions, especially the P2P fraud space. So, getting a good understanding of changes that may need to happen internally, the policies, changes that may need to happen to your disclosures. And then again, I would put some effort around how are we going to strategically roll this out where our customers see this as a big benefit and an opportunity that we can educate those customers at the same time?
LS: Makes a lot of sense.
SP: Shane We’ve covered a lot of topics, but is there anything else that you’d like to point out or discuss?
Yeah, just one quick thing. I want to read two of the quotes that came from survey respondents, our survey participants, and then talk through kind of the difference in the opposing ends of it. It’s really good stuff. The first quote is “retention of talent will continue to become a concern as well as smaller institutions ability to compete with fintechs while providing seamless experiences for customers.”
So, it’s interesting to me because this participant sees it as a competition with fintechs. And then this next participant, their quote is “how can we interact and learn from more successful banking as a service banks to collaborate on how to navigate this fundamental shift away from 1:1 geography-based banking and into delivering banking services through brand partners to target market segments?” And really, at the end of the day, that second quote, it’s talking about partnering with fintechs.
So, it’s interesting to me, we’re kind of in the middle of this transition where some fintechs are still seen as competitors and other fintechs are now seen as partners to help expand market opportunities. And I think that we’ll really see the drive towards this second over this next year. I think that we’ll see more and more banks that that see the potential of partnering with the fintech and the benefits that that can provide to their customers, whether that’s in platform banking or the benefits it can provide to the financial institution and the community in ways to generate revenue or new lines of business on the other end of that spectrum.
So, I think it’s a real dichotomy to see in the two quotes, one still being fintechs as a competitor and in some cases they are and they always will be. But another seeing kind of that new side of fintechs as a partner in a way to get solutions into the market that benefit our customers and help us grow.
LS: Excellent. We just scratched the surface of what our survey revealed regarding what’s on the minds of bankers across the country. Thanks again, Shane Ferrell, for joining FinTech Focus. And thank you all for listening. If you want to learn more about banking strategies and the landscape in 2023, be sure to check out the interactive 2023 report.
SP: You can find that report. Listen to previous episodes of this show and learn more about who we are and what we do at CSI by visiting csiweb.com or subscribe to Fintech Focus wherever you get your podcasts. We’ll be back soon. But until then, find us on Twitter @CSIsolutions or on our Facebook page, Facebook.com/csisolutions. See you next time.