Why this Fintech company is looking at traditional companies as it builds a new breed of bank

Banks, in one form or another, have been central to functioning societies for hundreds of years. It is estimated that in the United States almost every individual (92%) have an account in a traditional bank. One reason these institutions hold a majority of consumers’ accounts is because of their longevity: No matter what happens in the world, they tend to come out on the other side. Another reason so many rely on traditional banks is that the only other options they had, until fairly recently, were other banks with fairly comparable offerings.

As digital challenger banks and fintechs (think: Chime, Ally Bank, SoFi) began to emerge, consumers had more banking options than ever before. These new banks have been able to appeal to consumers in ways that traditional banks have not – with low or no fees, a mix of low-interest loans and high-interest savings options, digital interfaces, fresh, user-friendly features and a more transparent approach to banking. Because they are not tied to cumbersome legacy IT systems or bound by the same regulatory requirements as traditional banks, digital banks and fintech have also been able to innovate at a pace that traditional banks simply cannot.

While traditional banks still have consumers’ trust and the lion’s share of their accounts, they lag behind their competitors when it comes to customer experience. According to a December 2022 Prosper Insights & Analytics survey, 34% of consumers say they interact with their bank/financial institution most often on a mobile app, compared to just 21% who prefer to go into a physical location. This gap will only continue to widen as challenger banks make digital banking more appealing, accessible and mainstream.

In accordance Sopra banking software Managing Director Eric Bierryinstead of oversaturating the market with banking options, traditional banks are considering options to diversify their business models to work with digital banks.

“Fintechs can innovate faster than traditional banks, but they don’t have the backend infrastructure and industry experience needed to go beyond basic banking. This gives banks an opportunity to give digital banks what they need to be fully functioning banks, through a new model: Banking as a Service (BaaS).”

I spoke to Bierry on the heels of the company’s US expansion about how he sees traditional banks and challengers working together, and why this will result in a whole new kind of bank.

Gary Drenik: Traditional banks and fintechs have long competed for market share. Why would they suddenly want to work together?

Eric Bierry: Traditional banks have a 100+ year head start on the competition. This gives them unrivaled experience and expertise. It also means that they run on older systems that stand between them and their ability to innovate at the same rate as fintechs. But the reality is that they don’t need to.

The banking industry has been so focused on the banks’ need to replicate the experiences fintech creates, that they have not even considered the possibilities for them to work together.

Shifting from competitors to partners will not happen overnight. Banks must change their mindset about fintechs. We recently surveyed banks around the world for our annual Digital Banking Experience (DBX) report and found that 74% of them still see these new entrants as a threat to their existence. What is interesting, however, is that they also recognize the potential of working with them.

Drenik: You seem to have high expectations for banks and fintech working together. How do you envision both benefiting from this “collaboration”?

Bierry: Digital banks and fintech are not only growing at an exceptional pace, they are changing consumers’ expectations of their banking experiences along the way. But they are limited in what they can offer to these hard-won customers, given that they are in no position – now or in the future – to provide a full suite of banking services, such as mortgages, personal loans and credit cards. These things require banking licenses that are timely and expensive to acquire, and backend infrastructure and industry experience they don’t have – not to mention capital and regulatory requirements. Fintechs are nowhere near stacking up to traditional banks in these areas.

This is where Banking as a Service comes in. Through BaaS, traditional banks will provide fintechs with what they need to be fully functioning banks, including their banking licenses, infrastructure and expertise. This will allow digital banks and fintech to continue to focus on innovation and customer experience, rather than having to navigate funding, lending and regulation. For banks, BaaS offers lucrative new revenue streams.

Drenik: There are a number of fintechs out there that focus on equipping traditional companies with financial capabilities, such as payments and financing. Does Banking as a Service have implications outside banking as well?

Bierry: Yes, there are a number of potential revenue streams here, and we see that over half of the banks (52%) already offers its capabilities to third parties.

With a BaaS model in place, banks can “bankify” companies in traditional industries, such as car manufacturing, property and insurance.

The banks essentially enable companies to communicate directly with their customers and wholesale partners to offer bank-like services, such as financing. This opens up companies to completely new income opportunities.

Drenik: Can you share an example of what “bankifying” a traditional company might look like?

Bierry: Take a car manufacturer. Instead of allowing the wholesale dealers to obtain financing from a bank to purchase their fleets, the manufacturer can instead extend financing to dealers directly. Not only does the manufacturer benefit from the interest generated by the loans, but they can also better predict their future inventory needs.

Payment and financing capabilities also bring car companies one step closer to the consumer, allowing them to process transactions directly and take advantage of new trends such as on-demand cars.

In real estate, companies can directly finance mortgages for their home buyers. And so on. This is just the beginning of the possibilities of BaaS – we will continue to see more use cases emerge over time.

Creating this new type of bank is one of our main focuses as we continue to expand into the US

Drenik: There is no shortage of companies in the US looking to transform banks in some way. What do you see as the opportunity for Sopra Banking Software stateside?

Bierry: We have worked with 1,500 banks in more than 100 countries – including Barclay’s, Santander, Credit Suisse and Bank of Africa –to digitize their offers and innovate the banking experiences they offer their customers. This has given us a first-floor understanding of what these banks have in common, their challenges and the opportunities before them.

The US has nearly 10,000 commercial banks and credit unions, and is home to nearly 45% of the world’s fintech unicorns. It also has thriving automotive, insurance and real estate industries, all of which are undergoing digital transformation.

While there are many companies that specialize in overhauling legacy systems, few do what we do, which is to provide banks and other companies with the digital interfaces and tools they need to unify the systems they use and bring new banking services and financing options for end users. And to be clear, the US is not a testing ground for us. We already have more than 500 million people worldwide using our software through our partner banks.

By introducing Banking as a Service for banks, we will of course correct their journeys and reimagine their relationship with fintechs. This will have the added benefit of setting the stage for banks to drive the ‘bankification’ of traditional companies.

As part of the Sopra Steria Group, we are in the unique position of being an agile fintech with a large corporate backing to support our expansion in the US.

Drenik: With consumer concerns about finances currently at an all-time high and more than half of consumers (51%) without “rainy day” emergency funds (source: Prosper Insights & Analytics survey, December 2022), it’s reassuring to know the banks aren’t going anywhere.

Thanks, Eric, for sharing a look at how Sopra Banking Software is working to change how banks and companies finance the people who buy from them.