In the banking industry, technology adoption has emerged as the deciding factor in who surfaces as the winner or loser. Unfortunately, community banks are losing market share to larger banks and fintechs due to their inability to keep pace with the latest innovative solutions.
When establishing long-term goals, small community banks typically aim to either grow their business to become an attractive acquisition target, or expand and maintain their independence. In either scenario, implementation of digital systems is critical to their success.
Technology Challenges Facing Community Banks
Continuing to do business as usual won’t lead your community bank to the podium. Community banks who truly want to get ahead need to make significant changes to their technology to keep up with the competition.
That’s exactly what community banks are hoping to do in 2023. The percentage of small banks looking to grow deposits among their retail base of customers more than doubled from 21% in 2022 to 51% in 2023. One of the simplest ways a bank can do that is through partnerships with fintech companies to provide valuable services to the bank’s customers.
Unfortunately, implementing technology to drive deposits isn’t as simple as it sounds, especially when community banks are working with significantly smaller technology budgets than many other financial institutions.
Besides budget constraints, community banks are faced with a number of challenges that make implementing new technology—and fintech partners—difficult:
Integration bottlenecks. Incorporating multiple technology partners to get the services you desire can slow down integration and stall the product’s release to market.
Compliance and security risks. Using more than one integration partner opens a bank up to more opportunities for security threats and compliance breaches.
Inflexibility to make quick changes. Multiple direct-to-core integrations make it more difficult for community banks to pivot business decisions or bring on new partners.
Disparate data models. Financial institutions struggle to see a holistic view of the enterprise when data from each partner is in a different format.
Roadblocks with integration to the core. Often, fintechs cannot easily integrate with a bank’s core, costing time and money to implement new products and services.
This list of challenges one might face is enough to make any financial institution throw in the towel. Whether you’re a small community bank or a large financial institution, however, partnering with a fintech is feasible and should be part of your organization’s long-term goals.
How to Find Value in Fintech Partnerships for Community Banks
In the not-so-distant past, banks viewed fintech companies as fierce competitors in the financial industry. Since technology emerged as a key component to a bank’s success, the idea of partnering with the competition has become a growing trend—and rightfully so!
The relationship is mutually beneficial. A bank can offer highly demanded products and services to its clients, while a fintech can utilize a bank’s charter, which allows it to act like a financial institution.
There are two different strategies for a bank-fintech partnership:
Affinity play. Through affinity play, fintechs gain access to a specific customer group through a bank (i.e., minority groups, newly graduated doctors, customers who care about the environment, etc.). A partnership through affinity play results in a bank enhancing its offerings without investing heavily in developing new products or services, while fintechs expand their market to a specific demographic or interest group.
By functionality. This strategy is about the functionality of the fintech product. It allows banks to add new functionality to their existing products or services without having to build it themselves, while fintech companies gain access to a larger customer base.
How Does a Fintech Partnership Drive Deposits?
Banking as a service (BaaS) allows non-bank companies to offer financial products and services to their customers by using the infrastructure of a licensed bank. BaaS platforms can bring a new set of customers and revenue streams for banks.
For example: An airline offers a credit card to customers to earn miles or pay for a ticket over several months. The airline can work with a bank to embed banking-type functionality into their business process. The bank is ultimately working with a fintech to provide this credit card or payment option to the airline customers.
This allows the bank to reach a larger pool of consumers because of the customer base the airline is bringing in through this financial offer. Without the partnership, the airline customers may never have an interest in working with that particular bank.
As you look into various partnerships, there are a few things to consider before committing to a fintech and its products/services.
A smart fintech partner should offer:
Comprehensive business-continuity safeguards.
SOC 2-compliant technology.
How to Partner With a Fintech Through Mesh
Whether a bank is acting as a sponsor bank or simply employing technology that allows it to enhance its offerings, the bank can drive deposits by implementing Mesh for a seamless partnership with fintechs.
Instead of facing the challenges of integrating multiple technology partners into the bank’s core, community banks need to consider a simpler solution: Mesh integrations.
As a community bank decides to take on more partnerships, it becomes bombarded with different integrations (and timelines) to its core, disparate data across each partnership, and increased security and compliance risks. Alternatively, Mesh is one integration to your bank’s core that, in turn, provides integration to any fintech.
“You could manage each integration separately or, with Mesh, you manage one integration to your core. If you use Mesh where there is a common data model, and every fintech is integrating in the exact same way, you have economies of scale. You let Mesh deal with everyone’s contrasting way of describing data categories and converting it.” —Joel Legg, Core10 VP of Technology
Core10’s Mesh product centrally manages all fintech partners and enables banks to plug and play new vendors. By utilizing an integration tool such as Mesh, community banks can easily add new or change fintech partnerships as they pivot their business strategy to meet the demands of their customers and drive deposits. Want to learn more? Let’s talk.