The verticalization of small business banking, a rise in customer centricity and a shift from open banking to open finance expected to impact financial services next year
Praxent, a fintech product agency with more than two decades of experience, today shared trends expected to most significantly impact the financial services industry next year. These trends include:
The industry will become more customer-centric, creating new value for consumers. For example, there will be a new wave of innovation that is based around self-sovereignty, delivering greater privacy and control to consumers. Customers will have more control over their data and gain the ability to make their tokenized information open to different financial services providers, allowing them to shop for the best offers and services anonymously. This will increase competitive pressure for financial services providers, causing them to prioritize customer centricity to stay relevant.
The community bank playbook is also evolving with an eye toward customer centricity. Neobanks as well as established community financial institutions are launching brands that empower account holders to align their identity with their financial lives. For example, consider Daylight, the bank for the LGTBQIA+ community; Greenwood, the bank for African Americans; and FurSure, the bank for pet owners.
On the surface, it could appear that the industry is simply shifting from a geography-centered playbook (where the battle was won primarily based on the proximity of bank branches and the strength of community ties) to a model where identity alignment is the decision driver. However, the shift goes beyond that. New competing factors (aka value dimensions) are being added into the mix, fundamentally changing the rules of the game. The decomposition of financial technology into programmable building blocks, powered by APIs, is enabling this shift at an accelerating pace.
There will be a move from open banking to open finance. The same competitive pressures we have seen in community banking over the past several years are expanding into new areas, such as insurance and wealth management. Insurance policies for example, will become open, transferrable and more personalized, which will in turn drive down costs. This shift will empower customers with the tools to more easily find home and auto insurance policies that better fit their needs at a lower cost. However, such a trend also puts pressure on the insurance industry, reducing profit margins due to increased competition and a reduced cost of switching for customers. Businesses will need to determine how to remain competitive in response. Such a shift will benefit consumers as it reduces the friction in key financial journeys.
A changing interest rate environment will cause more banks to pursue sponsor banking strategies and prioritize small business banking innovation. While interest rates were low, many banks sought non interest rate income. Now that interest rates have increased, lending has become profitable again. However, in order to lend, banks need deposits. Next year, it’s going to become more difficult to gain deposits as banks compete by paying more for new deposits through higher interest rates to account holders. This makes sponsor banking a relevant and appealing strategy because it represents a way to effectively grow deposits without as many operational and fixed costs as physical branches.
As this trend continues, expect to see increased regulatory oversight focused on sponsor banking, making it more challenging for new entrants to stand up Banking as a Service offerings. However there is significant potential for those who succeed; a sponsor bank strategy will further accelerate the innovation of fintech products that offer more human-centered value propositions to consumers and businesses alike.
The interest rate environment will also drive innovation within small business banking, particularly focused on digital self-service. While this group has historically been overlooked by community financial institutions because they are more complex to serve yet aren’t much more profitable than an average consumer, small businesses are gaining attention now because they represent a strong way to grow deposits. However, instead of generalized banking solutions in a stand alone banking portal, expect to see verticalized solutions that embed commercial banking within enterprise software applications targeting specific niches.
There will be an unbundling of legacy core banking and investment technology. The future of core banking and investment technology will increasingly resemble a suite of composable building blocks that can be assembled to create fresh value propositions. As a result, many legacy products will be sunsetted in the coming years. While this may provide a short-term hassle for institutions, it will ultimately be positive for the industry as a whole as the trend eases integration burdens and unlocks wider innovation.
“As the industry adopts data standards and competitive pressures build, financial services companies will be challenged to think differently about how they deliver value and differentiate next year,” said Tim Hamilton, CEO and founder of Praxent. “There will be a heavy emphasis placed on achieving positive unit economics, leveraging technology to lower the cost to serve existing customers while optimizing the acquisition of new ones. However, this can only be accomplished by delivering a differentiated digital experience with the right strategic focus. Those financial services companies that embrace this challenge will be well positioned to prosper next year and beyond.”