By Russell Bennett, Chief Technology Officer, Fraedom
The US financial services market is not only large in scale, it also encompasses organisations of many different sizes, at different stages of maturity and technological functionality. At one end of the scale are some of the most technologically advanced commercial banks in the world, keenly engaging with the latest technologies from virtual payments to distributed ledgers. At the other are the most traditional, old-fashioned institutions that have yet to even start their journey to digital transformation.
There is clearly great diversity at play here. The US financial services market is so large, it inevitably incorporates a wide range of organisations – all quite distinct in their approach to business. There is also an innate conservatism at play in some parts of the US, where we can see an inertia around change which often translates into an unwillingness to consider embracing new technologies.
For fintechs this market diversity is clearly good news. On one hand, it is a market focused on driving innovation, keen to engage with the best that fintechs can offer; while on the other, it offers fintechs the chance to get on board with banks that are either part way along the road to technological enhancement or have just started out. In both cases, it gives them the opportunity to provide guidance on a journey which ultimately results in the uptake of new technologies including the latest apps, cross-border digital currencies and virtual card payments.
Regional Banks – A Disruptive Influence
For fintechs, one such opportunity is presented by the prevalence of regional and super-regional banks across the country – another important example of diversity in the marketplace.
Traditional national and multinational banks have historically been able to dominate the marketplace and stay ahead of challenger or regional banks thanks to their broader commercial banking and treasury-based operations. Today, though, the opposition Tier 1 banks face is becoming ever stronger.
There are numerous regional banks throughout the US, many of which aspire to grow into super-regionals, cutting into the established banks’ power base in the process. In striving to achieve their increasingly ambitious goals, many challengers have focused on driving the growth of their commercial cards business, a process that over time has also involved integrating their cards operations with their core treasury businesses.
It’s an integration not just of function and structure but also of the approaches banks use to market and sell their products. Regional banks have incorporated card products into their treasury portfolio and in many cases these cards have quickly become their fastest-growing and most profitable lines. They use them as an entry point to effectively ‘land and expand’ within target organisations. It’s a profitable move for many such banks but to make it work is challenging. Increasingly, they are partnering with fintech providers and leveraging technology to turn their vision into reality.
Capitalising on the Opportunity
The ambition of the regional and super-regional banks to challenge their larger rivals, therefore presents great opportunities for fintechs to step in and provide the systems and consultancy these banks need to develop more effective commercial card programmes.
That is just one area where they can play a role but regional banks are relatively well advanced in technology compared to the much smaller local banks that work with limited technology and have not yet addressed many of the opportunities that new systems and solutions can potentially bring. That represents just as important an opportunity for the fintechs to introduce these banks to technology that will benefit them as organisations.
For fintechs, the time is clearly right to start embracing the range of opportunity that the diversity of the US market provides as this variety may erode over time as market consolidation gathers pace.
According to worldwide management consulting firm, McKinsey: “From 2000 to 2014, there was a 28 per cent decrease in the number of small banks, while the number of large banks rose 33 per cent. The rise in the number of mergers for small banks indicates that despite a relatively stable economy banks are still turning to inorganic growth to gain scale and operate more efficiently and competitively. This trend is expected to accelerate over the next five years, especially among small to mid-tier players.”
So, with the diversity of the US market likely to be eroded over time and the current challenger status of the regional and super-regional banks unlikely to endure for ever, now is the time for fintechs to step in and partner with US banks as they evolve their technological approach. It is after all an opportunity that may not last forever.