Traditional card-acquiring independent sales organizations (ISOs) are evolving into independent software vendors (ISVs)—aka fintechs—by providing merchants with a single destination for payments and financial services. While this may alarm traditional financial institutions, which have historically viewed fintechs as industry competitors, it doesn’t have to. In fact, banks can benefit through the formation of partnerships with fintechs.
To learn more about the evolution of the fintech market and how fintechs and banks alike can come out on top by forming partnerships, PaymentsJournal sat down with Cliff Thompson, VP of Business Development at Avidia Bank and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.
What services do fintechs provide?
To understand the value a bank-fintech partnership can offer, one must first understand what types of services fintechs deliver. The terminology used to describe fintechs is vague, and many tech-savvy organizations are eager to label themselves as one. Further, the lines between an ISO and ISV (or fintech) are blurred.
The following matrix, cited in a review published by the Journal of Financial Intermediation, delves into the range of services that fintechs offer:
As shown in the matrix, there are a range of services offered by fintechs. In general, “fintechs are all about APIs and making financial services available so other companies can consume them, use them, and make them available to their own customers,” explained Sloane.
Partnerships between fintechs and banks are mutually beneficial
While historically competitive with one another, fintechs and banks can work together in a way that benefits both parties. For banks, “composing a solution using fintech business partners is a unique opportunity that’s expanding in the market, increasing the depth of friction and connectivity a company has to its customers and providing new revenue opportunities,” added Sloane.
Traditional banks can offer API access and a bundle of payment and financial services to fintech organizations making market moves. “Banking as a Service (BaaS) is paramount to fintech efforts, and that is sourced at the sponsor bank level,” said Thompson.
On the flip side, partnering with banks to gain access to financial service APIs and payments capabilities allows fintechs to amplify their offerings to their downstream merchant clientele.
The wider breadth of services that fintechs are beginning to offer enable them to become a one-stop shop, immediately benefiting their customers through convenience. Banks can also help fintechs navigate the highly regulated nature of financial services, which makes it necessary for fintechs to tread carefully when expanding their footprint into the financial industry.
Market demands drive fintech innovation
ISOs are growing and diversifying their revenue streams by leveraging existing merchant platforms to provide additional software services. E-bills, direct biller options, shopping cart gateways, and traditional online mobile banking services are just a few of the many ways that ISOs are doing so.
Market shift is driven by the need to meet the expectations of today’s on-demand society. Accordingly, ISOs and ISVs are heavily focused on offering a broader menu of capabilities to remain competitive. “Independent software vendors are all about understanding the market that they’re supporting and distributing software that is right on target for that market segment,” said Sloane.
Companies’ in-depth knowledge of a particular segment allows them to layer financial services on top of their existing solutions, providing better overall business processes and resources to customers. One such example is Zillow, which has begun offering home loans and closing services through its real estate database.
Now is the time for banks to break tradition and partner with fintechs
According to a survey conducted by the Double Diamond Group, there are at least 10,000 companies in the U.S. that are either ISOs or fintechs. These businesses currently represent approximately $1.6 trillion in domestic payment volume, which is noteworthy in itself. Beyond that, growth is anticipated to continue in upcoming years; the compound annual growth rate (CAGR) of payment volume effectuated by ISVs is expected to soon exceed 80%.
“This is certainly a favorable trend that is beneficial to banks willing to break their traditional role by becoming an integrated channel partner of ISVs,” noted Thompson. While the number of banks willing to support ISVs is limited today, additional fintech-friendly banks are likely to emerge as demand increases at the fintech market level.
What should fintechs look for in a bank partner?
In general, fintechs are trying to meet certain market benchmarks at rapid rates and need to have the ability to pivot quickly. Yet traditional banks have been notoriously slow to act or react. For that reason, it is crucial that fintechs prioritize partnering with banks that can support expansion efforts in a timely fashion.
Flexibility is also key. Whether it is offering compatible APIs, delivering payment facilities, or working through how a fintech’s program will meet market demand, it is important for banks to have the willingness to bob and weave with their efforts according to their fintech partner’s needs. Ultimately, fintechs can benefit the greatest by choosing a bank partner that offers consistent, ongoing support and nurtures the relationship for the long haul.
Banks and fintechs don’t always have to be head-to-head. Rather, there are many opportunities for fintechs and banks to form mutually advantageous partnerships. Fintechs can leverage bank partnerships to drive forward innovation and add value to their customers, while banks can benefit by offering APIs and regulation-compliant financial services to fintechs. Choosing the right bank partner depends on the particular needs of a fintech, but speed, flexibility, and consistency should be top-of-mind considerations.