The modernization of financial institutions has arrived—Fintechs, be ready 
By Eddie Oistacher 
Digital transformation has been a key theme for financial institutions (FIs) in recent years. According to Cornerstone’s What’s Going On In Banking 2023 report, 76 percent of banks have already embarked on a digital transformation strategy—with another 18 percent planning to develop such a strategy in 2023. This emphasis on modernization makes a lot of sense: Facing ever-increasing pressure from fintechs pioneering digital-native solutions, FIs must make proportionate investments to stay competitive.
In addition to providing competitive pressure, fintechs are in many cases FIs’ best friends on the road to modernization. Many fintechs are purpose-built to enable the modernization of FIs in key areas like lending, payments, regulatory and blockchain. With less than one in four FIs nearing completion of their digital transformation strategy, the size of the opportunity for these fintechs remains very large. This is good news for fintechs, who have seen their valuations plummet over the past year.
There’s even more positive news for fintechs in Cornerstone’s survey: 71 percent of responding FIs have begun leveraging APIs, and 59 percent have deployed cloud computing. Since so many fintech offerings leverage both, this opens the door for fintechs to establish strong partnerships with FIs on many key facets of their digital transformation strategies. 
According to a survey from The Financial Brand, the top four solutions on which FIs are looking to partner with third-party providers are digital account opening and onboarding (55 percent); digital lending systems for consumers (37 percent); targeted marketing solutions and analytics (31 percent); and digital lending systems for small businesses (30 percent). Let’s take a closer look at account opening and lending technology—two themes that represent outsized opportunities for fintechs.

Digital account opening and loan origination

In the early 2010s, as consumers began shifting away from in-person and phone interactions, a handful of fintechs burst onto the scene with streamlined, mobile-friendly and near-instant account creation experiences. At the time, most FIs were still offering multi-screen or paper-based onboarding experiences that took minutes, hours or even days to navigate. While FIs have made significant progress, the survey from The Financial Brand suggests that opportunity still exists. 
Regarding loan origination, the lending analog to account opening, the challenge for FIs isn’t limited to the user experience. Credit decisioning is a huge area of opportunity, with many lenders now leveraging technology to approve significantly more customers, and to get smarter about heading off delinquencies before they happen. Often, the machine-learning algorithms that power these modern underwriting methods incorporate a wide variety of data sources and train their models to get better over time as they learn from real repayment data. 
Another area of opportunity is fraud management. Fintechs like SentiLink and Unit21 are taking modern, machine-learning approaches to prevent fraud—which is a necessity as bad actors employ increasingly sophisticated techniques and technologies to take advantage of weaknesses in legacy systems. As time goes on, the cost of failing to implement modern fraud-prevention strategies only increases.

Lending technology

With lending taking the #2 and #4 spots in the survey from The Financial Brand, it’s clearly on the minds of FIs. And we can confirm this from our experience at Peach, where we have a firsthand window into the thought process of FI lenders. For example, we’ve witnessed the recent emphasis on updating loan origination technology, given how materially it affects lenders’ ability to acquire customers.
However, many of the FIs who have modernized their loan origination systems are still leveraging decades-old post-origination technologies — in particular, their loan management systems and their servicing and collections technologies. These legacy technologies almost invariably hinder lenders’ ability to stay competitive.
As important as investments in customer acquisition are, it makes intuitive sense that post-acquisition technologies also deserve attention — as they hold the keys to lasting customer satisfaction. But the importance of the loan management system in particular goes even further. The loan management system is the heartbeat of lending programs, determining what loan types are supported and how flexible lenders can be in adapting their lending programs to changing regulations, customer preferences and business needs. 
The loan management system also dictates whether and how easily lenders can offer modern and innovative lending programs. For example, it’s taken existing lenders many years to be able to add buy now, pay later (BNPL) capabilities into their lending portfolios to compete with more nimble fintechs.
Additionally, given the potential for a weakening economy — and thus, weakening credit quality — lenders with legacy servicing technology will be at a disadvantage if borrowers struggle to repay their loans. Lenders with modern servicing technology, on the other hand, will be able to offer borrowers intuitive and low-friction access to their accounts, provide flexible loan modification tools to meet borrowers halfway when they encounter financial challenges, and employ automated communications strategies to optimize collections effectiveness and minimize agent involvement. 
These capabilities can make a material difference to the financial performance of a lender’s portfolio, and the fintechs designed to power these capabilities for FIs will be positioned for strong growth in the coming years.

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