How fintech is transforming brick-and-mortar banking

The financial technology industry is the catalyst behind global digital transformations, not just with banks, or big business or Wall Street, but also with individual consumers.

Fintech is designed to make banking-related transactions faster and more efficient by improving performance, accessibility and profitability — while lowering costs by providing less expensive online offerings that provide customers more convenient ways to manage their finances.

The technology also allows legacy banks to revitalize their brands by appealing to a new generation of customers who prefer digital banking and related financial services. Those banks also can continue to serve those customers who would rather have face-to-face bank branch personnel interactions.

“The key bank challenge is to remain digitally relevant without going to excess. Banking is a hybrid market with a combination of in-house services and external high-tech support giving customers what they want,” said Troy Sanderson, president and CEO of Exchange Bank.

To achieve all this, banks are acquiring fintechs and obtaining outsourced financial technology software services for opening accounts, processing transactions, taking deposits, and streamlining the application and approval time for loans.

Acquisition activities continue to rise, such as FDIC-insured national bank Capital One Financial Corp.’s purchase of 15 fintech companies and its announced plans to acquire Discover Financial Services for $33.5 billion. Two years ago, Social Finance Inc. (SoFi bank) purchased Golden Pacific Bankcorp for a reported $750 million.

The San Francisco Bay Area is currently home to 370-plus fintech firms, including Chime, Upgrade and Varo. This region is also known for strong venture capital support of artificial intelligence innovators and high-tech startups critical to the future of electronic banking.

Fintechs are attracted to banks because of their large and loyal customer bases, thousands of ATMs, ready access to cash and broad geographical footprint.

While the average bank customer older than 35 maintains the same checking and savings accounts for 17 years, according to a Bankrate survey, those aged 17 to 34 only do so for 7.6 years. The goal for bankers is to broaden their customer base to attract and retain more young people and other new customers.

Remaining digitally relevant

“Exchange Bank is relationship driven and meets customers where and how they wish to be met,” said Sanderson of the Sonoma County financial institution. “Our 16 branches are welcoming places for human interactions combining strong personal connections with a robust internal technical component. This includes adding new online tools as they become available and relevant to our customers’ needs.”

He points to Apple Inc. with an extensive online presence while still seeing high foot traffic in its retail stores where consumers come looking for new cellphones and meet with company reps when they have operating issues and need technical support.

Sanderson said Exchange Bank will always have a community-focused presence that also serves small businesses. He referred to the bank’s handling $385 million in Paycheck Protection Program loans for businesses through the U.S. Department of the Treasury and the Small Business Administration related to COVID-19 losses.

“Technology continues to drive ease of use for consumers and efficiencies for banks. However, I believe successful community banks will not replace their deep community involvement. Exchange Bank customers will never see or hear computer-generated chat bots,” he said. “Our intent is to leverage technology to enhance customer experiences.”

He said the bank invests significantly in cutting-edge, secure and innovative digital banking products while maintaining the largest brick-and-mortar footprint in Sonoma County.

Competitors or collaborators?

As more banks view fintechs as helping them offer essential upgrades to their internal operating infrastructures, others see them as competitive threats.

“I see fintech’s more as potential partners than competitors,” said Tim Myers, CEO of Bank of Marin. “The big three in bank technology (FIS, Fiserv and Jack-Henry) have formed lasting technology partnerships with banks. Together, these firms account for 75% to 90% of this market’s valuation.”

Myers observed that bank–fintech relationships are becoming common in the consumer banking world, but not on the commercial side where Bank of Marin is positioned as a community business bank.

He said megabanks may not have the same desire to establish ties with fintechs, since they employ armies of software engineers and spend millions of dollars annually on technical infrastructure and app upgrades.

“Small banks typically do not have the budget to offer an array of competing online and mobile services,” Myers said. “Community banks have more incentive to collaborate. Banks have customers, while fintechs have a variety of new tools. We need each other going forward.”

Cellphone branches

“Today, more money is moving through cellphones. They are the new bank branches,” according to Rick Smith, CEO and president of Chico-based Tri Counties Bank. “Brick-and-mortar branches don’t work well as retail stores.”

A typical branch has several employees along with the cost of build-outs, leases, utilities, computers and other furnishings for employees.

Tri Counties closed a few of its 75 branches and supermarket locations because of low foot traffic, and realizes that gaining new accounts via mobile connections has become their No. 1 method for acquiring new customers.

To gain new accounts, Tri Counties is working with Texas-based Q2 to enhance client experiences through mobile, online and voice banking services to help improve marketing and sales efforts.

Fintech and bank advantages

With less overhead and zero storefronts, fintechs can offer savings accounts with higher interest rates (in some instances ranging from 4.35% to 5.25% average percentage yield) and lower fixed costs. Fintech appeal is also stronger for startups and entrepreneurs seeking funding without the usual requirements for credit scores, two-plus years of financial statements, revenue records and collateral assets.

Chime, for example, advertises fast two-minute online account setup, no opening deposit requirement, no maintenance fees and 24/7 digital banking. The fintech trend has led industry watchers to envision this model as a lower cost alternative to human account sales reps, while helping to avoid human error.

New banking services are not just based on artificial intelligence. They utilize cloud computing, big data analytics, robotic process automation and blockchain developments that are changing how financial services are conducted.

AI is already being used in traditional banking environments providing advanced voice recognition, natural language processing, account management through user imaging, and machine and deep-learning networks to thwart theft, detect fraud and identify anti-money laundering practices.

Despite what Sanderson has said about Exchange Bank, AI and its customers, other lending institutions using chatbot “advisers” are offering digital counsel for creating and managing automated investment portfolios, insurance, trading, banking services and risk-management operations based on mathematical rules and algorithms.

In 2023, the financial technology market was valued at $160.5 billion, expected to reach $501.9 billion by 2032, according to Custom Market Insights. Digipay.guru, a mobile wallet platform, says the worldwide market for fintech services will reach $792.50 billion within eight years. And Allied Market Research estimates that global demand for fintech as a service is expected to increase at a compounded annual growth rate of 18.5% through the year 2032.

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