Fintech July 1, 2021

Building a better digital banking experience

What is digital banking?

Digital banking is more than just banking online: it’s digitizing typical banking functions to take both user experiences and service options to the next level.

Traditional banks and non-banking financial institutions (NBFIs) act as the infrastructure, providing FDIC insurance, relationships, and so on. Fintechs act as the face: they manage these back-end providers and handle digital-forward aspects like UX, specialized services, and customer onboarding. The totality of these services is known as digital banking.

How has Fintech disrupted corporate banking? 

In today’s interconnected global landscape, personal control still reins. Apps give us the power to do business or shop with our fingertips — we expect that power to translate to the most mundane aspects of our daily operation. And that’s not just true of individual consumers, but commercial banking customers, too.

But the innovation and improvements to customer experience seen in retail banking or fintech apps have not translated to commercial banking and financial services.

As traditional corporate banks struggle with their digital transformation strategies, their solutions fall short of meeting their customers’ expectations for the experience of banking. These shortcomings impact small-to-medium enterprises (SMEs) particularly deeply. If these companies want to do international business, they’re forced to put up with outdated banking portals and manual reconciliation; traditional corporate banks just haven’t cracked the code on some processes.

And that’s where Fintechs come in.

Fintechs are disruptive. They elevate customer expectations for digital service and specialization, driving banks to innovate. But Fintechs are also capable of meeting needs banks aren’t meeting — which makes the two excellent partners.

Ultimately, as these Fintechs expand their services and build partnerships within the traditional banking sector, they can evolve their offerings and become true, full-featured digital banks.

That starts with disruptive innovation — building a new product offering or service model that transforms existing markets and value networks. Here are three ways Fintechs are elevating the corporate banking model by meeting needs which that very model has created.

#1: Fintechs cater to digital native businesses

That fingertip-level of control consumers and business leaders expect? That’s an effect of digital nativity. An increasing amount of the global workforce are digital natives, and they believe that payment processes should be top-speed — like everything else.

As these digital natives grow their businesses, Fintechs have stepped in. Fintechs understand the pain around traditional banking bureaucracy, and they align with company missions to create more efficient technologies.

In short, they’re designed to attract newer SMEs, often run by digital natives looking for seamless digital tools, filling a gap that traditional banks struggle to fill.

Meanwhile, corporate banks are discovering that they need to radically digitize and pivot their audience focus — or lose younger businesses with massive growth potential. Fintechs can be disruptive to corporate banks, but they can also be additive, and vice versa.

#2: Fintechs streamline accounts payable and receivable payments

Getting paid quickly and efficiently is huge for international businesses. How much time does the average company waste tracking income, making invoice payments, and keeping the books up to date? The older commercial banking structure makes it hard to accurately track and manage thousands of transactions moving around the world, even if you have one central portal to work from.

Modern digital banks present upgraded processes as a huge opportunity to boost ROI for clients.

They’ve evolved to give clients better all-in-one platforms that eliminate portal headaches and allow for automation. Businesses stand to regain a substantial amount of revenue and brainpower to use on bigger and better things.

#3: Fintechs have restructured lending processes

Getting venture capital and loans in the traditional way can be complex for small companies, SMEs, and certain startups who want to go to market quickly. Traditional banks rely on financial statements and can take between 1-3 months to facilitate a loan.

Now, there are numerous alternate providers who are reshaping how lending works through smarter data. Fintechs gather data from various sources to determine their client’s value quickly. With the ability to analyze sales on Shopify, Amazon, or Stripe, alternative lending companies use their own risk model that analyzes all revenue streams at once for a holistic view of the client. Smaller businesses have a better chance at funding and faster turnaround time from this new type of financial institution that understands where the system fails entrepreneurs.

And the above are just three ongoing possibilities.

With Fintechs actively improving processes traditional banks have let grow stale, it’s a perfect time for these companies to break into digital banking. Such a foray demands the same active effort as this process improvement. Let’s look deeper at why Fintechs should become digital banks.

Why should Fintechs become digital banks?

Does this story sound familiar?

You got Netflix several years ago for on-demand movies. Then you added Hulu for some TV. You recently added Disney+ (and you pretend it’s for the kids). Until last year, you had cable for the news and sports. But this year, you got rid of it because digital services are increasingly a complete replacement for cable: Hulu bundled with ESPN+ and Disney+, live news is ubiquitous, and cable is obsolete.

Here’s a secret: this narrative also applies to Fintech — and can be a parable to show you why you need to become a digital bank.

Why you need to become a digital bank

Fintechs are the Netflix of the financial world. They came about to offer a more accessible, affordable, specialized digital service: on-demand payments to avoid the headaches of banks. It was an unbundling of traditional banking.

And then customers began to need more individual options — investing with Acorns, lending with SoFi, prepaying with Chime — to fully replace banks.

In response, Fintechs are moving to become all-inclusive, capturing customers with a niche service and keeping them with a full suite of solutions within one platform. Fintech platforms are rebundling traditional banking.

With every upgrade, these Fintechs take one step closer to becoming a digital bank.

There are a few key lessons to take away from this, including that:

So, you know the reasons and understand the opportunity. What’s next?

You will need to determine features, customer requirements, and best practices. Let’s start with features.

What digital banking features should Fintechs offer?

Though the market is crowded, the demand is high. All signs point to now being a perfect time for growing Fintechs to move forward with digital banking. But it has to be done the right way.

An overarching strategy is key, but no matter your approach, you’ll need certain key features that are table-stakes now. So, what features do Fintechs have to offer in order to win business from traditional banks?

There are four that really stand out.

International capabilities

Global business is booming, but most banks can only offer limited international features. That’s particularly true in commercial banking.

For challenger banks, this presents an opportunity to outcompete. Partners can help, such as a cross-border transactions partner.

Streamlined regulatory compliance

You might not think of compliance as a feature, but it absolutely is for the businesses that make up your prospective client base. Compliance — and associated user trust — is a leg up that established banks have by default, so challengers need to get it right in order to have a right to play.

Many Fintechs and emerging digital banks aren’t proactive enough about regulatory compliance. Again, our best suggestion is a partnership: choose a quality Money Service Business (MSB), another Fintech, or a bank that can cover the regulatory side of things.

Specialized automation

Automation is another feature that seems like a no-brainer, but once again, it’s the details that matter. Automation that streamlines your operations will always be a great feature for your business, but automation that makes life easy for your target audience is a game-changer.

Corporate banking in particular is primed for innovation here. Again, Accounts Receivable is a great example. A modern AR process isn’t just a great feature to offer, it’s also ripe for automation.

Seamless customer experience

A great customer experience is a vital differentiator for digital banks. But many challenger solutions fall short of a truly seamless end-to-end experience.

That’s often because of parasitic partnerships. If a partner enables you to offer a certain feature, but does so on their own terms or in a way that degrades your customer experience, you’ll eventually lose customers. Your customers will go around you to find the experience they’re looking for.

At that point, you need to weigh the importance of a particular service against the benefits of a seamless end-to-end experience. Ideally, you’ll have the flexibility to offer the same service but with a unique experience optimized for your customers’ needs.

In other words, you don’t need to create all your own solutions, but you do need to own all your relationships and have full control over the experience you provide.

Control over experience is facilitated by a set of digital banking best practices; follow them, and you can gain and maintain that control as you evolve into a one-stop-shop digital bank. Don’t follow them, and that evolution will be hampered by issues like a lack of customer growth. So what are those best practices, exactly?

What are the digital banking best practices for Fintechs?

Growing Fintechs need to navigate evolving customer expectations, the uncertainty of a quickly changing global environment, an investor preference for mature opportunities, and rapid digitization in a traditional industry.

What do those challenges have in common? They all point to the same truth: Growing Fintechs shouldn’t reinvent the wheel. Instead, they must learn from the digital banking best practices of successful players in the digital banking space to craft a strategy suited to their unique goals.

That starts with simple principles, including committing to structured goals. Digital banking best practices build on those ideas and hone them to a more granular, tactical level.

Here are our five most effective digital banking best practices:

  1. Build trust by serving a specific market need.
  2. Get as much real-time customer data as possible.
  3. Have a detailed short- and long-term business plan.
  4. Don’t forget the back-end stuff.
  5. Find the right partners now and for the future.

The key here is you can’t cherry-pick among these digital banking best practices. They all feed into one another. They’re also all vital to business growth.

In fact, industry leaders agree that two of the top four things investors look for in new Fintechs are:

  • Whether you’re serving a clear, pressing market need and
  • Whether you’ve got the right partnerships that will set you up for long-term success.

1. Build trust by serving a specific need

Successful digital banks focus on a specific, solvable need that is currently unmet by the market — then build a foundation of trust by staying loyal to that original purpose and customer base.

2. Get real-time customer data

Essentially, digital banks saw how frustrated customers were that traditional banks didn’t listen to them and decided to flip the script. To compete, you need to do the same. To win and keep customers, listen to them.

3. Have a detailed business plan

It seems simple, but many Fintechs get so caught up in the excitement of a thrilling idea that they forget to take a step back and write down a detailed business plan. Goals are one of the core principles of building a digital bank.

All the successful digital banks we speak to started out with a business plan with one-, three- and five-year goals.

4. Don’t forget the back-end stuff

Most growing Fintechs are masterminds in UX or growth hacking. But that often means that behind-the-scenes details like compliance get forgotten or put off. A key digital banking best practice is investing time and resources into back-end logistics from the get-go.

The truth is, your UX is only as good as your back-end workings, including compliance mechanisms.

Digital banks already in the market have compliance down to a science, relying on their roots in the traditional banking sector. So learn from that perspective, and make compliance and logistics a priority — which usually means, again, finding the right partner.

5. Find the right partners now and for the future

Digital banks — and particularly Fintechs that become digital banks — don’t go it alone. They build partnerships that suit their business needs and that go beyond a one-way vendor relationship.

As we mentioned, you can’t control experience if you aren’t aware of the right partners and their limits, both today and as you scale.

If your current partner isn’t equipped for the volume of payments or loans that you’re hoping to move in six months or is working with manual processes bandaged together, you need to know that things will start to break once you cross a certain threshold.

You also need to anticipate what things will look like once growth happens, because it can happen virally: what does your business look like when you have one million users, up from 100,000 a month ago? What has to change to make that possible?

Most likely, the answer is your partnerships.

The bottom line here, and one that digital banks understand well, is that you’re only as good as your partners.

Ready to evolve?

Digital banking isn’t an easy industry to break into. But it’s one with endless opportunity for innovation right now, and with a few tried-and-true best practices up your sleeve, you’ll be several steps ahead of the game. If you think you’re ready to offer clients more, read on to find out how to begin evolving into a digital bank.

Person accessing digital bank while holding a card and a phone

How should you evolve your fintech platform into a digital bank?

We’ve broken it down into three very simple steps.

  1. Decide your goal
  2. Understand your end user
  3. Find partnerships

1. Decide your goal

Before you move forward, you need to determine the end state you’re working towards. You have two options:

  • Become a true, full-featured digital bank
  • Become a specialized Fintech utilizing supplemental banking services

The difference between these options is really the extent to which you want to enhance your current services versus reposition yourself as an all-in-one offering.

2. Understand your end user

If you decide to become a digital bank, you need to start by understanding your customer. The great thing about fintech customers is that they’re all different profiles (Unify customers are very different from Chime, for instance) so you have a lot of room to compete. Of course, your main priority in evolving your services should always be to provide the ones that will deliver the maximum value to your end customer.

3. Find partnerships

You have a list of what you need to offer. Don’t try to build it yourself: pretty much everything is already built.

Search for partnerships that enable you to embed features within your application and under your own brand, typically via an API.

Think back to the strategic value you considered in step one. You’re trying to establish yourself as the go-to financial destination for your customer, not just a Fintech with icing on top. Invest in partners who support that vision.

What next?

If you’ve truly begun the evolution from Fintech to digital bank, you’ll have already established your long-term goals. But don’t forget to consider risk and the nature of the market. Your strategy has to be future-proof.

How can Fintechs future-proof a digital banking strategy?

For traditional banks, a digital banking strategy is all about digital transformation: they have the banking services and relationships but are woefully behind in technology or even customer service.

For Fintechs, it’s a completely different ball game. Your digital banking strategy must focus on how you’ll win business from traditional banks because of your digital advantages; the area you need to enhance to make that possible is your range of banking services.

Long-term success with these digital banking strategies boils down to two key factors:

  1. Narrowing down the focus of your service
  2. Selecting partnerships that are beneficial from day one

Focus

Where most Fintechs fail in their quest to compete as a digital bank is in their focus or scope. If you start out with the goal to “do it all” and be the next challenger bank from scratch, chances are you’ll fail within six months or a year. You won’t have enough structure or enough differentiators to carve out a place between specialized Fintechs and established banks.

Consider these questions. Do you:

  • Have a mission statement?
  • Know your audience?
  • Tackle a particular pain or need that traditional banks are not addressing?

To learn more about how to dial into your niche and your audience, read our blog on future proofing here.

Partnerships

If focus is the internal factor that can make or break your digital banking strategy, partnerships are the external factor. We’ve said it before and we’ll say it again: partnerships must be a fundamental building block of your strategy, not an afterthought or a nice-to-have.

To future-proof, you should evaluate your partners thoroughly based on your needs today and on how they’ll be able to keep up as your scale. They should be ready for the future, but also ready to help your Fintech evolve into a digital bank starting now. (Remember our discussions of parasitic partners or short- vs. long-term partnerships above.)

As you consider partnerships, chat with us to get our thoughts on a particular provider or solution area.

We’re also happy to talk about some of the major trends today in digital banking. Because this market is rapidly developing, it’s critical to your Fintech’s evolution to keep an eye on the pulse of other challenger banks. Your business can learn from the go-to-market strategies of true digital banks — the all-in-one offerings.

So, what should you know about the trajectory of this space right now?

For obvious reasons, digitization became the primary focus for innovation across various industries and verticals during and after 2020.

The ascent of digital banking continued, more steeply. Such technology gave businesses that were looking to better service online customers — and their growing expectations — efficient payments solutions.

The ascent is not slowing or leveling off. The market will remain ripe with opportunity as businesses emerge and evolve to address customer expectations in online retail. The obtainable market is viable for many emerging digital native banks, with an emphasis on specialization and embedded products that may define the industry standard in the long term.

Embedded finance and banking: more than a trend

Digital banks win when they embed a product into their own ecosystem to better own the transaction lifecycle, from lending through to the actual payment. Instead of outsourcing, digital banks can lend money, facilitate payment, and collect loans on a centralized platform. This means a reduction in intermediary fees, not to mention reconciliation and collection headaches.

Partnerships between banks and financial service businesses will continue to enable emerging brands to access embedded banking and — as the service grows — embedded finance. The industry will expand beyond standalone financial service companies to cater to anyone who wants to use seamless integration to meet customer requirements and streamline costs.

Focus on SMEs in the US market

The first wave of challenger banks in the US was focused solely on the consumer. In the future, these banks will vary their audiences, especially in the US market. Digital natives are now the leaders of SMEs, and they’re demanding more from banking and from technology. They need speed, competitive agility, and better service. And they represent an enormous opportunity.

Specialization in consumer health and other markets

Specializations are an evergreen trend. As politics shift and regulations emerge or are updated, customer experience demands and required capabilities will also shift. Markets will open up alongside these changing needs, including the student, family, and consumer health markets — it’s anyone’s guess as to where the next opportunity will lie.

Speaking of emerging opportunities, we’re already living in the future of banking — a future where electronic payment processing and virtual accounts are both expectations and realities.

Why are virtual bank accounts key to your digital banking strategy?

Fast, painless electronic transactions are quickly becoming the norm in everyday life. Amid the pandemic, they became a necessity that caused an unabating wave of global demand for digital banking solutions, even from SMEs.

Digital banking and growing Fintechs are rising to meet this demand. But solving for every international challenge is not realistic.

That’s why virtual bank accounts are a lynchpin feature of digital banking. They allow Fintechs and challenger banks to compete with traditional banks by offering flexibility and accessibility in the ways they manage payment flows.

Only the right virtual accounts partner will have all three:

  • a single bank account with a unique log-in that they don’t have to open everywhere
  • the ability to send payments internationally with ease
  • reduced friction with in-app features

In particular, multi-currency virtual accounts are ideal for digital banks and fintechs looking to support SMBs and SMEs expanding internationally, such as Starling Bank, who used Currencycloud’s virtual account solution to provide fully tracked payment functionality to their clients no matter where their end users sent money.

That flexibility is a huge win. Multi-currency compatibility means virtual accounts can deal across currencies with little to no delay in adjusting account balances, and far less money lost to exchange fees or post-transaction currency reconciliation. Such losses are no longer sustainable in today’s rapidly changing business landscape.

There’s a lot more to share about how virtual accounts support your digital banking strategy, so fold them into your thinking for now and read on.

Even with virtual accounts as a key component, you still need to consider other important facets of your strategy, and begin to prioritize accordingly.

Why is electronic payment processing the future of digital banking? 

Long term, electronic payments have near-infinite applications and benefits — it’s impossible to see how they will factor into our lives and businesses at any given moment in the future. But there’s no doubt they will play a role.

The pandemic brought us an even more accelerated shift toward digital systems that are automated, convenient, and efficient. Electronic payments, unsurprisingly, reined. As time goes on, traditional business pains around payments will be pushed out: the manual backlog will disappear, and the cost of payments at scale will go down, too.

That’s not to mention the broader implications of a more digital, cashless society, such as environmental sustainability and financial inclusion.

It’s a vision that digital banking is poised to deliver, and it’s made possible by tools like electronic payments. Any digital bank would be remiss not to understand and prioritize them as part of its strategy.

To learn more about the future of digital banking and to discover how your Fintech can partner with Currencycloud and other tools, MSBs, and banks to provide the digital banking experience customers long for, reach out to start a conversation today. We’re ready to talk.

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