Currencycloud Blog August 3, 2020

How (and why) to evolve your Fintech platform into a digital bank

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increasingly a complete replacement for cable: Hulu bundled with ESPN+ and Disney+, live news is ubiquitous, and cable is obsolete.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.

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:

Digital banks are becoming the norm

Momentum is picking up. This transition is more and more common as Fintechs recognize the enormous opportunity to keep customers and become a default money service.

For instance, you might have invested with Robinhood. A few years ago, any earnings you wanted to spend or move out of stocks would have to leave Robin Hood and go to a traditional bank. Now, they’re offering Cash Management — a fancy name for a brokerage account that comes with a debit card. Your money still goes to a bank in reality, but from your perspective, it’s all in Robinhood.

Customers expect more

A key trigger for all this is the evolution of customer expectations. Everything else on my phone is instant and user-friendly, so why isn’t banking? Why do I need to hop between platforms to get services? Fintechs are transparent with their pricing, so why aren’t banks?

This is particularly true with commercial banking. Personal banking has begun to digitize with Fintechs like Venmo, so business customers are understandably frustrated that their 9-5 experience is so different — the business world is lagging far behind.

The demand for these digital banking services is growing dramatically in the SMB, SME, and even enterprise realms.

Banks are taking a backseat

Traditional banks have begun to accept that they simply can’t compete with Fintechs for the truly digital, user-friendly experience they offer. With the rise of fintech banks, traditional banks have found their niche as sponsorship banks: the infrastructure that enables this system.

They provide the FDIC insurance, KYC, relationships and so on — the stuff that’s easy for them. The Fintechs take care of the stuff that’s hard for banks: digital services, customer onboarding, marketing. Rather than reinventing the wheel, these two groups are partnering together.

3 steps to transform into a digital bank

So you want to evolve from a Fintech to a digital bank. Now what?

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 merely enhance your current services versus reposition yourself as an all-in-one offering.

For instance, if you currently offer money transfer services in one region and want to add in FX for a more global reach, that’s simply a supplemental service. However, if you want to add FX and connections to checking and savings accounts, so that users can transfer money and then keep it within your ecosystem, that’s digital banking.

This distinction matters because becoming a digital bank requires much more strategic planning, not to mention more services. It also requires keeping things under your brand umbrella, not just connected to your platform.

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.

Dig into what your customers want that they don’t have, including features like a card or FX. Your main priority in evolving your services should always be the ones that will deliver the maximum value to your end customer.

Remember that you’re not becoming a traditional bank — you’re still a fintech at heart. You should be starting with the core service that made your Fintech stand out in the first place – after all, that’s what gets your customers in the door. The rest is just to keep them there rather than going to a different bank.

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.

When choosing partners, it’s important to think back to the strategic value you considered in step one. It might be tempting to find a partner that offers the quickest time to market as long as you send customers to their app instead of yours, but if you do that, you won’t be a digital bank. You’ll be a Fintech with some icing on top.

And you’ll also leave yourself at risk: what if that partner decides to enhance their own services and poach your customers? Your customers will already know their brand and services, so it wouldn’t be too hard.

Similarly, partner pricing shouldn’t come down to the bare minimum charge or even price per transaction. You need to consider the lifetime value to your customer, because what’s at stake is the big picture of becoming a true fintech bank.

You’re trying to establish yourself as the go-to financial destination for your customer. Invest in partners who support that vision.

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