NAFCU Services Blog

Aug 24, 2023

Why Building a Fintech Blueprint is Mission Critical

Prepared by SRM - Prakash Natarajan - Director, Fintech Advisory Services and Jeff Ostheimer - Director, Payments Strategy

Most financial institutions will claim to have a “fintech strategy,” but their plans are often rudimentary at best. Those who went the extra mile to build plans with greater specificity were rewarded when the pandemic spurred a need to transition operations and customer engagement to digital channels. Much like disaster recovery planning, the payback only becomes apparent in hindsight.

The events of the past few years accelerated shifts in the financial landscape. Most changes are permanent, and many stem from regulatory and technological dynamics that extend well beyond the pandemic. In our latest report, we make the case that credit unions of all sizes need a fintech blueprint – a more-detailed plan than a basic strategy statement. We believe the environment has changed enough that even those with previously robust plans should revisit and refresh their approaches.

Open Banking, Open Playing Field

The development of open banking is the most fascinating factor to consider. This trend, facilitated by mainstreaming API connections that automate data calls into disparate systems, first gained traction in Europe, reflecting a regulatory nudge provided by the Payment Services Directive (PSD2).

The CFPB is spearheading a similar push in the US, invoking authority to require financial institutions to make certain data available to consumers. Part of the bureau’s stated goal is to encourage innovation and competition by simplifying the process of changing financial providers. In many cases, these alternative providers will not be traditional banks – think PayPal, CashApp, Intuit, and an array of aggressive, digital-first startups.

Member expectations continue to evolve in their demands for convenience – often influenced by experiences outside the banking sector – and in sensitivity to data permissions. Open banking is poised to play a role in addressing these matters, reshaping the industry amid regulatory action and API advancements. As such, the topic should be a part of every credit union’s fintech blueprint.

Keeping Pace in Real Time

An emerging trend playing out in parallel with open banking is real-time payments. The Clearing House, owned by a handful of the country’s largest banks, is already in the market with its RTP® solution. It was joined in late July by FedNow, the Federal Reserve’s own set of real-time payment rails.

The US Faster Payments Council has documented more than one hundred real-time payment use cases, and the EU experience points to demand in areas like tax collection, government disbursements, and consumer auto loan and utility payments.

What's a Smaller Credit Union to Do? Plenty!

The country’s largest financial institutions publicly tout annual tech spending measured in billions. Several are acquiring fast-growing fintech platforms, often those that serve targeted verticals like healthcare and business travel. Some large banks are developing in-house alternatives to Buy Now Pay Later (BNPL) models. Later this year, Early Warning Systems – a consortium owned by seven major banks – will launch Paze, an FI-centric entrant to the digital wallet space currently led by nonbanks like Apple and PayPal.

The price of admission to this competition may appear daunting for modestly sized credit unions. However, multiple fintech accelerator programs actively look to pair smaller financial institutions with promising companies hungry for go-to-market partners. And venture funds for credit unions offer an opportunity to participate in the upside of these startups at manageable investment levels. Early Warning also allows smaller institutions to join the Paze wallet initiative, mirroring the firm’s “big tent” approach to Zelle in the P2P payments space.

The fintech landscape is evolving so rapidly that credit unions must develop a detailed blueprint documenting how they plan to participate. We encourage interested parties to read SRM’s new report to get even more detail on the points illustrated above and a listing of critical factors to consider and address in your fintech blueprint build-out.

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