Fintechs Are Taking A Bite Out Of Banks: What This Means For Businesses

Greg Cohen is the chief executive officer of Fortis, a leading integrated commerce platform.

The rise of financial technology organizations (fintechs) over the past half-decade has complicated and, in many cases, started to disintermediate the relationships consumers and businesses have with traditional banks.

For generations, businesses have used financial institutions for cash management, credit, capital and myriad banking services. Many even developed personal relationships with their bankers and often used that bank to not only manage deposits but recommend and deliver an array of financial services.

But even for businesses that continue to work with their banks, expectations have changed as fintechs have created new and enhanced experiences that are now demanded by clients.

As smaller businesses started using services like Square and Stripe for payment acceptance and consumers used Venmo or PayPal accounts to pay for services, customer expectations changed, and all payers and payees began to expect a hassle-free experience. From there, fintechs expanded into other segments of financial services traditionally owned by banks.

Consumers who use fintech services for digital payment, such as Venmo or Cash App, have online accounts that function like bank accounts. Businesses that deal with fintechs can now access a range of services including lending and credit solutions. Point of sale financing, better known as “buy now, pay later” (BNPL), is gaining momentum globally, opening up new ways to drive sales online and offline. Bill.com and others are automating accounts payable and receivable solutions, streamlining legacy invoicing processes.

All businesses are affected by the fintech revolution. That’s why it’s important to know what’s happening and have a strategy.

Fintech Business Service Expansions Squeeze Traditional Banks’ Revenue

Payment solutions providers started expanding into the business loan market with offerings such as Stripe or Square Capital. Other types of financial services such as corporate cards and even treasury services to businesses followed—all services banks used to exclusively handle for businesses.

At the same time, fintechs are changing payment expectations on the consumer side by offering new ways to pay. Firms such as Affirm and Klarna are offering BNPL financing, which is now a wildly popular payment method, especially with Gen Z and millennials, while Venmo and Square Cash have become popular deposit wallets.

Fintechs that offer these payment choices make commerce incredibly simple for both buyers and retailers, resetting consumer expectations and helping businesses drive more sales by removing friction from the purchase process. The pandemic increased the general comfort level with digital payments, and thus more people are using integrated commerce solutions.

This expansion is squeezing bank revenues and lessening their relevance in the marketplace. While some businesses may opt for a hybrid approach, using their bank to access some services and working with fintechs for others, there is no doubt that fintechs are disrupting long-standing banking relationships with their expanded portfolio of services.

Change Is Challenging For Traditional Banks

Banks recognize fintech as an existential threat. Large banks have profitable investment banking revenue that insulates them to some degree, but smaller banks have less of a cushion, so there’s greater urgency to adapt. Some large banks have responded to heightened competition by investing in fintech startups, partnering with infrastructure technology companies like Apple or even acquiring technology businesses to maintain share and relevance in key solutions or segments.

Most smaller banks don’t have the resources for that, but there are other options available. Partnering with technology companies to build out digital payment platforms can help them remain relevant. Building or buying a system for a new digital infrastructure of their own is also a viable option. There are more technologies available for the incumbent ecosystem, and in the coming years, banks will probably have to pursue one or a combination of these strategies to survive.

Doing so will entail overcoming formidable obstacles to change, such as the generally risk-averse banking culture and a regulatory environment that puts banks under greater scrutiny than their fintech competitors. It’s impossible to predict what the future holds for banks, but the consumer and business movement toward seamless, integrated digital commerce and banking seems unstoppable.

How Businesses Can Get Ready

While the demands of all clients are changing quickly, banks need a multi-pronged strategy for adopting new experiences and delivery models while also leveraging their core advantages—including their physical presence in the communities where businesses operate.

Especially at smaller banks, local bankers live and work in the same communities as the business customers they serve, which fintechs can’t match. Banks also have a lower cost of capital and direct access to banking networks, creating a naturally lower cost structure.

Lastly, banks are perceived as a safer partner due to their highly regulated nature, which offers some guarantees to businesses that work with them. It is incumbent on legacy financial institutions to leverage these advantages.

Simultaneously, banks can partner around innovative commerce technologies that offer opportunities for their business clients to drive sales through invisible, embedded commerce solutions. This approach allows a bank to expand its offerings while maintaining the core control over the customer relationship. The key will be providing business clients with a commerce and banking ecosystem that is digital, feature-rich and offers customers more choices.

In general, it’s important for business leaders to be aware of what is happening as banks and fintechs battle it out for a share of the business banking market. Competitive pressures on the banking and fintech side are yielding innovations that can help businesses increase sales and build brand loyalty. At the end of the day, that’s what business leaders should root for as banks and fintechs compete.

By Forbes | https://www.forbes.com/sites/forbesbusinesscouncil/2022/05/10/fintechs-are-taking-a-bite-out-of-banks-what-this-means-for-businesses/?sh=7bda436c3f6a