Given the crucial role of fintech vendors in the ever-evolving commercial banking sector, it was an opportune moment to synthesize and build on our existing fintech coverage to offer a refined focus on some of the companies and dynamics shaping the broader commercial banking and payments landscape. The report builds upon our popular quarterly Fintech Spotlight report series, in addition to reports assessing various components of the fintech market and our frequent conversations with banks and vendors. 

What’s in the Report

No report can claim to cover the entire fintech market: Estimates suggest it includes over 26,000 companies distributed globally. This report offers a large but by no means comprehensive list of fintech vendors helping to shape the modern commercial banking sector. 

Shaping can mean many things. In this case, we mean companies pushing the envelope with innovative products, vendors impacting emerging or underserved markets, solutions emblematic or representative of broader trends, and services or solutions that integrate the cutting edge of technological advancement. 

We aren’t endorsing any of the companies included in the report, but we do think the companies are exciting and worth checking out. The majority of them report less than US$25 million in annual revenue and are typical of what is commonly thought of as a fintech. A select minority of the companies are larger to help illustrate phases of growth and maturation of fintech vendor solutions. The product offerings of the featured companies fall within numerous product categories, including payments, cash management, lending, core and digital banking, and data management and analytics.

In sum, our team hears about and looks at hundreds upon hundreds of vendors every year, which we distilled down to 350. For each company, we provide the following information:

• Company website
• Product category
• Go-to-market strategy
• Headquarter location 
• Product description
• A brief explanation of why we included the company 

Beyond the indexed and categorized list of 350 vendors, the report also provides market commentary on a few of the following topics:

• Drivers of adoption 
• Funding patterns 
• Implications of the Regional Banking Crisis 
•  Scandals 
• Fintech marketplaces 
• Pain points within specific product areas 

Why it Matters

The fintech marketplace in commercial banking continues to evolve rapidly. FIs and large legacy financial services vendors now more than ever need to understand opportunities available to them through partnering fintech vendors and recognize potential challenges that disintermediating fintech-based products and services pose. FIs seeking to understand the dynamics behind disintermediation will find the report and follow-up conversations with the teams’ analysts especially valuable. 

Recognizing new technological innovation, revenue opportunities, and shifts in how financial services meet or exceed customer needs can also guide FIs and larger vendors on new product development. In many regards, the fintech vendor marketplace within certain product areas shows us what sorts of solutions are growing in popularity, how expectations are changing, and where innovation is headed.

The current market is increasingly challenging for smaller fintech vendors to navigate due to higher interest rates, increased investor skepticism toward the technology sector, and growing competition. A foundational challenge many newer fintech vendors are experiencing right now is that FIs, larger vendors, and even businesses are deploying more stringent due diligence toward third-party vendors. 

A greater emphasis on due diligence translates to more failed onboarding and longer durations to reach revenue. Moreover,more startups are experiencing shorter cash runways and less interest from investors. This dynamic is at the core of why many fintech vendors are going out of business or merging with larger firms to stay afloat. This report provides critical insight into competitive intelligence, possibilities for differentiation, and an overview of what sorts of products and services are succeeding in a turbulent environment.

How Datos Insights’ Clients Can Leverage the Report 

The report provides readers with market commentary on some of the critical factors impacting the contemporary fintech marketplace, such as interest rates, funding, and drivers of innovation within cash management, core and digital banking, data management and analytics, lending, and payments. The index of 350 fintech vendors offers insight into companies that are shaping the broader market through product developmentand intervention within emerging and underserved markets.

Clients of Datos Insights can benefit from this report’s content in several of the following ways:

• Refine existing fintech research and partnership strategies 
• Recognize existing market indicators within various lines of business 
• Understand companies that are reimagining financial service products or developing cutting-edge solutions through new technologies 
• Learn about revenue opportunities, client needs, and new areas of product innovation 
• Access a range of companies ideal for potential partnerships 

Not everything can fit into a report. Hundreds of companies we looked at were not included. Only a fraction of the team’s collective knowledge on product areas, drivers of innovation, and data on end-user preferences could make it into this report. 

There is no “one size fits all” approach when it comes to refining a strategy for product development, fintech partnerships, or how to compete with rising expectations for best-in-class services. As a result, some of the best insights garnered from this report are likely to come from follow-up conversations with members of the Commercial Banking and Payments practice. 

For clients or prospective clients seeking to learn more about the report or schedule a follow-up advisory call for a deep dive on any subject related to the report’s findings, please reach out to me at bnestor@datos-insights.com.

The post Overview of 350 Fintech Vendors Shaping the Commercial Banking and Payments Landscape appeared first on Datos Insights.

Modernization efforts centered on payments and other financial processes are top priorities for FIs and businesses. Datos Insights survey data shows that 94% of businesses expect at least somewhat significant investment in payments technology in the next 24 to 36 months. Along with keeping up with rapidly evolving technological innovation and continued digitization of financial products and services, modernizing financial capabilities among businesses presents unique market opportunities for FIs.  

Most banks are expecting to invest in payments technology and other best-in-class financial services over the coming year. However, many FIs are experiencing significant hurdles when it comes to focusing on technology advancement, integration, and go-to-market strategies, simultaneously risking slow return on investment and underutilization from slow end-user adoption. In sum, modernization means that opportunities are abundant, but capturing market share and realizing ROI presents an ongoing challenge.     

With modernization as a key driver of new market opportunities, Datos Insights recognizes several key trends for the commercial banking and payments industry in 2024.

• Payment modernization fills critical needs for automation and real-time payments. Businesses increasingly demand a difficult-to-achieve payments scenario – simple processes with robust options and capabilities. Payments modernization for businesses translates to efficient procedures that maximize capabilities within accounts payable and accounts receivable, often through automation, along with faster payments. Banks have been slow to offer holistic product solutions and new capabilities with clearly defined value propositions, both of which are areas of focus for FIs going into 2024.     
• Industry-vertical payment trends provide market opportunity. There is a growing awareness within financial services that product deployments have varied use cases and unique value propositions between industry verticals. This is especially true of payments but also holds for other cash management and lending products. Fintech vendors have often led the way in devising industry-specific solutions. FIs have always catered to certain industries or had specialization with certain client types, but many banks are integrating or developing solutions geared toward specific industries, such as healthcare payments.    
• Generative AI is rolling out into live production at banks. Generative AI has suddenly become the hottest topic when it comes to the deployment of new technologies within financial services. Most banks have not yet integrated generative AI into processes or products, but this is likely to evolve rapidly throughout 2024. Integration will likely begin with embedded generative AI capabilities into existing third-party or in-house-developed platforms for routine back- and middle-office bank procedures. However, expect to also see the rollout of generative AI within specialized financial products throughout the year.    

Other areas like enterprise resource planning banking (ERP banking), foreign exchange processing, competition for small-business banking, and increased churn in commercial lending will also impact the financial services industry in 2024.  

To learn more about the key trends Datos Insights is watching in the commercial banking and payments market this year, read the full report or reach out to Erika Baumann, Director, Commercial Banking & Payments and Healthcare Payments at ebaumann@datos-insights.com.

The post Where Commercial Banking and Payments Is Headed in 2024 appeared first on Datos Insights.

Joined by Pat Alcox, Treasury Management Product Director at Huntington Bank, Rodney Nilson, Vice President Product Management at Bottomline, Booshan Rengachari, CEO of Finzly, and Kurt Shreiner, EVP and President of Corporate Financial Services Division at SouthState Bank, the panel considered the transition away from legacy payment types, bank and business perspectives on payments diversification, and whether choice always leads to good business practices.

Shifting Payment Trends

Few contemporary topics in commercial banking are as exciting as payments transformation. Commercial clients are beginning to rapidly diversify their payments processes, leading to a decreased reliance on legacy payment methods. For example, Datos Insights asked over 700 midsize and large businesses which payment tools they used in the previous 12 months. While in 2022, 65% of businesses had used mobile/digital payments, this increased to 73% in 2023. Meanwhile, paper check usage declined from 80% in 2022 to 67% in 2023, and ACH decreased from 70% to only 51%.

The data reflects that banks and businesses want to invest in payments technology. In fact, Datos Insights research shows that 94% of midsize and large businesses consider it somewhat or very significant to invest in improved payment technology in the next 24 to 26 months.

From a bank perspective, as one panelist noted, it is critical to consider which payment methods to invest in centered around client demands and identify existing relationships where integrating new payment methods can add value. Beyond value, clients also want simplicity and ease of use. Panelists from the banks and vendors could agree that more choices don’t always equate to simpler operations, especially if banks and their clients have difficulty with integration. Vendor partners, in particular, should be tasked with simplifying the integration of new payment tools and reducing payment complexities for business clients.

Pricing Complexities

The pace of transformation in payments is causing everyone to step back and assess their overall pricing strategies. Businesses are using more diverse payment methods, but some are not using emerging payment types because of the assumption that change equals unnecessary costs. Part of that assumption is based in reality since some financial institutions are overpricing to avoid losing wire and ACH fees.

Datos Insights research has shown that in 2022, the primary reasons businesses weren’t using RTP were concerns over manual processes and integrating RTP into existing workflows. In 2023, these reasons shifted to 30% of businesses voicing concern that RTP was too expensive, and 25% were concerned over too much manual processing. Clearly, many businesses want to invest in better payment technology and want the benefits of newer payment methods but are concerned about the price of both. Banking panelists agreed that it’s difficult to find the appropriate price for RTP but that working with larger clients has helped to guide that decision-making process.

Panelists from vendors suggested that overall value needs to be elaborated when it comes to pricing. If switching to new payment methods can show demonstrable value and reduce overall complexity, then businesses are willing to pay. This also includes pricing for value-added services more generally, which can require shifting mindset from viewing payments as a commodity to a value-add—especially in areas like customer experience and use of data, which can add new revenue opportunities and strengthen client relationships.

Final Thoughts

Businesses want more payment options and the benefits that stem from improved payments technology. However, concerns over price limit how many businesses are using some payment types, and banks are understandably concerned over which payment types to invest in, and whether there is a race to the bottom in pricing.

Every panelist agreed that payments need to be viewed beyond commodification and understood more broadly as a function of adding value for clients. Businesses want simpler payments along with greater choice, yet banks know that offering different payment tools requires tough investment choices and complicated integrations. Vendor partners can assist with payment modernization by simplifying integration to numerous payment types, which can accelerate a bank’s ability to bring new payment tools to market.

However, it is still the bank’s responsibility to position new payment tools toward solving practical business problems and to connect payments to wider value propositions, especially when priced alongside other value-added services that improve customer experience or make use of data connected to new payment types. For more information on payments strategies and technologies, reach out to Erika Baumann at ebaumann@datos-insights.com.

The post Unpacking the Payments Race at Datos Insights’ Commercial and Small Business Banking Forum 2023 appeared first on Datos Insights.

As we reach the anniversary of the largest government spending-package geared toward sustainability to date, it’s worth reflecting on where ESG in commercial banking currently stands and where it’s headed in the near term.  

The Inflation Reduction Act of 2022  

The Inflation Reduction Act of 2022 (IRA), enacted a year ago, contained new spending programs and tax adjustments aimed at lowering both inflation and the federal budget deficit. The legislation modified existing tax codes, impacted tax enforcement, adjusted prescription drug policies, and further built on existing COVID-19 relief efforts, among many other spending initiatives.

The IRA was also, according to the Department of Energy, the “single largest investment in climate and energy in American history.” Various estimates have placed the combined spend and tax incentivization of the sustainability-linked initiatives in the IRA between US$700 billion and over US$1 trillion through 2030.

Given the IRA’s clear focus on sustainable energy transition, the legislation might as well have been called the Emissions Reduction Act. Most of the total cost for the IRA’s sustainability-linked goals stems from tax credits with the obvious goal: Businesses and individuals will invest in renewable energy sources and make other sustainability-linked improvements if it makes financial sense.

It has only been one year since the passage of this landmark sustainability legislation, so assessing its overall effectiveness or contribution toward substantial reductions in emissions isn’t exactly fair.

When signed into law, the IRA immediately released US$370 billion in funding to provide tax credits for sustainable energy projects and private-sector investments. Within six months, the IRA reportedly created over 100,000 jobs linked to sustainable initiatives, especially within the wind, solar, and electric vehicle (EV) sector, and resulted in nearly US$100 billion in sustainable energy projects.

Targeted tax credits are geared toward the transportation and manufacturing sectors, with specific tax credits for electric trucks, charging infrastructure and equipment for fleet owners, zero-emission equipment at marine terminals, battery storage, and renewable energy sources at manufacturing sites. The IRA has also expanded the tax credit for “green” improvements to existing industrial buildings and new industrial development, including solar panel installation, HVAC improvements, and more. Finally, the IRA has expanded tax incentives for emission offsets such as carbon sequestration.  

Judging by job creation, implementation of new sustainability projects, and spurring what appears to be consistent growth in the “green” sector, the IRA has shown considerable signs of preliminary success.

What This Means for Businesses

Businesses in the U.S. were already making sustainable improvements a greater priority. The reasons for this are complicated, but at a high level, the causes for the shift toward sustainability come down to investor demand based on ESG risk assessments, consumers and activists pushing larger companies to take a more active approach toward social goals, and many businesses viewing ESG or sustainability as complementing existing marketing efforts and, in some cases, good for overall business.

Context matters as well. The EU has passed numerous regulatory frameworks advancing ESG and sustainable goals impacting U.S. businesses that directly or even indirectly work in European markets. The Securities and Exchange Commission (SEC) in the U.S. has proposed new regulations, and broader legislation geared toward ESG or sustainability goals is often debated in election cycles.

The outcome of proposed regulatory shifts is still unknown, but regardless, many U.S. businesses assume ESG and sustainability will grow in importance from a business and regulatory standpoint in the coming years.

While many businesses have shifted toward ESG and sustainable initiatives in theory, in practice the outcomes have been somewhat mixed. For many businesses, hurdles to making significant improvements include lack of clear direction, data, and knowledge on how to implement a clear ESG or sustainability strategy, especially when it comes to a company’s broader footprint and supply chain. In addition, the high financial cost of investing in things like solar panels or other significant improvements often means high-impact improvements never make it past the proposal stage.  

The IRA helps with some, but not all, problems for businesses seeking to make ESG and sustainability improvements. The legislation does not make clear what sorts of oncoming regulations businesses should begin preparing for, nor does it help businesses better understand or utilize ESG data, implement a clear ESG strategy, or understand which areas a business should prioritize for improvement.

However, the IRA is helping grow the “green” sector by pushing demand, and it enables businesses to better make a business case for investing in sustainability improvements through tax credits, widening availability of sustainable solutions, and incentivizing carbon capture.

Tax credits will mean more companies pursuing carbon capture and offsets as part of their broader emission reduction strategy, which will result in increased sustainability improvements within commercial and industrial real estate development as well as rehabilitation, manufacturing, and logistics.

Crucially, the financial incentives for sustainability within the IRA have helped or will soon help many businesses begin or expand their ESG roadmap. In order to help establish or broaden an ESG roadmap to go beyond utilizing tax credits, businesses may need a partner to help guide ESG and sustainability improvements, which often comes through an ESG consultancy provider. Financial institutions (Fis) have begun expanding their ESG scope, going from bank disclosure reporting to also including ESG products and services within commercial banking, often expanding and building upon early-stage ESG strategies.  

Commercial Banking and ESG

Datos Insights research has shown that roughly 60% of commercial end users are interested in utilizing ESG products and services through their FI. Banks already have experience navigating ESG within capital markets and wealth management, and many banks make annual disclosures on ESG performance to align with various non-governmental reporting standards.

Along with disclosures and reporting, some banks have made net-zero commitments and have accelerated their own ESG strategies, clearing the way for these institutions to make significant improvements over the coming years. Banks engaged in making significant steps toward sustainability and other ESG improvements have acquired experience and expertise, making them valuable partners for businesses seeking to do the same.

For most businesses, borrowing money is necessary to make significant sustainability improvements. Some FIs have begun offering “green loans” with favorable terms for businesses investing in things like renewable energy. Banks can also offer products and services that reduce paper usage within financial processes, such as digital payments and paperless invoicing, among many others.

Reducing paper consumption and adding solar panels is a great starting point for many businesses, but if a business wants to confront its broader supply chain footprint, then aligning with its FI becomes even more critical.

Banks have access to payments and other transaction data, producing what amounts to a broader map of a business’s entire ecosystem. Banks can offer products and services taking advantage of this type of data for reporting, assessments, benchmarking, compliance, and even as tools for promoting downstream influence, such as offering preferable payment rates to suppliers with improved ESG performance or integrated carbon offsets within business-to-business payments.

The IRA and Commercial Banking

The extent to which commercial banking divisions offer ESG products and services varies widely throughout the U.S. banking landscape. Put broadly, the entire market is relatively new and immature. A bank may offer a commercial card with carbon offsets for travel purchases but then fail to tout some of the environmental benefits of digital payments on its website.

Some banks already offer businesses help with ESG reporting but then have no plans to consider ESG supply chain analysis tools. Green lending is perhaps the most common ESG product within commercial banking, and even that is not ubiquitous throughout the industry.

Yet even with an immature market, demand for ESG products and services is growing across companies of differing geographies, revenue sizes, and industry verticals, and companies want their banks to help them achieve ESG-related goals. Especially if the SEC implements new regulations, many businesses and their banks are unprepared to meet new ESG challenges, primarily because of the challenges associated with making a strong business case for developing and onboarding new ESG solutions.

The IRA helps make the business case for banks to either newly enter or further develop ESG offerings within commercial products and services. The demand for ESG products and services already exists and is likely to grow. New regulations are likely to come in the near or midterm.

Even through continuous warning alarms of an oncoming recession, through interest rate hikes, and with a tech sector that has seen continuous shake-ups in the recent past, the “green” sector is growing quickly, in part due to the ever-growing reality of climate change, but also because of the sustainable initiatives in the IRA.

Final Thoughts

Banks are uniquely poised to become leading partners for businesses of all sizes seeking to meet regulatory shifts and accelerate ESG and sustainability-related goals. The IRA has presented an opportunity for banks to enter the ESG commercial banking market or mature existing ESG products and services.

FIs can begin by publicizing their existing ESG disclosure processes, year-over-year improvements, and make or highlight sustainability goals for 2025, 2030, and beyond.

Further entry into the ESG commercial banking market means educating clients on the sustainable benefits of existing initiatives, such as digital payments and paperless processes. ESG preparedness requires training relationship managers on how to have conversations about ESG with clients and integrating ESG into cross-sell opportunities. Especially as banks transition from market entrants to market leaders, they will need to develop or create fintech vendor partnerships to roll out specialized and impactful ESG products.

Some solutions to consider include a green lending program with vertical knowledge in solar, wind, and geothermal; green deposit accounts for businesses; commercial card programs with carbon offsets; access to reporting and disclosure services; cash management and supply chain ESG analysis tools; and integrated mechanisms for carbon offsets within payments.

As ESG grows in importance within commercial banking, investing now in varied solutions, training, and industry specialization avoids loss of market opportunity going forward and can provide banks with a competitive edge through problem solving for clients as they face new and unique challenges. For more information on ESG in commercial banking, see some of my recent reports or reach out to me at bnestor@datos-insights.com.  

The post The Inflation Reduction Act: What It Means for ESG in Commercial Banking One Year Later appeared first on Datos Insights.

If the business is satisfied with the onboarding process for new products and services, that client is likely to form a trusting relationship with the FI and will keep the door open to further sales opportunities. However, Aite-Novarica Group research shows that the majority of businesses are dissatisfied with the onboarding process. Only about a third would recommend their FI to a peer based on the onboarding experience.

Why Improve Onboarding?

The results are clear: If businesses retreat from onboarding new products and services, FI-business relationships are negatively impacted. And when those relationships are damaged, both immediate and future revenue streams decrease. Although bankers know their onboarding processes need improvement, only 28% of FIs are budgeting onboarding improvements as a significant priority.

Businesses increasingly expect quality onboarding experiences. In fact, fintech vendors have made some inroads with businesses by touting easier and faster onboarding for products and services. Improving the onboarding experience helps FIs retain existing customers, attract prospects, and open pathways for future revenue through cross-sell opportunities.

Meanwhile, failing to improve the onboarding experience risks losing current and future sales to other FIs and fintech vendors. In many cases, FIs already know they should improve onboarding, but for a variety of reasons they have difficulty making an internal business case for the budget needed to overhaul the experience. For FIs uncertain about how onboarding is impacting their business, they should discuss how satisfied current clients were when onboarding new products. More likely than not, the results will suggest it’s time to invest in onboarding.

Investing in Onboarding

The landscape to attract business clients is becoming more competitive than ever. The regional banking crisis has caused many businesses to seek a new FI, and the rising trend of fintech vendors disintermediating FIs for critical products and services continues to increase.

To retain a competitive edge, FIs need to prioritize making significant improvements to their onboarding experience. The decision to make critical changes to the onboarding process needs to come from bank leadership—ultimately, the process will require enterprise-wide modifications, in addition to clearly defined benchmarks and improvement ownership.

Resources and time are necessary to make the right process improvements. Waiting to make the necessary investments and further delaying the steps needed to overhaul onboarding will only set an FI back further relative to other banks.

Process Automation

Underlying the time and resources necessary to improve onboarding is the required integration of process automation to accelerate and improve the onboarding experience.

The ability to integrate with a business’s ERP system, automate workflows through digitization, provide a quality user interface for onboarding, and utilize fintech vendors specializing in bank onboarding processes are all critical inroads to overhauling onboarding processes quickly and smoothly.

These types of improvements reduce human error as well as cut back on time and input redundancies, resulting in increased client satisfaction. The goal is to have a digital ecosystem centered around the customer experience.

Revamping an entire treasury onboarding process is no easy feat, but it is no longer a nice-to-have option. An automated, digitized treasury onboarding experience improves customer relationships and your FI’s overall success. To learn more about how to emphasize the business case for a better treasury onboarding process, what other institutions are doing, and what you should be prioritizing, register now for my colleague Paul Kizirian’s upcoming webinar with FINBOA Strategic Advisor Dave Hunkele on June 13th at 1:30 PM ET.

The post Why You Need to Invest in Your Treasury Onboarding Process Now appeared first on Datos Insights.

Part three of my conversation with Stephanie and Gilles considers how startups can utilize analyst firms to solve some of their biggest challenges. Startups don’t need to be clients to get value out of analyst firms. Analyst firms provide research that a lot of insurers, banks, and potential vendor partners rely on for product development. In addition, through thousands of conversations with insurers, banks, and software vendors per year, analysts have a unique lens on what it takes to stand out in a competitive market. Here is what Stephanie and Gilles had to say about how a fintech or insuretech company can maximize its relationship with an analyst firm.

So, where do analyst firms fit in all this? How can startups work with analyst firms? 

• Stephanie Dalwin: Advisory firms won’t help startups talk to insurers. We don’t sell leads, we don’t make introductions, and we don’t market platforms on a vendor’s behalf. Our value is that we can help companies understand the insurance industry. We have hundreds of conversations a month with insurance companies, financial institutions, and software vendors. We always have a finger on the pulse of the industry, and we’re uniquely positioned to help a company tailor its messaging or understand which parts of its platform will or won’t resonate with insurers. Just as insuretech companies can help insurers be better, advisory firms can help insuretech startups be better. 
   
• Gilles Ubaghs: We can help fintech firms get visibility with banks and financial institutions. A big part of our job is helping our clients understand what’s going on out there and what vendors of all kinds are doing. Whenever I mention fintech research, some of the first questions that always crop up are what are you seeing and who should we be aware of. FIs want to know about technology trends and interesting new players; it’s the whole reason we started our Fintech Spotlight flagship series. The first step here for a fintech company is to give us briefings. We want to know what you’re up to, how it’s going, and what’s next. It doesn’t have to be formal, but we want to know who you are—so we can tell others about you. It doesn’t guarantee that we cover every fintech firm out there, as a big part of our job is cutting through the market noise, but not talking to analysts makes it harder for us to understand your business and lowers the chance that we mention you in research or to clients.

But isn’t working with analyst firms expensive?

• SD: Most analyst firms aren’t pay to play; we are objective, and we don’t rank vendors higher based on who pays us most. Instead, we provide advisory. Understandably, an advisory relationship is not financially possible for many early-stage companies. I personally don’t approach every conversation with startups expecting that they’ll become an advisory client. I’m more interested in keeping in touch with them and understanding what technology and business models they’re bringing to the industry. I’d also argue that startups can find a lot of value in keeping up with analyst firms. A frequent communication cadence helps startups stay on our radar for things like research and industry reports that insurers and established vendors will have eyes on.
• GU: Any decent analyst firm is not pay to play. If you come across implications from any firm that it will only write about you or feature you in its syndicated research if you pay, not only is that pretty professionally unethical, but it suggests that you are probably dealing with a pretty bad analyst firm with weak integrity. But do understand that does limit how open we can be in providing advice and guidance about the broader market back to you. All analyst firms also do bespoke research, which can vary from sponsored thought leadership to webinars to sponsoring events or doing internal research. The thing to understand, however, is that it still isn’t pay to play, as an analyst firm will retain editorial control. We won’t write falsehoods we disagree with or support messages we don’t believe. We also understand that a lot of fintech companies are still at an early stage and budgets are tight. That’s OK—we want to hear from you anyway. There are always benefits to nurturing these relationships, especially when so many fintech firms pivot, grow, and change over time.

What are some best practices for working with an analyst firm?

• SD: Startups are of growing interest to insurance companies, and it’s in both our and our clients’ best interest to know what’s happening in insuretech. With that in mind, I’m always willing to talk to new and emerging companies. Generally, it’s a good idea to keep up with analyst firms. I understand that startup resource bandwidth is often constrained, but even a quarterly or twice-yearly briefing can help keep companies on our radar for research and reports. Analyst firms can also provide some fantastic free coverage; it’s worthwhile to have an analyst relations contact on websites and LinkedIn pages. Our audience is largely institutional: insurers, financial services companies, etc. Participating in our reports has helped startups boost their signal and get on the radar of insurers.
   
• GU: The key thing is just to talk to us. If we reach out—respond. It doesn’t always have to be a big, formal presentation with 10 people on a call. Some of the best fintech conversations and briefings I’ve had have been off the cuff at events, sometimes even over a drink or two. It’s worth being responsive when you can, and even if you don’t want to answer all our questions (we understand commercial sensitivities) share with us what you can. I’d also advise any fintech company speaking to analysts to focus on your unique selling points. There are a lot of fintech firms out there, so what we want to understand is: What makes you stand out from the competition, and what problem do you solve? A constant question in the back of any analyst’s mind when writing pretty much anything is, “So what?” It’s easy to share data or facts, but the “so what,” that question of how is any of this relevant or interesting, is always what we really want. The more we can understand your “so what,” the more likely we are to feature you in research and mention you to clients.

What are best practices for working with an analyst firm as a client?

• SD: If you’re a client of an analyst firm, talk to the analysts frequently! We’re here to help, and we have a lot of knowledge that isn’t necessarily in our reports. When you sign up for research and advisory, you’re not simply signing up for a library of reports and data. Rather, this type of relationship is, well, a relationship. It provides face time with industry experts who can talk through questions and give feedback on solutions. It also provides a network of partners invested in a vendor’s success. Startup clients can think of analyst firms like a “phone a friend” lifeline for any questions or concerns they have.
   
• GU: Stephanie put it well—talk to us! The difference in being a client is we can go deep on the advisory services and really get more involved in helping you understand the nuances of what’s going on out there. The banking world and the fintech world are becoming closer, which is great, but there is still a pretty big cultural clash in many respects. We can help bridge that divide. Some fintech firms can become a bit too consumed by startup “techie” culture, and most bankers aren’t really thinking about the latest cutting-edge solutions day in and day out, so it pays to understand where both sides are at. But again, it doesn’t have to be formal. My favorite client questions are what I call shower thoughts. Random questions or musings—just a short poke to see if we have thoughts or any research on x, y, or z. It’s useful for us to know what your questions are as it help us guide the research, but most analysts also love to nerd out and get into it with clients. You just have to ask!

What Comes Next?

Advisory services can form an integral part of a tech startup’s go-to-market strategy. From providing assistance with market research and making critical introductions to insurers or banks to refining product development and honing marketing language, an advisory firm can offer crucial assistance to tech startups regardless of revenue size or product maturity. As clients, tech startups can access a team of experts, or they can initiate an advisory firm partnership through thought leadership, white papers, bespoke research, webinars, and a host of other services. 

While part three concludes this series of blogs, be sure to check out some of our recent research in these spaces to get a sense of trends and the current landscapes. Our latest Commercial Banking Fintech Spotlight highlights data and analytics startups bringing new capabilities to the space. Our recent report Insuretech for Insurers: A Guide to 300 Startups provides an overview of market dynamics and insuretech solution providers in North America.

As I mentioned above, our team has a wide breadth of experience working with fintech and insuretech startups. Feel free to reach out to Gilles at gubaghs@datos-insights.com or myself at bnestor@datos-insights.com for any questions about our work with commercial banking fintech companies. Stephanie can be reached at sdalwin@datos-insights.com if you’re interested in learning more about how we help insuretech startups. 

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Part two of my conversation with Stephanie and Gilles further assesses solutions for technology startups to consider when seeking partnerships with insurers and commercial bankers, including better understanding the problems insurers and commercial bankers are attempting to solve, recognizing the importance of use cases, and knowing best practices for approaching sales cycles at financial services institutions.   

Should we pay more attention to disintermediation or partnership in the near term?

Stephanie Dalwin: Partnership, for sure. Disintermediation, i.e., a completely agent-less buying experience, has become the focus of direct online insurance sales. Yet insurance can be confusing, and consumers want the option to get on the phone with an insurance agent when needed. Much startup coverage has also focused on insuretech as a competitive threat or disruptive force. The reality is that most startups are future partners. Insuretech companies can benefit from the vast knowledge of risk that insurers have, and insurers in turn have a lot of technical know-how to learn from startups. 

Gilles Ubaghs: It’s less of an either/or question than it used to be. Through partnerships, a lot of fintech firms are rapidly expanding their presence in commercial banking, and it’s just outright competition that’s increasing. It is getting harder to compare all legacy banks will all new, disintermediating fintech companies. What we see extensively in our survey data work on the Commercial Banking & Payments team is that businesses of all sizes are increasingly working with fintech firms to get the capabilities and functionality they want, which is nibbling away at existing bank/client relations. At the same time, businesses overwhelmingly prefer to go to their banks for these capabilities. Even now, many say they would switch back if their, or another, bank offered these capabilities. Ultimately, banks need to look at the end-user experience. 

What can financial institutions be doing to make the onboarding and procurement process more manageable for startups? How can they be “right-sizing” these processes?   

SD: Insurers are used to dealing with behemoth software vendors; traditional onboarding and procurement are lengthy by necessity. Yet a startup with 18 months of funding runway can’t withstand a multi-year sales cycle. In fact, sometimes the kindest thing an insurer can say is a quick and simple “no,” allowing startups to focus their extremely finite resources elsewhere.  
 
Evaluating insuretech companies by the same standards as larger software vendors will be cumbersome for startups and insurers alike. What’s more, traditional measurements of return on investment (ROI) don’t typically apply, and startups will have trouble proving ROI early on. Insurers can generally reduce risk by keeping startups off mission-critical processes at the onset of an engagement. Insurers can instead focus on how a startup may generate lift on a narrow use case or subset of the business and expand use of a platform through a phased rollout. 

GU: It’s starting to happen, but banks need to formalize and templatize their processes when it comes to fintech partnerships. We’re seeing a growing number of banks—close to two-thirds!—reporting that they either have or will soon have dedicated fintech partnership teams within their organization. Banks need effective, and as Stephanie rightly points out, speedy processes to identify, verify, onboard, and monitor fintech partners. One area that will help is the growing use of fintech marketplace ecosystems and app stores from most of the major core banking and digital banking vendors. 

What do startups need to keep in mind about sales cycles at financial services institutions?   

SD: For starters, they’re long. Many insurers are actively working to reduce the sales cycle time. But even so, startups need to prepare for certain inflexible realities in the onboarding process; chiefly, insurers will never give up a thorough security review, nor should they. Startups will also need to keep in mind that sales cycles will vary by size of insurer. Larger organizations may be more siloed; smaller and midsize companies may give access to business and IT leaders more easily. Startups should also be mindful of working with insurer innovation units. A good innovation unit will have a clear tie to business units and will be actively solving business problems, rather than exploring new technology for the sake of new technology.  

GU: Compliance, compliance, compliance. Most banks by this stage fully get the benefits that fintech firms bring, and even identifying suitable partners isn’t seen as that hard. Where problems and time lags come up pretty consistently is compliance and regulatory risk audits. It’s a Byzantine world, but fintech companies that really understand the regulatory requirements of banks and any potential hurdles have a huge advantage. This is a large reason commercial banking and payments fintech organizations are a bit less developed than those on the consumer side. It’s hard to get that compliance piece right. If they haven’t already, fintech firms should be hiring former bankers and people with that regulatory understanding to make sure they’re lined up ahead of time. 

How should startups be positioning their platforms for financial services institutions? What should they think about in their messaging?

SD: The trap I see most startups fall into is hyper-focusing on the technical aspects of their solution. Yes, the technology is important. But articulating insurance use cases matters more. I’ve seen many pitch decks begin with five slides describing a company’s advanced AI or cognitive computing when they should really open with how a solution addresses business pain points. Another cardinal sin is positioning a platform as one that can “do it all.” Insurer technical resources are often tied up in larger-scale transformation work and won’t have bandwidth to figure out how an all-you-can-eat platform fits their company’s needs. A solution that can be anything to anyone will likely have a difficult time landing in insurance.     

GU: Stephanie is totally right: The technology is critical, but most of the key decision-makers here won’t be that technically savvy. What they want to see is the use case and how it benefits what they do already. Aite-Novarica Group research shows that the most successful bank-fintech partnerships are those seen as complementary to existing bank product and service lines, rather than totally left-field new revenue streams. Focusing your messaging on how your solution can help banks do what they already do, but better, will be more effective than focusing on something they haven’t done.

What Comes Next?

It remains to be seen what 2023 has in store for fintech and insuretech startups, but this year will certainly present new challenges: potential economic crises, a challenging job market, and funding uncertainty, to name a few. Even so, the importance of startups remains clear: They bring vital new technologies and capabilities that are not always available in-house for financial institutions.

Our next blog post in this series will discuss how analyst firms can partner with technology startups to deepen market understanding, hone product messaging, and better align with current industry demand.

In the meantime, be sure to check out some of our recent research in these spaces to get a sense of trends and the current landscapes. Our latest Commercial Banking Fintech Spotlight highlights data and analytics startups bringing new capabilities to the space. Our recent report Insuretech for Insurers: A Guide to 300 Startups provides an overview of market dynamics and insuretech solution providers in North America.

As I mentioned above, our team has a wide breadth of experience working with fintech and insuretech startups. Feel free to reach out to Gilles at gubaghs@datos-insights.com or myself at bnestor@datos-insights.com for any questions about our work with commercial banking fintech companies. Stephanie can be reached at sdalwin@datos-insights.com if you’re interested in learning more about how we help startup insurance carriers and vendors. 

The post Tech Startups in Commercial Banking and Insurance, Part 2: Solutions and Partnerships appeared first on Datos Insights.

Aite-Novarica Group advisors Stephanie Dalwin and Gilles Ubaghs have no shortage of experience working with technology startups in their respective verticals. To get a better understanding, I asked them about market transformations in their areas of coverage. Part one of this three-part series considers some of the problems and challenges technology startups in commercial banking and insurance are experiencing and suggests various strategies they might consider employing to succeed in an increasingly difficult environment.

What specifically do we mean when talking about “fintechs” in your area of coverage?

Stephanie Dalwin: On my side of the fence, I’m referencing insuretech, i.e., any companies bringing new technologies or business models to the insurance industry. Some consider insuretech to be a subset of fintech, and there certainly is a lot of overlap in these two spaces. Yet insuretech is really a stand-alone coverage area, given the unique complexity and requirements of insurance.

I also want to note that, as my colleague Jeff Goldberg points out, “insuretech” is not synonymous with “disruption.” Many thought leaders position insuretech as antagonistic or disruptive to the industry. However, startups bring technical expertise that insurers might not have access to in house. Even startups entering the industry as competitors (e.g., startup carriers) may actually end up being partners or acquisition targets for established insurers.

Gilles Ubaghs: Ask even the biggest multi-billion-dollar financial services vendor if they’re a fintech firm and all of them will say absolutely. Yet when most banks or institutions talk about fintech organizations, they mean something quite specific that’s characterized more by a style than any specific size or company age.

Most of the market thinks of fintech companies as being young, innovative, and disruptive—digitally forward with an eye to improving (and often disintermediating) existing processes, capabilities, and status quo players. We actually don’t limit usage of the term “fintech” to just startups, as there are quite a few midsize, long-established vendors out there doing bleeding-edge work that has real potential to shake up commercial banking and financial services.

By its disruptive nature, the fintech category tends to preclude large incumbents in the market. I think a key aspect of what constitutes fintech is what are these alternatives to legacy processes and who are these providers. Fintech is like art—it’s hard to pin down one definition, but most people recognize it when they see it.

How have market dynamics changed for tech vendors over the past year?            

SD: Insuretech unfortunately has not been spared from economic uncertainty. We’ve seen a lot of layoffs. We saw a dip in investments at the end of 2022; it remains to be seen what 2023 has in store. Public exits have had disappointing results. The pressure to attract tech talent may ironically be alleviated by some of the tech layoffs; a large pool of talent is looking for a place to land, and it’s a ripe time to be part of innovation in insurance.

There have also been bright spots: We’ve seen a maturing market with larger startup players acquiring others. We’ve also seen greater involvement of insurers, whether through venture investing, participating in accelerators, or acquiring solutions of their own.

GU: The fintech market, like the broader tech market, is undoubtedly going through a rough patch. But many of these challenges are driven more by the supply side than the demand side. The market has been booming since the Great Recession and an ultra-low interest rate environment became the norm, and the past year has seemingly been bad headline after bad headline—from the crypto crash to Silicon Valley Bank (SVB) to large-scale layoffs at some of the biggest names in fintech.

While the funding environment is tight at the moment, the biggest shift now is more about attitude. Visionary tech gurus are out, and fiduciary due diligence is very much in, so we are seeing increased focus on good governance, revenue income, and the bottom line. The irony is that banks have never been so open to fintech partnerships. The frameworks are finally becoming more widespread, and the need for new capabilities hasn’t changed. Those fintech companies (and their partners) who can weather the storm will do very well longer term.

What are some common obstacles that startups face in breaking into financial services? 

SD: Simply put: Insurance is complicated. Startups entering the space face a uniquely difficult challenge. There are 55 regulatory jurisdictions, and legacy back-end systems and processes are pervasive. And, of course, insurance has a language of its own; anyone new to the industry has surely had to get up to speed on terms like “reinsurance” and “subrogation.”

The industry also poses a difficult cultural obstacle for new entrants. Insurance by its nature is the business of risk avoidance. Unfortunately, anything “new” may be seen as a risk, including startups and, more generally, innovation. Many insurers have embraced insuretech, but startups still need to prepare to demonstrate their understanding of the industry, the value of their solution, and their ability to weather a potentially lengthy onboarding process.

GU: Everything Stephanie says above is bang on when thinking about breaking into financial services. “Move fast and break things” just doesn’t work in such a heavily regulated environment, and with good reason (cough, FTX, cough). For fintech companies looking to partner with banks, compliance, security, regulatory oversight, data sharing, and privacy are all top of mind for financial institutions and not going away anytime soon. A lot of fintech firms are now full of ex-bankers who know the market well, which helps enormously—and fintech companies that can get in front of the dry technical and regulatory hurdles have a big advantage.

I’d also add integrating into legacy bank platforms and processes. This can be a real hurdle for a lot of financial institutions working with creaky infrastructure. For those going directly to end users, including the small and midsize business space, the biggest challenge aside from sheer visibility is very much the trust factor in gaining at least the appearance of being a stable and secure financial services partner. In a post-FTX and post-SVB world, that will likely become harder. I suspect we’ll see a lot more up-front discussion of partners, regulatory protections, and security consideration in marketing messages.

What challenges do startups face in boosting their industry presence and getting their marketing message in front of a wider audience?  

SD: Insurer CIOs and heads of business units are regularly flooded with sales messages. The big challenge is breaking through the noise without sounding “salesy” (in fairness, this is probably true in any industry). Industry tech conferences are a great way to get in front of insurers. Thought leadership can demonstrate a solution provider’s understanding of and value to the industry.

Another challenge is simply understanding the industry and its players. Many startups are industry outsiders (increasingly, more insurance veterans are founding startups, though gaining traction is a perennial issue). Accelerators and incubators are increasingly partnering with insurers to help guide startups and expose them to a wide swath of the industry. Insurers can also help startups navigate their own organizations via a dedicated innovation champion or team.

GU: The volume of noise in the fintech market is difficult to keep up with for specialists focusing on this space, let alone for decision-makers within financial institutions who have day-to-day operational issues to contend with. A critical starting point is just repetition and visibility: Attend the banking conferences, produce webinars, give interviews, and try to get forward in the trade press. Financial institutions in particular are increasingly keen to work with fintech firms, but no one wants to be first. If you want to gain financial institutions’ attention, tell them who else you are working with. Show people the use cases and the case studies whenever you can. Work with the core and digital banking providers to get involved in their fintech marketplaces. Paths to partnership are growing, and fintechs should pursue all of them. A lot of fintech organizations tend to be focused on the more glamorous tech side of the startup world, when they really need to focus more on the everyday banking world.

What Comes Next?

It remains to be seen what 2023 has in store for fintech and insuretech startups, but this year will certainly present new challenges: potential economic crises, a challenging job market, and funding uncertainty, to name a few. Even so, the importance of startups remains clear: They bring vital new technologies and capabilities that are not always available in-house for financial institutions. Our next blog post in this series will discuss ways in which startups can contend with the ever-changing market dynamics on the horizon while demonstrating value to banks and insurers.

In the meantime, be sure to check out some of our recent research in these spaces to get a sense of trends and the current landscapes. Our latest Commercial Banking Fintech Spotlight highlights data and analytics startups bringing new capabilities to the space. Our recent report Insuretech for Insurers: A Guide to 300 Startups provides an overview of market dynamics and insuretech solution providers in North America.

As I mentioned above, our team has a wide breadth of experience working with fintech and insuretech startups. Feel free to reach out to Gilles at gubaghs@datos-insights.com or myself at bnestor@datos-insights.com for any questions about our work with commercial banking fintech companies. Stephanie can be reached at sdalwin@datos-insights.com if you’re interested in learning more about how we help startup insurance carriers and vendors.

The post Tech Startups in Commercial Banking and Insurance, Part 1: Problems and Challenges appeared first on Datos Insights.

One discussed in a recent blog post is the increasingly complex relationship between financial institutions (FIs) and fintech vendors. FI-fintech competition, disintermediation, innovation, and partnership were threaded throughout the many subtopics discussed at our 2022 Innovation in Cash Management & Payments Forum (ICMP). Another horizontal trend of great interest at ICMP that also cuts across the top trends of 2023 is client-bank relationships.

Client-Bank Relationships

Sometimes called relationship banking, this strategy boils down to banks forming a client relationship—often through a business opening one or more depository accounts or through a business loan—then assessing that customer’s needs and pain points to cross-sell various products and services.

In the process, FIs obviously stand to profit, but that profit is dependent on increasing client satisfaction and loyalty, which most likely develops because the business has increased efficiencies and improved processes related to various facets of the company’s finances. Put simply, FIs care about cash management products because they can increase client satisfaction by offering better cash management products. Likewise, readers of our 2023 Top 10 Trends report want to learn more about embedded lending because clients (or prospective clients) want a better borrowing experience.

All of this should sound intuitive since offering products and services that help customers is inherent to how businesses grow. While in theory relationship banking should be simple, numerous hurdles translate to many potential failures in client-bank relationships, resulting in expected outcomes like clients taking their business to other FIs or bypassing banks entirely through the use of fintech products and services. One perfect example of a failure in client-bank relationships is the process of cross-selling new products and services.

Cross-selling products comes down to finding out what clients want or figuring out problems that clients have based on other products the client has utilized, such as a loan or online banking services. When clients’ wants or problems can be resolved by existing products and services, it should be simple enough to offer them these products and services, a process typically relegated to account management and sales teams. However, consider what happens when a disconnect exists between what clients want and their knowledge of what products are available to them.

Small Businesses and Payments Products

Payments modernization has been a key trend impacting commercial banking for several years, and Aite-Novarica Group considers both payments infrastructure transformations that enable real-time features and sustainability-linked payments products two key trends to watch in 2023. Payments products also were discussed at 2022 ICMP, especially the complexities of determining when certain payment types should be used, the accelerating rate of new payment types coupled with the persistence of legacy payment types, and how the market perceives use cases for payment types.

Modernization includes digitizing payments, embedded and real-time features, and a host of other products that can simplify business operations and better protect against fraud. New payment products can also impact transaction fees, an important consideration when small businesses choose their payments products and services.

For example, when Aite-Novarica Group asked small businesses whether they were interested in changing their back-end payment processes to be more digital and automated, about 75% were either interested or very interested. Fewer than 5% of respondents were not at all interested. Clearly, when it comes to client-bank relationships, banks should happily offer digital and automated products to their small business clients, which in turn would increase client satisfaction and loyalty to their FI.

However, when asked what has been the most effective at educating their businesses about different payment types and options, only 15%-20% of small businesses responded that it was their banker. Bank websites have proven somewhat effective in improving these numbers, since 25%-30% responded that their bank’s online banking site has helped educate them on payment options.

Avoiding Missed Opportunities

But that means roughly half of small businesses get their information on payment processes elsewhere. Over 20% of small businesses responded that they learned about payment types and options through self-help, self-directed research, or reading articles, with the remainder getting their information from industry conferences, webinars, family and friends, and other businesses—not from their FI.

Part of cross-selling within client-bank relationships relies on clients learning about new products and services available to them or on banks digging into a business’s cash management and payments processes to uncover pain points that could be resolved through FI-provided products and services. The latter is the most effective strategy since it enables problem-solving rather than just selling a list of products. Inevitably, business clients will learn about products and services elsewhere, but the primary source should be the client’s banker or material provided directly from their FI.

Most alarming for client-bank relationships are SMB owners who are unaware that their FIs should be the definitive source of information to learn about payments products and services available to them. This includes the respondents who conducted their own research to learn about payments products or relied on industry conferences, webinars, and other sources for information. It is these small businesses that are likely to switch FIs or bypass an FI altogether for various payments services since they don’t know what is available to them from their existing FI. They may be tempted to try external products or services discovered through an internet search or suggested by someone at another small business.

The result for banks? Missed opportunities, perhaps losing business to other banks or fintech startups. For clients? Unnecessary work and time spent researching payments products when the bank could have, in many situations, happily helped.

Improving Client-Bank Relationships

The above data points illustrate that FIs should pay greater attention to how they communicate product and service offerings to clients. Perhaps small businesses are given less attention than midsized or large organizations at some FIs, or the methods of communication are proving ineffective. As technical solutions grow more sophisticated, it is increasingly imperative that account managers and sales teams are provided with additional training not only on technical knowledge, but also on how to communicate technical jargon in a way clients can understand. Along with other improvements, banks should be able to better understand the current wants and predict the future needs of their business clients.

Client-bank relationships are behind many of the pressing issues transforming commercial banking and payments. Important components of this relationship include customer demand for real-time capabilities, pathways to sustainable financial products because clients need help improving their ESG ratings, ERP integration, embedded lending, accounts payable solutions, and the many other topics addressed in our Top Trends report.

These trends are critical because business clients, now more than ever, need FIs that understand their need for solutions and products that improve their workflows and ultimately improve their business processes.   

To learn more about our Top 10 Trends or to further discuss improving client-bank relationships, please reach out to me at bnestor@datos-insights.com.      

The post Don’t Forget the Basics: Client-Bank Relationships Critical to All Top 10 Trends appeared first on Datos Insights.

Corporate end users continue to seek automated, intuitive payments and cash management products and services. Both FIs and vendors are meeting this demand, and many corporate clients are willing to work with both.

As a result, the ecosystem of competition—as well as partnership—between FIs and fintech vendors continues to define the financial services landscape. FIs have gone from making quick adjustments to meet customers’ needs during a pandemic to adapting to fast-paced technological innovation in order to keep up with industry change.

However, FIs are more aware than ever of the resources and time necessary to deliver optimal products and services. Since avoiding technological innovation is not an option, FIs are carefully navigating a situation in which they must simultaneously balance the short-term needs of their clients with the long-term investments in innovations on the horizon.

With FIs balancing short-term solutions and long-term strategic initiatives to keep up with ever-evolving technological innovation, Aite-Novarica Group recognizes several key trends for the commercial banking and payments industry in 2023.

A few of these are:

• Payments infrastructure is enabling real-time everything. With immediate benefits such as paying just in time, improving operations, enhanced liquidity management, access to enriched data, and improving working capital, businesses are demanding real-time everything. Market-leading FIs across the globe have made inroads, but many FIs are encountering numerous pain points in enabling real-time payments. FIs should prepare for real-time now to avoid disintermediation from vendors and to prepare for ISO 20022 implementation.  
• Life-cycle banking is going beyond Banking-as-a-Service (BaaS) products. BaaS products are offered “as-a-Service” and require a banking license. When combined by effective corporate users, they can function as a type of embedded banking. Life-cycle banking transcends embedded functionality since it accounts for the life cycle of users’ day-in-the-life activities throughout the financial supply chain of a company. This transition will increase value propositions beyond single “as-a-Service” and embedded products.
• Embedded lending is likely to transform the small business (SMB) lending world. Using APIs to integrate over the firewall of their borrowers and directly into the accounting system for underwriting, embedded lending, for early adopters, has been shown to improve the borrower experience, streamline lender processes, and increase fraud protection. A divergence seems to be growing in the lending world between those who are seeking embedded capabilities and those who are not.
• M&A activity continues to rise due to a challenging economic and competitive landscape. In many cases, mergers and acquisitions (M&A) are allowing combined resources to invest in new products, digital capabilities, and automated processes. While ultimately resulting in fewer FIs, M&A activity will continue, resulting in fewer, but more robust, product and service offerings from FIs.

Other areas like sustainability in commercial banking products and services, improved onboarding experiences, and growing demand for accounts payable solutions will also impact the financial services industry in 2023.

To learn more about the key trends Aite-Novarica Group is watching in the commercial banking and payments market this year, read the full report Top 10 Trends in Commercial Banking & Payments, 2023: Moving Toward a Period of Growth and Connection or reach out to Director, Commercial Banking & Payments Erika Baumann at ebaumann@datos-insights.com. You can also watch the recording of our January 31st webinar where we explored each of these top trends in detail. Click here to access the recording.

The post Where Commercial Banking and Payments Is Headed in 2023 appeared first on Datos Insights.

Cutting across the many topics addressed was one major elephant in the room—the multifaceted relationship between financial institutions (FIs) and fintech vendors that has emerged as a result of APIs and open banking.

The Rise of Fintech Competition

First, a little background. The rise of fintech vendors is familiar to anyone covering the commercial banking sector. Our team frequently discusses the current fintech vendor landscape with clients and publishes a quarterly report assessing companies making an impact in the space. Four words seem to crop up time and time again when covering emerging vendors: competition, disintermediation, innovation, and partnership.

These terms reflect a very real situation in which fintech vendors have altered the commercial banking sector, offering FIs market competition. Past Aite-Novarica Group research shows that over 30% of businesses utilize a fintech vendor for at least one cash management or payment service, and nearly 30% rely on a vendor for two services.

Reasons for this range, but nearly 45% of businesses say it is because fintech vendors provide better or automated payment reconciliation, 42% because vendors provide more payment options, and 36% because it’s easier to submit a payment file to a fintech-vendor-provided service. Much of this reliance on vendors has stoked considerable anxiety for FIs that critical revenue-producing services and products are at risk of disintermediation through fintech vendors.

In many cases, fintech vendors are bringing market-responsive innovations to market—and they are doing so quickly. By focusing on one or a limited number of highly specialized solutions, fintech vendors are able to pinpoint customer experience, can design products around pain points in a given area, and can avoid issues that develop from working with legacy systems. Meanwhile, FIs have structural constraints that make this type of innovation extremely difficult. However, stringing together vendor-based solutions is, in many cases, an imperfect solution for businesses’ banking needs.

An Imperfect Solution

Fintech vendors are not without considerable market challenges of their own, though. These challenges have hindered growth for many companies and could lead toward a slowdown of fintech innovation in 2023. Vendors in this space have relied on a friendly investment environment to scale and provide go-to-market solutions quickly. Economic circumstances have led to less investment in newer startups and new budget considerations for existing companies, which will most likely result in fewer fintech vendors outcompeting FIs on the innovation front.

Slowing market growth isn’t the only challenge on the horizon. Earning trust with business clients in areas like cybersecurity and fraud protection is an easier proposition for FIs than for vendors. Businesses tend to want stability; it’s not unheard of for a business to show reluctance to utilize fintech vendor products and services—the vendor could go out of business or get acquired, both of which could lead to disruptions for the client.

Similarly, businesses fear dealing with a newly implemented system, which could require calls to vendors’ customer support for however many specific products a business has onboarded (rather than a single call to an FI). Fintech vendors can also have difficulty selling directly to businesses, especially when those businesses have a long-standing relationship with an FI.

Above all other problems fintech vendors face, the primary pain point is integration. Businesses are often reluctant to adopt numerous task-specific platforms without any centralized point that connects all of them. Utilizing different vendors for treasury, cash management, payment, and other solutions can create integration and interoperability issues; strain IT departments; and increase exposure to fraud, cybersecurity threats, and the other issues described above.   

While fintech vendors might excel in time to market and innovation, creating a more competitive marketplace, FIs excel in all the areas in which vendors tend to fall short. FIs have proven reliability, often have long-standing relationships with clients, and garner trust with their clients not only because FIs are here to stay, but more importantly, because they have a proven track record and higher stakes when it comes to fraud protection and cybersecurity threats.

FIs have connections throughout an organization’s financial chain of command for sales purposes, and they can provide an all-in-one shop for treasury, cash management, and payments products—with only one customer service number to call when a problem develops. FIs can provide ease of integration and the assurances of a trusted partner that many fintech vendors can only dream of offering.

The Elephant in the Room

Which brings us back to ICMP 2022. Most attendees at ICMP 2022 were from FIs, but no small minority were from fintech vendors. One of the highlights of the event was the vendor showcase to introduce new banking solutions. Across the various panel sessions—which included topics on payments, middle market customers, evolving financial technologies, APIs, and onboarding—the issue of FIs versus fintech vendors came up repeatedly. Given the recent nature of fintech vendor competition, this wasn’t a total surprise. What was unexpected, however, is how little competition and disintermediation were discussed.

Instead of competition, many of the panel’s speakers and attendee comments focused on best practices and strategies for FIs to make smart partnerships with fintech vendors. Rather than concerns over disintermediation and market share, speakers from FIs shared thoughts on due diligence with potential fintech partners and speakers from vendors talked about partnerships that enable vendor-based solutions to configure into an FI’s broader go-to-market strategy.

Increasingly, FIs recognize their own limitations in innovation, while fintech vendors understand their own limitations in scalability and market impact. As a result, both sides seem poised to increasingly seek value-additive partnerships. In a room filled with employees from both FIs and fintech vendors, the big question of the day seemed to be how both sides can get to know one another.

These types of conversations are a reminder of why in-person forums are often irreplaceable. But simply recognizing that FIs and vendors should be collaborating is where the truly hard work begins.

For vendors, this means learning how to make inroads with FIs; how to modify existing products to be offered through an FI; and how to market directly to specific banks based on asset size, client base, and overall market strategy. For FIs, this means adequate due diligence, understanding the details of implementation and interoperability for specific solutions, and making critical choices between vendor solutions.

Final Thoughts

With so many hot-button topics discussed at ICMP 2022, it’s perhaps a stretch to say that FI-fintech vendor relationships was the one with most resonance for the evolving commercial banking sector. It was certainly a topic raised throughout the day, perhaps because partnership is widely understood as a critical way forward.

As investors pull back on fintech vendors, which could result in fewer new startups and less innovation, and as FIs prepare for turbulent economic times through their own cutting of costs, now more than ever partnerships seem like a mutually beneficial way for FIs and fintech vendors to bring new services and products to clients.

To learn more about FI-fintech partnerships, or to further discuss details from ICMP 2022, please reach out to me at bnestor@datos-insights.com.

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At best, forgetting to account for practitioners’ POV within organizational practices can lead to stagnation in improving processes—at worst, guidance and analytics can miss the mark, resulting in missed business opportunities, misallocated resources, and dissatisfied employees.

Aite-Novarica Group takes the perspectives of practitioners seriously. Most of the advisors on our team have industry experience themselves, and all of them have frequent conversations with current practitioners to better understand the challenges and opportunities in niche areas of the financial ecosystem. Paul Kizirian, Strategic Advisor with the Commercial Banking & Payments practice, for example, built the first ethnographic consulting practice in financial services when he was with Wells Fargo, a process that was covered as a case study in this book.

He has brought that same attention to practitioners’ voices into his role at Aite-Novarica Group. In a recent series of reports, he makes a clear case for the importance of considering the daily ins and outs of practitioners in accounts payable (AP), accounts receivable (AR), and cash management. Key takeaways from each of these reports are highlighted below.

Accounts Payable

Financial institutions and vendors have developed numerous solutions to streamline or increase efficiencies in corporate treasury. However, as noted in Accounts Payable Solution Adoption: Determining Success or Failure, there is often a disconnect between treasury, AP, and the broad solutions offered by banks and vendors that directly impact the daily process of issuing payments.

In essence, solutions are developed, sold by banks or vendors to commercial clients, and sometimes receive interest from treasury. But when it comes to AP, they often hit a roadblock. This is frequently the case when neither the bank nor corporate treasury fully understand the needs and business requirements of AP.

When implementing new payment solutions for AP, there are six nonnegotiable factors to consider:

• Organizational structure
• Accounting procedures
• Working capital implications
• Vendor relationships
• Invoicing process
• Payment process

Each factor takes into consideration the daily processes of AP and, ultimately, the AP practitioner’s POV. Without the practitioner perspective, internal controls, accounting rules, and other critical aspects of the daily practice of making high quantities of payments within strict guidelines get lost in the language of automation, efficiency, and digital payment files.

New tools shouldn’t introduce additional risk for accounting, create payment disruptions, or cause any number of other problems. Banks and vendors should understand the importance of AP practitioners’ POV when it comes to proposing payment and other treasury solutions to commercial clients.

Accounts Receivable

A similar set of issues arises in AR, the department responsible for processing a company’s revenue. The report Accounts Receivable: Untangling Cross-Channel Complexity illustrates the daily operations and challenges of AR.

A major pain point for AR comes down to payment type. Each type creates a different workflow process, which can be compounded by B2B versus B2C payments, different lines of business, and different locations, all requiring daily reconciliation. Adding to the difficulty here is that many AR processes require manual effort.

Understanding the daily operations of AR can help banks and vendors develop better solutions for their commercial clients. As noted in the report, effective automation is key to increasing efficiencies and reducing workload in AR. There is no such thing as one-size-fits-all automation.

In this report, Paul provides a detailed checklist of things to consider when developing an AR solution. These include: whether bank reports provide sufficient detail/addenda, auto-matching capabilities, and digital wallet integration, among many other factors.

In general, adoption comes down to matching the many capabilities that, from a practitioners’ POV, help fulfill the complicated function of AR. When boiled down to the basics, this function includes collecting receipts quickly and posting to accounting systems accurately. Financial institutions and vendors, once they understand the daily pain points and guidelines of AR procedures, can increase revenue by targeting clients with specific solutions.  

Cash Management

The title of the person responsible for cash management within organizations varies: finance manager, controller, treasury manager—the list goes on. Regardless of its leader’s title, cash management often utilizes a treasury workstation (TWS), an enterprise resource planning module (ERP), or other cash management platform to aggregate account balances into a daily cash spreadsheet, which ultimately impacts liquidity.

Not only do accounts matter, but so does the value of anticipated transactions in order to provide an accurate picture of the company’s cash position. The perspective of daily operations and cash managers is covered in Daily Cash Management: How Cash Managers See Into the Future.

Much like with AP and AR, the person responsible for cash management experiences particular hurdles in day-to-day operations, both in terms of accurately gauging account balances and properly forecasting expected cash streams. Forecasting presents numerous challenges and is based on receiving timely and high-quality data from other departments, especially AP, AR, payroll, and reports from the company’s bank. Financial institutions and vendors can act as key partners to streamline these processes, but they must have a thorough understanding of the specific needs and pain points that go into daily cash management.

There are several methods to help prep financial institutions partner with cash managers, including proactive capabilities that produce better and more up-to-date information, solutions that strengthen internal communication and data sharing, and better-quality analytics tools. Solutions that don’t take into account the POV of cash managers will get scrapped, much to the detriment of facilitating a better relationship between cash management and partnering financial institutions.     

Building Better Relationships

There are ample opportunities in the commercial banking sector for state-of-the-art technologies that ramp up automation and improve efficiencies. Financial institutions and vendors can deepen their relationships with various departments across client organizations through strong partnerships and role-specific solution offerings.

However, all too often, new products are developed and pitched to clients without a full understanding of the practitioners for whom these solutions are intended to help. When the solution is no longer used, sales staff find it easier to tell themselves that someone wanted to stay in their old ways rather than figuring out why the solution did not work for the team it was intended to help.

To end this cycle, solutions need to consider the practitioner POV, which means understanding the rules, procedures, and demands of the full workflow of AP, AR, and cash managers. When banks and vendors gain a true understanding of the workflows involved in these parts of a business, they can develop true solutions that not only facilitate, but actually improve business processes. These are the types of solutions that provide a win-win in the world of commercial banking.

For more information on how practitioners’ perspectives can shape banking solutions, and to learn more about AP, AR, and cash management processes, please reach out to us at pkizirian@datos-insights.com or bnestor@datos-insights.com.   

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The pivot away from SMB clients to large enterprise customers is likely to impact tens of thousands of small business startups, and it is speculated to be the result of low earning margins from SMB customers. The move may be an outcome of the NASDAQ’s downturn, a tightening of venture capital, and warnings of an oncoming recession.  

Brex’s rapid entry and dramatic withdrawal from the SMB market is yet another example of the SMB credit market’s particularities over the past several years—or even since the 2008 recession. Trepidation, occasional turbulence, as well as considerable opportunity and growth characterize the SMB lending and credit markets. While Brex may not find short-term gains in continuing its relationship with small and medium-sized businesses, recent Aite-Novarica research demonstrates that financial institutions (FIs) are relatively aligned in seeking growth in the current SMB credit market.

Just as the trepidatious approach to SMB limited recovery from the 2008 recession and ensuring liquidity for SMBs was central to maintaining economic stability during the COVID-19 pandemic, the future of SMB lending could become even more critical as warnings of an oncoming recession grow more frequent. Now more than ever FIs should understand and prepare an SMB lending strategy for economic disruptions in the near and medium term.    

SMB Lending and the Last Recession

The landscape of SMBs and SMB credit markets was significantly altered due to the 2008 recession. A January 2020 report from the Consumer Financial Protection Bureau’s Office of Research (CFPB) outlines two major changes that were the result of 2008: First was a significant reduction in the number of small businesses, and second was a decrease in the number of smaller community banks that often served the SMB credit market.

Lending to small businesses declined so significantly during the recession that, as of 2017, small business lending still had not returned to pre-2008 levels, though with some variation based on locality and geographic region, as the CFPB report indicates.

Hampering economic recovery efforts after 2008 was a lack of new small businesses compounded by insufficient access to SMB loans. It was the COVID-19 pandemic that ultimately reversed trepidation toward the SMB credit market, though not without considerable turbulence.

COVID-19 and SMB Credit Markets

Like so many other things, COVID-19 severely transformed the economy for SMBs. Between lockdowns, transitions to remote work, making safe environments for workers and customers, and general economic uncertainty, among many other challenges, SMBs were forced to adapt to an entirely new business landscape.

While assistance was available through various government programs to help survive the initial crisis, such as the Paycheck Protection Program (PPP), COVID-19 continues to economically reverberate across SMBs through labor shortages, supply chain issues, inflation, and now a potential recession. PPP and other programs helped confront immediate liquidity shortages, but ultimately it was FIs that became critical partners to SMBs during the height of COVID-19.

These partnerships helped limit closures and unemployment, and they maintained a relatively well-functioning economy during a global pandemic. While the pandemic already had extremely negative outcomes, they could have been compounded by economic disaster. As Aite-Novarica Strategic Advisor David O’Connell notes, it was PPP and the aggressive focus of FIs toward SMB lending during COVID-19, with all the turbulence those processes entailed, that permanently reversed over a decade of FIs’ ambivalence toward SMB lending.

Current State of the SMB Credit Market

In O’Connell’s May 2022 report, The Go-Go State of the SMB Credit Market: Everyone’s Building a Bigger Boat, he provides an in-depth and up-to-date overview of the current state of the SMB lending world. Based on extensive interviews with bankers at FIs engaged in SMB lending, he finds that no FIs were considering reducing their position in SMB loans—instead, most sought to increase involvement in the market, with over half intending major growth. Automation of loans, which increased tremendously during the COVID-19 pandemic, is still a pain point in increasing loan volumes.

Most FIs expect greater automation in coming years, suggesting an updated and digitized infrastructure capable of handling greater volumes of SMB loans. However, these trends are not inevitable, and at the granular level, growth will be apparent in certain geographies and loan types while stagnation or reduction might characterize other parts of the SMB credit market. At a macro level, these trends could also reverse due to economic instability from another recession.

The Next Recession?

Another recession is not inevitable, and if there is a recession, its exact contours and impact on the SMB market will not be easy to predict. However, if the 2008 recession and the disruptions caused by COVID-19 offer any lessons for this market subsegment, it’s that a robust SMB lending program from FIs that ensures liquidity for SMBs to adapt to transforming economic conditions is essential to lessen and eventually reverse any impacts from a new recession.

FIs missed considerable opportunity to provide loans to SMBs during the economic recovery after 2008 until COVID-19 brought SMB lending to the forefront. Once FIs renewed SMB lending volumes, the banks, SMB owners and employees, and the general economy benefited. A severe tightening of SMB liquidity could worsen and prolong a future recession and could form another missed opportunity for FIs.

Instead of retreating, FIs should reevaluate at a granular level which subsections of the SMB market make the most sense for their lending programs, continue automation efforts, and pursue other modifications to their overall lending strategies. These actions would be especially helpful if another recession were to occur.    

To learn more about the current SMB lending market and how financial institutions can align lending strategies for a possible economic recession, please reach out to us at doconnell@datos-insights.com or bnestor@datos-insights.com.

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Aite-Novarica Group’s Commercial Banking & Payments (CB&P) practice is here to help banks help their small businesses meet some of these goals. By popular demand, the CB&P team is once again hosting its Small-Business UX Forum to help financial institutions and service providers with innovative practices to meet small businesses’ cash management, payment, and user experience (UX) demands.  

What the Forum Covers

The Small-Business UX Forum will be hosted virtually on Thursday, April 28. Sessions will be available on-demand for registered attendees after the event. This year’s Forum will focus on strategies for financial institutions to implement and position the payments and financial service technologies that SMB users demand.

When it comes to payments and financial services technology, end users have high expectations for UX, often driven by recent innovations emerging at big businesses. They are eager for financial services partners to help them automate processes, create market differentiation, and provide an accessible UX. These demands, combined with the consumer-like UX demands of SMB users, make this segment of business users unique.

Onboarding solutions to meet these demands is a known pain point for many financial institutions. Aite-Novarica Group research shows that over half of businesses believe that the onboarding process with their financial institutions is too repetitive, complex, and manual. Some financial institutions and vendors have made strides to improve this process, increasing client retention and cross-selling opportunities.

Another trend we will explore during the event is how the complex payments landscape is opening the door for non-bank providers to engage directly with small business clients. Approximately 7% of small businesses are already utilizing a fintech provider for payment services, and that number is growing. Understanding why this is happening and how to position small business solutions better in the market is key for financial institutions of all sizes. FIs must be able to distinguish between what is table stakes and what capabilities are still emerging to help prioritize solution initiatives.

Financial institutions of all sizes can access the same or similar technology as these solutions become more affordable and accessible, which helps maintain competitiveness across the industry. Still, it can be difficult to learn about all the new tech tools and understand the ins and outs of the complex technology marketplace aimed at SMBs. These difficulties can mean bankers don’t always have up-to-date solutions available or go-to-market ideas ready on short notice to assist small-business clients with customer experience, payments, lending, and other capabilities. Understanding key segments, like the increasing number of millennial-led businesses, is crucial for providing the right solutions to the right small business clients.

Why to Attend

The Small-Business UX Forum gained traction because it brings together experts from across the SMB space to share their knowledge. This year’s experts include Aite-Novarica Group Head of Banking & Payment Insights & Advisory Christine Barry, Director of Commercial Banking & Payments Erika Baumann, and Strategic Advisors David O’Connell and Gilles Ubaghs. We will also have over a dozen featured speakers from various banks and financial services providers.

These panelists will lead discussions on a wide range of critical topics, some described above, including fintech vendors, lending and onboarding, millennial-run small businesses, and other topics impacting small-business clients.

To register for the Small-Business User Experience Forum, visit our website here.

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The crisis about millennials has mostly faded, and with the exception of some Gen Zer mockery, most attention on millennials now has to do with home buying, career transitions during COVID-19, and millennials taking over prime-time advertising slots.

Lost in much of the waning hysteria over millennials, but highlighted in our recent report SMB Payments and Millennials: Millennials Expect More, is that many millennials now own and operate small and midsize businesses (SMBs), and the percentage of millennial-owned SMBs will only grow with time. While some generational arguments don’t stand up to scrutiny, what is clear from our recent data is that millennial business owners have clear preferences and higher expectations in their commercial banking practices.

Millennial-Operated SMBs and Banking

There is a stark contrast between commercial bank expectations among baby boomer- and Gen X-run SMBs and their millennial counterparts. Based on extensive surveying, millennial-run SMBs are far more likely to consider alternatives to traditional banks to run their finances, privilege online banking channels, and have higher levels of interest in payment modernization.

As an age cohort, millennials are surprisingly less confident regarding knowledge of payment and commercial banking, which, coupled with higher levels of digital fluency and having lived through accelerated technological change in banking practices during the COVID-19 pandemic, seems to have resulted in a greater degree of openness regarding new banking and payment tools.

Millennials grew up during a period of rapid digitization and technological innovation, so it is unsurprising that millennial business owners not only have high expectations with respect to banks, payments, and digital offerings, but also expect more help and guidance from their banking partners.

Opportunities

While millennials wanting more may harken back to some of that generational bashing, they don’t necessarily want more for less. In fact, a surprising observation from recent research is that millennial-run SMBs seek long-term, mutually beneficial relationships with financial services partners and are willing to pay more for banking services than other generations.

For example, millennial-owned businesses are already nearly twice as likely to situate within higher monthly payment categories than baby boomer-owned businesses and show very high levels of interest in updated electronic payment platforms.

Like any business owners, millennials view keeping costs low as a priority—however, they broadly view technology integration positively and understand payment modernization as a key investment in growing their businesses. Millennial SMB owners have high expectations for banking services, and these expectations offer a crucial opportunity for banks to provide value-added payment and other capabilities.

Inflation and SMBs

Millennial-run SMBs are significantly more open to working with a variety of banking and financial service providers that can better meet their needs, offer more capabilities, and provide a more personalized and contextually relevant level of service. While the last few years have proven a challenge for many SMBs, it looks like the next few months, if not longer, will see this trend continue as SMBs keep contending with disrupted supply chains and rising levels of inflation.

As SMB owners seek to navigate these challenges and better manage their liquidity and cash-flow, they will be open to working with partners that can help them in the near term. Be it fintech firms, neobanks or traditional SMB banking providers, there is an opportunity for financial institutions to develop and strengthen their relationships with millennial-run businesses.

Loyalty among SMBs is changing. More than just a commoditized banking relationship, millennial SMBs are looking for partners, and this has the potential to lead to growth or loss depending on banks’ willingness to meet these needs head on.

To learn more about how millennial business owners are interacting with financial institution partners, please reach out to us at gubaghs@datos-insights.com or bnestor@datos-insights.com.

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