Will Banks use their superpowers to help customers achieve Financial Health?

Summary: Achieving and maintaining Financial Health is a difficult task for millions of Americans, and Banks are in an enviable position to help them get to a better place. The key is for Banks to provide a dashboard and tools to help customers gain overall visibility across all of their activities, and then provide actionable suggestions based on those insights. Fintechs have been focused on this area for some time, building on top of Banking-as-a-Service Providers and Data Aggregators. How will banks leverage the trends in these industries to to create their own differentiated offerings?

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As I stated last week, there are two areas where banks have an “unfair advantage”: Identity and Financial Health. I covered Identity in the previous post, and it is now time to discuss their superpowers in Financial Health.

How could Banks leverage and complement the rise of Embedded Finance?

I am a big proponent of embedded finance and the benefits that it can bring to techfins and consumers alike. For consumers, the opportunity to access the appropriate financial service when and where the need arises (e.g. a car loan as I am buying a car) is very attractive. For the companies, it is the opportunity to provide a profitable value-added service that will keep customers in their experience, and will help them better control the customer journey.?

The flip side is that it may leave consumers with a fragmented view of their finances - a car loan here, a savings account there, still another service somewhere else - without a central dashboard, and without tools to help them make smart financial decisions.?

Banks could provide the dashboard and the tools to help customers gain the overall visibility across activities that can be lacking from partial embedded finance offerings. This could make a big difference to consumers and help them become, and stay, financially healthy.

The problem that I see is that banks don’t seem to be focused on financial health, not even on helping customers manage well the activity they have directly within the bank itself. Yes, banks do offer tools (graphs that show you how much you spend per category, that tell you your outflow vs. inflow of funds…), but those tools are not front-and-center in their offering, and lack a path to action. For example, the bank may tell me that, on average, my inflows are larger than my outflows by $500, but it doesn’t help me figure out what I should do with those $500. How is the bank incentivizing me to save this money, or to use it to pay down some high-interest loan that I may have with them (would they even want me to do that)??

How can Banks take advantage of the Banking-as-a-Service and Data Aggregator Trends to create a compelling offering?

On the other hand, Fintechs do have a history of focusing on financial health. From inception, they needed to provide a differentiated offering, and friendly and accessible tools that would intuitively guide people to make the right decisions were sorely missing. Many of these Fintechs have developed their capabilities on 1) The rising industry of Banking-as-a-Service (BaaS), and on 2) Data aggregators such as Plaid and MX.? BaaS may be going through some headwinds, and data aggregation through some tailwinds. What does this mean to banks?

What is happening in BaaS??

The headwinds here are mostly coming from regulatory scrutiny on the banks behind the BaaS platforms.?

Cross River Bank, a household name in BaaS, with over 80 fintech partnerships, recently found itself in difficulties with the FDIC for engaging in unsafe or unsound banking practices, specifically around the Equal Credit Opportunity Act and the Truth-in-Lending Act. Before Cross River, MoneyLion and Blue Ridge Bank had brought compliance into the limelight. For Fintech firms, knowing whether a program could violate a law is table stakes for compliance.

Although working with BaaS providers and fintechs can be very profitable for banks, navigating the waters of compliance in bank-fintech partnerships requires disciplined ongoing compliance monitoring and risk management. This may well explain the results reported by Cornerstone Advisors’ 2022 and 2023 What’s Going On In Banking studies that show the number of banks involved or planning to get involved in BaaS declining year over year.

This development may give retail banks an advantage as they look to provide their own enhanced services to customers. If it becomes a bit harder for fintechs to find the right banking and platform providers, or if the requirements imposed on them by the banks become a bit tighter (and likely impact the customer experience and / or their profitability), the door may open for retail banks to play a much bigger role. Of course the main question still remains: Will they do it? Hopefully the ecosystem lands in a place with maximum competition among players that will benefit the end-customer.?

What about data aggregators?

In mid-May Plaid announced that they had migrated 100% of their traffic to APIs for several financial institutions, including Capital One, JPMorgan Chase, USAA and Wells Fargo. The announcement also mentioned signed agreements with other North American Financial institutions - such as RBC, Citibank and M&T - that would allow them to move in the same direction with those institutions in the coming months.?

For Plaid’s customers - Wise, Chime, Varo… - and their end-users, this means significantly fewer errors and issues (vis-a-vis the current screen-scraping methods) and much higher customer satisfaction. Plaid is a leader in this space, and these agreements will benefit countless fintechs.?

The banks are doing the right thing - allowing their customers to access and use their own data in the way that best fits their needs. Having said this, two questions linger in my mind in light of the Plaid’s announcement about how the :

Question #1: Will the banks use the APIs themselves to provide their customers with a holistic view of their financial lives? Will they put those tools front and center, along with clear recommendations to improve their customer’s financial outcomes? They know they need to do this (Fintechs will), but will they do so?

Question #2: Plaid competes with other aggregators such as MX and Akoya.

Akoya is co-owned by Fidelity, The Clearing House Payments Co. and 11 of its members (including big names such as JPMorgan Chase and Wells Fargo), and was created to facilitate sharing of financial information in a secure manner, while avoiding the need for direct integration with the banks. Akoya provides a single connection, whether it be for a financial institution or fintech, that gets you broad coverage on the other side of the network (it uses FDX APIs, just like Plaid).

It is meant to be the banks’ answer to the likes of Plaid and MX, with one major difference: Akoya does not hold data, and it does not know who the end-user is. It is pass-through. This is a big difference with other data aggregators (in fact, Akoya is not a data aggregator, although it achieves many of the same goals), and beneficial both to banks and their customers (bank customer data is not replicated in yet another database owned by another third party, with all the added risks this brings).

My understanding is that Plaid is implementing direct integrations with the banks as it moves to APIs, and away from screen scraping - this type of one-to-one integrations is exactly what the banks were trying to avoid with Akoya. Taking this into account: What are the banks’ plans with Akoya now? How will they continue to support it, develop it and promote it???Would Akoya be a better choice for banks to provide customers with visibility across their accounts (many more banks and credit unions would need to connect with it, beyond the 11 major banks that currently own it)?

Link to article in personal page: https://trishburgess.com/f/will-banks-use-their-superpowers-in-financial-health