As the Los Angeles Times recently detailed, many small, community banks are riding the fintech wave by offering fintech upstarts that want to offer their customers banking services the ability to outsource core banking functions to them.
Some banks partner with fintechs directly, while others have relationships with companies like Cambr, which have created marketplaces that effectively broker relationships between fintechs like Square and more than 800 banks across the US.
“Airbnb, one would argue they are one of the largest hotel chains that doesn’t own a room. Our network works in a similar way.” Josh Siegel, the CEO of Cambr owner StoneCastle Partners LLC, explained. “We have an account at the bank, it’s the room we rent, and we can rent it out to whoever we want.”
In these direct and brokered partnerships, banks are providing the actual “banking” while their fintech partners are creating the banking customer experience. In other words, these banks are offering banking-as-a-service.
The opportunity to do so arises from the fact that while fintechs have disrupted every part of the financial services industry, banking licenses are not handed out like candy. Very few upstarts have demonstrated a desire to attempt to jump through the many hoops required to obtain their own banking licenses. Instead, they can more easily partner with established banks, which are responsible for legally and securely maintaining customer funds, while still retaining the ability to develop innovative banking experiences for their customers – the source of their value creation.
A different path to digital transformation
While the concept of digital transformation often evokes thoughts of sexy mobile apps and the like, the reality is that for some organizations, the best opportunities to take advantage of the digital opportunity won’t be consumer-facing. Instead, they will be behind-the-scenes in nature.
This is because not every business is well-positioned to create innovative new customer experiences at scale. To be sure, organizations must think carefully about developing new digital capabilities so they can better serve their customers and meet their expectations, but for small, community banks with small geographic footprints, lending their banking licenses to fintechs is arguably an ideal way to try to capitalize on the opportunities presented by the fintech revolution.
Of course, this approach isn’t without risk. Perhaps the biggest: at some point, their fintech partners could decide to obtain their own banking licenses. But given that very few of these banks would have been able to become fintech behemoths on their own, the gains from partnerships, even if they prove to be somewhat short-lived, almost certainly exceed what they would have been able to realize had they taken another path.
In short, small banks’ partnerships with fintechs demonstrate that there are multiple approaches to digital transformation. At its core, digital transformation doesn’t simply challenge companies to simply build slicker digital products. Instead, it challenges them to figure out how they can best use their assets (and develop new ones) in order to create value using digital technology.