For the longest time, when a new banking technology or service offering gained steam and customers began seeking it out, banks reacted by building their own proprietary solutions in-house. Big banks could handle this approach because they had scale and deeper resources in their corner; meanwhile, community banks were challenged or slow to provide offerings because of a lack of scale and shallower resources.
Today, the gap between big banks and community banks in technology and service offerings has been diminished as banks of all sizes frequently partner with third-party vendors to provide a variety of solutions for their customers. Through this evolution, community banks are able to offer similar services as larger banks while still maintaining all the benefits of a community-banking experience, including small-town feel and valuable local insight.
So, how did we get there and what does it mean for customers?
A third-party API – application programming interface - is like an app on a phone. One business has made a phone and loaded it with a mobile operating system, or OS. This is the first-party business/provider. The first party’s OS can do many things natively, such as send or receive calls and texts, but it has the ability to do so much more.
The first party doesn’t have the time or ability to develop every conceivable capability (such as internet banking and enhancements), which is why third-party developers are allowed to develop and publish internet banking apps (pending approval on the app marketplace); and why first-party providers enjoy partnering with third-party providers.
Prearranged payments, deposits and corporate cash disbursements — the most requested services — have been positively impacted by banks venturing out to third-party providers. Customer preferences lean toward paperless, flexibility and the least amount of friction in a given transaction.
Cash management used to mean multi-user online banking and account reconciliation with repurchase agreements to invest and protect excess funds overnight. Now, cash management as well as treasury services/treasury management, is all about providing efficient and affordable ways to send and receive funds, as well as liquidity management. It has to be done in a secure environment, and in a way with which both parties are comfortable.
As banking customers become more comfortable with technology and its benefits, the expectations have changed.
Bill-payment systems are a minimum. Automated clearing house (ACH) origination and electronic processing are an expectation. You are not distancing yourself from the competition by offering these services; they are baseline services that people need and expect that you’ll be able to provide.
Cost-saving and time-saving options will garner additional loyalty to both the provider and processor, so banks are constantly on the lookout for options to provide a competitive advantage.
One of the bigger changes third-party vendor collaboration allows is open banking. Customers can now choose how and when they want to do banking; the limits of time and space are gone because customers have multi-channel delivery available to them: online, in-person, mobile and more.
Open banking provides customers the option to share financial data (spending habits, reoccurring payments, companies used, etc.) with budgeting apps or other banks. Open banking will act as a disruptor, threatening larger banks by increasing competition and forcing financial institutions to better assist customers with managing their finances rather than simply facilitating transactions.
Banks enjoy partnering with known providers of technology and payment processing rather than creating it themselves. Customers, in turn, feel confident in their bank using these known providers. It all leads to a higher-quality relationship between customer and bank.
Fintech companies have made ordinary financial transactions much easier and efficient, and it’s really benefitted small businesses. From P2P (person-to-person payments) and POP (point-of-purchase) systems to Venmo and Zelle, the increasing availability and efficacy of financial technology means I need to understand and explain to my customers how all these technologies work with our own banking systems.
By partnering with third-party vendors, banks can develop a broader customer base. Meanwhile, banking customers gain additional access to support and resources for these services. The challenge is ensuring banks are up-to-date with current technology and aligned with the right third-party providers to best cover customer needs, both now and in the future.