FSI Member Spotlight, Episode #8: Open Banking and the Rise of Challenger Banks

In this episode of FSI Member Spotlights, Praxent Senior Director of Innovation, Lance Vaughn, has an enlightening conversation with Finovate Senior Research Analyst, Julie Muhn. Julie has been with the premier fintech and financial services conference series since 2011. Serving as the voice of Innovate, Julie has her ear to the ground when it comes to relaying industry trends and forecasting the future in banking and technology.

Julie and Lance jump right into embedded payments, an emergent trend that Julie sees continuing to grow in 2021 and bound to stick around for the foreseeable future. 2020 may have expedited certain microtrends within embedded payments, with Julie bringing up online grocery delivery apps as one timely example. Narrowing in on the embedded payments trend as it relates to banking, Julie identifies buy now pay later (BNPL) as an exploding trend with several key partnerships occurring over the past several months. She cites Chase’s newly announced ‘My Chase Plan’ — a paid digital BNPL offering for consumer credit card holders that eschews the sort of merchant partnerships many other BNPL solutions originate from. Julie predicts that this BNPL trend may slow down in the near future as increased consolidation occurs within the embedded payments sphere.

Julie and Lance also touch on open banking, noting that while the US has had a slower growth period in comparison to the EU, there are recent signs of progress. Julie brings up the Consumer Financial Protection Bureau (CFPB)’s recently announced Advance Notice of Proposed Rulemaking, which is pretty much what it sounds like — public input is being sought and the rules are in their infant stages of development. This vital step brings us that much closer to regulation of open banking in the US. We may begin to see key players align in the industry in the near future — and Julie asserts that consumers are more than ready. Why? With so many aspects of day to day life occurring online, consumers are becoming increasingly savvy to the role their data plays in their transactions across platforms and with third-party players.

Lance illustrates the central connection between fintech and banking as a service with the recent announcement of Moven and Q2’s turnkey digital ‘bank-in-a-box’. This product-driven partnership points to the industry’s general movement towards openness, as well as the need to answer to the rise of challenger banks. Now more than ever banks find themselves competing with challenger banks — partnering with fintechs and launching products and services that expand their offerings beyond their traditional, core competencies. With these types of integrations being much simpler to accomplish than they were even five years ago, product-driven partnerships make strong sense in ensuring a competitive advantage and delivering to consumer expectations.

Forecasting into 2021, Julie warns that while there is a challenger bank out there for nearly every consumer tribe imaginable, the time to start making money is at hand. While consumers are flocking to the challenger banks that fit their interests, they’re also maintaining relationships with their primary financial institutions. Challengers will, like BNPLs, begin to heavily consolidate in the near future — it remains to be seen how (and if) these challenger banks will become accountable for their business models. Julie also highlights Central Bank Digital Currencies (CBDCs) as a fascinating trend that she and other fintech insiders are keeping tabs on. With China’s recent announcement of their own CBDC launch, Julie is interested to see what sort of conversations arise around decentralized finance models in 2021. While the US is unlikely to see concentrated efforts towards its own CBDC in 2021, serious interest is only bound to gain momentum.

Key Takeaways

• Embedded payments and Buy Now Pay Later exploded in 2020, and while both will carry forward through 2021, Julie predicts BNPL will wane a bit as consolidations take place.
• The Consumer Financial Protection Bureau (CFPB) put forth an Advance Notice of Proposed Rulemaking — public input is being sought and the rules of open banking in the US are in their infant stages of development.
• Turnkey, digital ‘bank-in-a-box’ offerings are on the rise and provide a strong competitive edge for banks to compete with challengers.
• Challenger banks, meanwhile, need to start making money — and making themselves accountable for their business models — or consolidate.

About FSI

FSI is an exclusive community for financial services executives and digital product leaders who are looking to deepen their understanding of relevant innovation and emerging trends. What you can expect to get as a member of FSI:

• Access to conversations and discussions with your peers.
• Exclusive content focused on helping grow your business.
• A forum to ask questions, share experiences, and learn from some of the top leaders in this field.

This group is not for promotion, and content of an overtly promotional nature will not be allowed. The community is professionally moderated.

Share your experience and find solutions for the greater good. Invite your friends & colleagues!

Additional Resources

• Julie Muhn – Senior Research Analyst – Finovate Conference Series
• Finovate