Banks were poised to seriously increase their spending on fintech products and services at the start of this year. But an uncertain economy and workforce challenges have thrown up obstacles. iStock illustration.
A survey of 300 American banks and credit unions by bank consultancy Cornerstone Advisors last year predicted financial institutions wanted to increase their spending on fintech products and services by 33 percent, to $3.98 million per bank on average. But obstacles are getting in the way, local banking and fintech industry leaders say.
Investor funding shortfalls and talent acquisition challenges at banks are currently keeping fintech adoption from growing among local financial institutions, said Elizabeth Thomas, program director at Boston-based Mass. Fintech Hub.
“Obviously, things are tighter for funding largely due to macroeconomic conditions. I think it’s a big issue,” said Thomas. “Without funding, it’s hard for people to believe in their idea and try to build their own company. We hope that the funding will return from 2022 levels, but in the meantime, it’s a challenge.”
Around 350 fintechs were headquartered in Massachusetts as of 2020, according to the most recent data available from Mass. Fintech Hub.
Sourcing talent for internal posts is also challenging even when banks have been partnering with fintech firms for years, said Massachusetts Bankers Association President and CEO Kathleen Murphy, noting that banks already have their own digital and mobile banking platforms but are counting on high-quality workers that they can hire to fully guide them in their fintech journey.
Mass. Fintech Hub’s 49 members – comprised of banks, credit unions, academic institutions, IT-related firms and many others – and Mass. Bankers have partnered to hold career fairs and mentoring programs to bring employers to students.
Both Murphy and Thomas said that financial institutions want the best and brightest employees not just to guide them towards offering fintech-powered banking solutions, but also to educate their customers on how a piece of technology could improve their everyday lives.
Thomas said she’s optimistic about the local fintech industry’s growth potential once the current, tight funding environment for companies loosens up.
“Banks, through their fintech partners, have already adopted fintech in ways like cashing checks on your phone, using QR codes for payments in restaurants or wiring money to another account. We are excited, with developments such as real-time payments from the FedNow announcement as well as the opportunities to improve [consumers’] credit scores. For the average American, there’s [also] a lot to be done to provide them good financial education,” Thomas said.
The Next Level for Fintech
The same Cornerstone Advisors survey that predicted increased fintech spending found that 47 percent of banks and credit unions consider fintech companies like PayPal, Square and Cash App to be a “significant threat in the coming decade.” These “megafintechs” have access to every smartphone-carrying American adult, Cornerstone said, and have been decreasing their cost of engagement to less than $90 per customer. Data from market research firm Statistia also predicts that the number of digital payment platform users will reach to 320.20 million in the U.S. by 2027.
Mass. Fintech’s Thomas backed these growth projections, noting that fintech tends to spread and integrate across industries, and that the tight economic scenario in recent months may prove to breed new innovations which will be beneficial for fintech.
“If you think about events like the Great Recession of 2008, how many fintechs, technology and tech-savvy companies came out of that? Whenever there is a disruption or change, you know you can think of it as a new opportunity. So, we’re hopeful that we will see a lot more fintech innovations coming out of this time right now,” she said.
Generative AI, the same technology that powers ChatGPT, is creating a buzz in the fintech industry recently as a tool for identifying fraud, improving customer service and especially for the new and “exciting” idea of generating synthetic data for projections and testing, geared towards the development of future fintech products and services, Thomas said.
Robert Cashman, Metro Credit Union’s president and CEO, said the credit union is looking at adopting generative AI solutions that could authenticate customers’ voices to instantly identify fraud and avoid fraudulent transactions especially with its preparation to adopt RTP and FedNow by next year.
Metro is also adopting technologies to improve customer service and team efficiency through AI chatbots and call operators. Cashman said that these technologies will help Metro’s tellers focus on servicing in-branch customers.
Other than generative AI, Thomas noted that local fintech firms may also have future growth opportunities serving banking-as-a-service apps such as Google Pay, Apple Pay, or Uber, non-bank institutions that offer financial services even without building banking infrastructure.
Email: ncataldo@thewarrengroup.com
