Why Community Financial Institutions Must Tap Into Platforms’ Power

Companies large and small rely on third-party platforms to expand their markets or simply to exist at all. Increasingly third-party platforms may be the key to continued growth for community banks and credit unions too. But making this shift will demand some fresh thinking about where distribution ends and banking begins.

Businesses of all types use third-party platforms to enable discovery and distribution of their products. Why shouldn’t banks and credit unions increase their use of such channels as well? In fact, they may have to.

Amazon, eBay, Google Play, DoorDash, Uber and Spotify are all examples of third-party platforms that help sellers expand their markets by exposing them to a larger group of consumers than they would otherwise be able to access. These platforms support sellers by:

  • Enabling discovery of seller products.
  • Enabling distribution of seller products.
  • Attaching platform-specific value-add services to seller products.

Community financial institutions should be looking for opportunities to leverage the digital prowess of platform companies to attract and onboard new customers. Once onboarded, these consumers can build broader, lasting relationships with the institutions. This hybrid model gives community financial institutions a powerful competitive response to major banks. The giants can invest significantly in technology, but can’t provide hands-on customer service or personal relationship management.

Platforms supporting payment products, loan products and deposit products already exist and will continue to evolve. Embracing the potential of these platforms requires financial institutions to have technology that enables internal processes to mesh with the customer-facing experiences that third-party platforms provide. This operational transition also requires financial institution executives to change the way they think about products and customer relationships.

Tapping the Opportunity of Payment and Loan Platforms

Mobile payment apps — i.e. Apple Pay, PayPal, and Google Pay, with its Google Plex accounts provided by banks and credit unions — are the most visible examples of bank-relevant third-party platforms.

These platforms provide a new distribution channel for credit and debit cards issued by banks and credit unions, making them available on a mobile device for in-app, e-commerce, and physical point-of-sale purchases. They also expand the utility of card-based products with app-provided services like enhanced transaction security and electronic receipts. Community banks and credit unions looking to maximize interchange revenue need to ensure their cards can be used in these apps as mobile payment volume and interest in contactless payments continue to grow.

Third-party platforms that support bank loan products (i.e. LendingTree, Credible, car dealer financing systems) are relatively mature and widely available. These platforms allow consumers to create new banking relationships while searching for financing.

Typically, only loan products that rely on standardized underwriting rules and readily available consumer data fit these third-party platforms.

More complex small business loans, which are the sweet spot for community banks, are not typically supported on today’s prevalent loan distribution platforms. But they will be supported eventually as technology evolves to enable intelligent, automated credit decisionmaking and underwriting.

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Deposit Platforms Can Build Steady Funding Sources

Third-party platforms that support deposit products are less mature than payment and loan platforms, but may represent the biggest opportunity for community banks and credit unions.

“Sourcing low-cost deposits through third-party platforms could become one of the most effective enablers of a financial institution’s growth strategy.”

Current platforms like Bankrate.com and NerdWallet that review deposit options and compare rates and terms build awareness for deposit products. But they don’t allow consumers to open new accounts or otherwise access bank services. This gap can be addressed with the application of bank-owned digital account opening solutions.

Sourcing low-cost deposits through third-party platforms could become one of the most effective enablers of a financial institution’s growth strategy. Tying together third-party distribution platforms with modern digital deposit account opening solutions creates a new, attractive path to deposit growth. The promise is that community financial institutions can focus on growing business loan portfolios in local markets and let technology drive deposit growth. This will become mainstream as banks adopt necessary technology and explore new partnership models, especially with fintechs.

Different types of deposit product-centric platforms will emerge, likely with different business propositions and costs to the participating financial institutions. The key is to identify use cases where there is an intersection between activity on a platform and the need for a new deposit product. Notably, the combined checking and savings accounts being prepared by banks and credit unions for Google Plex are being developed specifically for the Google Pay platform.

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Understanding Basic Entry Requirements for Platform Participation

Financial institution participation in third-party distribution platforms requires:

  • An API-based digital account opening solution. APIs are necessary to allow account opening processes to fit into the platform provider’s user experience, and connect to financial institutions’ specific compliance workflows.
  • System architecture that ensures new customers and accounts created via third-party platforms are propagated to all relevant internal bank systems.
  • A partner who can help identify and facilitate partnerships with relevant third-party platform providers.
  • A compliance team that is willing to work with the business to ensure new partnerships and supporting technology do not introduce unacceptable risk.

Community banks and credit unions, of course, need to consider if deposit accounts sourced through third-party platforms are classified as brokered deposits. Proposed FDIC changes to brokered deposit rules may ease concerns here and interested institutions should monitor their status.

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Partnership Or Ecosystem? Figure Out Your Institution’s Role Versus the Platform

Getting involved with a platform of any kind requires a mental adjustment. With a few exceptions like credit cards, financial institutions historically own and operate their own end-to-end distribution channels, which they fully control.

And it’s only in recent years have financial institutions opened up to the idea that new accounts can be opened through digital channels, with no requirement for in-person interaction with the customer. But even new digital account opening solutions are typically contained within bank-owned channels such as the bank’s own website.

So opening up to third-party platforms means that other companies will control the initial experience the consumer has with the financial institution. And thus the financial institution must have technology and processes that allow bank services to fit into a user experience that is initiated by a different company.

Modern digital banking providers are a good place to start looking for support. Digital banking providers have already done all of the work required to create a holistic banking experience, tying together a variety of front- and back-office services. Modern, well-architected digital banking solutions can point to any presentation layer, including those provided by a third party.

Technology architecture, however, should not be the only consideration when choosing a partner who can help the institution engage with platform providers. A community bank or credit union needs a partner with the sophistication and industry connectivity to help broker relationships with relevant platform partners. Executives should look for partners who are already part of platform ecosystems, and push them to help the bank navigate.

Like it or not, deposit and loan products are commodities. They offer only a limited number of differentiating attributes that consumers care about — maybe only interest rate and associated fees. Community banks and credit unions can add a layer of differentiation via great service (in-person and digital).

All of these factors will continue to be important, but the next frontier that will differentiate growth banks from non-growth banks is discovery and onboarding. How does a “digital native” find the financial institution and start a business relationship? Third-party distribution platforms are part of the answer.

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