Businesses of all types use third-party platforms to enable discovery and distribution of their products.  Small businesses use platforms like Amazon and eBay to source customers and sell their products.  App developers use the Google and Apple app stores to promote and distribute their apps. Restaurants utilize DoorDash and Uber Eats to attract customers and deliver their food.  Artists use Spotify and Apple Music to promote and enable streaming of their music. 

In all ofthese examples, third-party platforms help sellers expand their markets byexposing them to a larger group of consumers than they would otherwise be ableto access.  These platforms support sellersin three ways: 

1. Enabling discovery of seller products;

2. Enabling distribution of seller products; and

3. Attaching platform-specific value-add services to seller products.

Enabling discovery of seller products

Community banks should be looking for similar opportunities to take advantage of non-bank platforms to expand their reach.  The promise is that community banks can leverage the digital prowess of platform companies to attract and onboard new customers.  Then, once onboarded, serve these new customers with the superior customer service that community banks and credit unions can uniquely offer.  This hybrid model gives community banks a powerful competitive response to big box banks who can invest significantly in technology, but can’t provide hands-on, local – or regional – focused relationship management and customer service.  By participating in current and future bank-focused platforms, community banks can reduce technology spend and focus on what they do best, namely building customer relationships. 

Platformssupporting payment products, loan products, and deposit products exist todayand will continue to evolve.  Embracingthe potential of these platforms requires banks to have technology that enablesinternal bank processes to mesh with the customer-facing experiences thatthird-party platforms expose.  It alsorequires bank executives to change the way they think about bank products andcustomer relationships.

Enablingdistribution of seller products

Mobile payment apps are the mostvisible examples of third-party platforms that community banks can use.  Examples include Apple Pay, Google Pay, andPayPal.  These platforms provide a newdistribution channel for bank-issued credit and debit cards, making themavailable on a mobile device for in-app, e-commerce, and physical point-of-salepurchases.  They also expand the utilityof card products with app-providedservices like enhanced transaction security and electronic receipts.  Community banks and credit unions looking tomaximize interchange revenue need to ensure their cards can be used in theseapps as e-commerce and in-app payment volume continues to grow.  Typically, a financial institution’s cardprocessor can do all of the work required to make the financial institution’scard available in third-party mobile payment apps.  While current payment apps do not necessarilyenable users to create new bank relationships, future apps may see the facilitationof card application and account opening processes within the app userexperience.

Third-party platforms that support loan products are relatively mature and available.  Examples include LendingTree, Credible, or even car dealer management systems that tie in bank financing for auto loans.  These platforms allow consumers to create new relationships and open loans.  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 readily supported on the prevalent loan distribution platforms in market today.  But they will be supported eventually as technology evolves to enable intelligent, automated credit decisioning and application of underwriting rules.

Deposit Partners and Platforms

Third-partyplatforms that support deposit products are less mature than payment and loan platformsbut may represent the biggest future opportunity for community banks.   Bankrate.comand NerdWallet are examples of current deposit product-centric platforms.  They build awareness for deposit products byallowing consumers to search across banks for the most attractiveofferings.  But they don’t allow consumersto open new accounts or otherwise access bank services.  In other words, they cover the marketingaspect, but not the distribution aspect, of a modern digital distributionplatform.  This gap can be addressed withthe 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 community bank’s growth strategy.  Acquiring homegrown deposits through branches is comfortable, but expensive and constrained by geography.  Buying deposits from placement firms is quick, but costly.  Tying together third-party distribution platforms with modern digital deposit account opening solutions creates a new, attractive path to deposit growth for community banks.  The promise is that community bankers can focus on growing business loan portfolios in local markets and let technology drive deposit growth.  And, community bankers can focus on growing business with newly acquired deposit accountholders via personal relationships and exceptional customer service. This will become mainstream as banks adopt the necessary enabling technology and explore new partnership models, especially with FinTechs.

Attachingplatform-specific value-add services to seller products

Differenttypes of deposit product-centric platforms will emerge.  Some will be national in scope and gearedtoward the general consumer (think FinTech looking to offer new capabilitiesthat require an underlying deposit account). Some will be national in scope but geared toward a specific consumersegment (think wedding planning or college saving solutions).  Some will be local in scope and geared towardsmall businesses (think practice management software or POS systems).  The key is to identify use cases where thereis an intersection between activity on a platform and the need for a newdeposit product. 

Requirementsof a third-party distribution

In allof the cases described above, community bank and credit union participation inthird-party distribution platforms requires the following:

  • AnAPI-based digital account opening solution; APIs are necessary to allow accountopening processes to fit into the platform provider’s user experience; The solutionneeds to flexible enough to accommodate financial institution-specificcompliance-related workflows.
  • Systemarchitecture that ensures new customers and accounts created via third-partyplatforms are propagated to all relevant internal bank systems, including thecore, the servicing platform (digital banking platform), the customerrelationship management (CRM) system, and any fraudmonitoring systems;  This can besimplified by ensuring the digital account opening solution interacts properlywith the financial institution’s existing core.
  • Apartner who can help identify and facilitate partnerships with relevant third-partyplatform providers.
  • Acompliance team that is willing to work with the business to ensure that newpartnerships and supporting technology are developed in a way that does introduceunacceptable financial or compliancerisk.

Communitybanks and credit unions, of course, need to consider if deposit accountssourced through third-party platforms are classified as brokered deposits.  Proposed FDIC changes to brokered depositrules may ease concerns here, especially if banks structure partnerships withplatform providers such that the bank creates and maintains a direct relationshipwith the new deposit accountholder.  TheABA, among others, has suggested in formal comments to the FDIC that rulechanges could go even further to facilitate more modern methods of depositgathering.

Transitioning From In-house to Partnership

Beyondregulatory concerns, community financial institution executives need to acknowledgeand embrace the idea that technology-driven customer acquisition requires a newmindset.  Community banks and credit unionshistorically own and operate their own end-to-end distribution channels.  Consumers today acquire deposit accountsthrough channels that are fully controlled by the bank or credit union, traditionallythe branch.  Only in recent years have financialinstitutions opened up to the idea that new accounts can be opened throughdigital channels, with no requirement for in-person interaction between thecustomer and the banker.  But even newdigital account opening solutions are typically contained within bank-owneddigital channels (i.e. the bank’s own website). Opening up to third-party platforms means that other companies willcontrol the initial experience the consumer has with the financial institution.  This doesn’t mean the bank can stop providinggreat products or great service once the customerrelationship is established.  Thebank must continue to have its own great servicing experience (online andmobile banking).  But it is just as importantto have the technology that allows bank services to fit into a user experiencethat is created by a different company. This is the future.

Moderndigital banking providers are a good place to start looking for support.  Digital banking is the solution layer thatsits between the bank or credit union’s internal systems & processes and itscustomers.  Digital banking providershave already done all of the connectivity work required to create a holisticbanking experience for customers, tyingtogether core, bill pay, card payments, statements, fraud management andfinancial management solutions.  But, notall digital banking solutions can be easily extended into third-party userinterfaces. Digital banking and “presentation layer” have become synonymousover the years, because of the architectural generation when solutions werefirst created.  But this ischanging.  Well-architected moderndigital banking solutions can point at any presentation layer, including thoseprovided by a third party.  This is donethrough APIs.  The solution has to bearchitected such that business logic (rules that define what a customer can doonline or in mobile) is separated from the presentation layer (website or mobile app). 

TheEcosystem Approach

Technologyarchitecture, however, should not be the only consideration when choosing a partnerwho can help the bank engage with platform providers.  A community bank needs a partner with thesophistication and industry connectivity to help broker relationships withrelevant platform partners.  Bank execsshould look for partners who are already part of platform ecosystems, and pushthem to help the bank navigate.

Like itor not, deposit and loan products are commodities.  Which means they have only a limited numberof differentiating attributes that consumers care about:  maybe only interest rate and associated fees.  Community banks and credit unions can add alayer of differentiation via great customer service (in-person and digital).  All of these factors will continue to beimportant, but the next frontier that will differentiate growth banks fromnon-growth banks is discovery and onboarding. How does a potential “digital native” customer find the bank and start abusiness relationship?  Third-party distribution platforms are partof the answer.

Platformbanking is the future, and those community banks and credit unions who embracethis future earlier stand the best chance of growing, or indeed surviving, asthe next generation of bank customers emerges.

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