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 of these examples, third-party platforms 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 in 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.
Platforms supporting payment products, loan products, and deposit products exist today and will continue to evolve. Embracing the potential of these platforms requires banks to have technology that enables internal bank processes to mesh with the customer-facing experiences that third-party platforms expose. It also requires bank executives to change the way they think about bank products and customer relationships.
Enabling distribution of seller products
Mobile payment apps are the most visible examples of third-party platforms that community banks can use. Examples include Apple Pay, Google Pay, and PayPal. These platforms provide a new distribution channel for bank-issued credit and debit cards, 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 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 e-commerce and in-app payment volume continues to grow. Typically, a financial institution’s card processor can do all of the work required to make the financial institution’s card available in third-party mobile payment apps. While current payment apps do not necessarily enable users to create new bank relationships, future apps may see the facilitation of card application and account opening processes within the app user experience.
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-party platforms that support deposit products are less mature than payment and loan platforms but may represent the biggest future opportunity for community banks. Bankrate.com and NerdWallet are examples of current deposit product-centric platforms. They build awareness for deposit products by allowing consumers to search across banks for the most attractive offerings. But they don’t allow consumers to open new accounts or otherwise access bank services. In other words, they cover the marketing aspect, but not the distribution aspect, of a modern digital distribution platform. 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 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.
Attaching platform-specific value-add services to seller products
Different types of deposit product-centric platforms will emerge. Some will be national in scope and geared toward the general consumer (think FinTech looking to offer new capabilities that require an underlying deposit account). Some will be national in scope but geared toward a specific consumer segment (think wedding planning or college saving solutions). Some will be local in scope and geared toward small businesses (think practice management software or POS systems). 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.
Requirements of a third-party distribution
In all of the cases described above, community bank and credit union participation in third-party distribution platforms requires the following:
- An API-based digital account opening solution; APIs are necessary to allow account opening processes to fit into the platform provider’s user experience; The solution needs to flexible enough to accommodate financial institution-specific compliance-related workflows.
- System architecture that ensures new customers and accounts created via third-party platforms are propagated to all relevant internal bank systems, including the core, the servicing platform (digital banking platform), the customer relationship management (CRM) system, and any fraud monitoring systems; This can be simplified by ensuring the digital account opening solution interacts properly with the financial institution’s existing core.
- 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 that new partnerships and supporting technology are developed in a way that does introduce unacceptable financial or compliance 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, especially if banks structure partnerships with platform providers such that the bank creates and maintains a direct relationship with the new deposit accountholder. The ABA, among others, has suggested in formal comments to the FDIC that rule changes could go even further to facilitate more modern methods of deposit gathering.
Transitioning From In-house to Partnership
Beyond regulatory concerns, community financial institution executives need to acknowledge and embrace the idea that technology-driven customer acquisition requires a new mindset. Community banks and credit unions historically own and operate their own end-to-end distribution channels. Consumers today acquire deposit accounts through channels that are fully controlled by the bank or credit union, traditionally the branch. 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 between the customer and the banker. But even new digital account opening solutions are typically contained within bank-owned digital channels (i.e. the bank’s own website). Opening up to third-party platforms means that other companies will control the initial experience the consumer has with the financial institution. This doesn’t mean the bank can stop providing great products or great service once the customer relationship is established. The bank must continue to have its own great servicing experience (online and mobile banking). But it is just as important to have the technology that allows bank services to fit into a user experience that is created by a different company. This is the future.
Modern digital banking providers are a good place to start looking for support. Digital banking is the solution layer that sits between the bank or credit union’s internal systems & processes and its customers. Digital banking providers have already done all of the connectivity work required to create a holistic banking experience for customers, tying together core, bill pay, card payments, statements, fraud management and financial management solutions. But, not all digital banking solutions can be easily extended into third-party user interfaces. Digital banking and “presentation layer” have become synonymous over the years, because of the architectural generation when solutions were first created. But this is changing. Well-architected modern digital banking solutions can point at any presentation layer, including those provided by a third party. This is done through APIs. The solution has to be architected such that business logic (rules that define what a customer can do online or in mobile) is separated from the presentation layer (website or mobile app).
The Ecosystem Approach
Technology architecture, however, should not be the only consideration when choosing a partner who can help the bank engage with platform providers. A community bank needs a partner with the sophistication and industry connectivity to help broker relationships with relevant platform partners. Bank execs 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. Which means they have 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 customer 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 potential “digital native” customer find the bank and start a business relationship? Third-party distribution platforms are part of the answer.
Platform banking is the future, and those community banks and credit unions who embrace this future earlier stand the best chance of growing, or indeed surviving, as the next generation of bank customers emerges.