The Future of Traditional Banks in the Age of Fintechs

In recent years we’ve seen the steady rise of digital banking and fintechs. Relying on cutting-edge technology, fintechs have disrupted the financial industry and amassed a value of over $187 billion. As fintechs continue to gain a foothold in the financial services market, the future of traditional banks comes into question. Banks and credit unions have to find ways to both compete and thrive in this evolving financial ecosystem. 

Traditional banks can achieve this by improving customer engagement and experience and incorporating non-traditional data sources and technological innovations into their business strategies to strengthen credit risk decisioning and support market recovery. 

Automate processes and embrace technological innovations 

Much of what sets fintechs and challenger banks apart from traditional financial institutions are their reliance on modern technology and Banking-as-a-Platform models. In today’s digital world, banks and credit unions can benefit from leveraging the latest innovations to streamline back-office operations and support the digital banking transformation. AI, RPA, and ML-backed solutions enhance data capture, loan processing, underwriting, compliance, fraud prevention, onboarding, and several other functions to help improve internal processes.

If legacy banks and credit unions incorporate modern technology into their processes, they can help improve their employees’ workflows, allowing them to reallocate their time to other aspects of the business. That includes placing more emphasis on the customer experience, which impacts their ability to satisfy current customers and create new relationships. 

 

Learn how to build a better future with alternative data >

 

Incorporate alternative data into credit decisioning and identity verification

When it comes to traditional banks, marginalized groups have often been shut out due to inadequate or nonexistent credit histories. Almost 9 million households in low-income areas had limited access to conventional banking services before 2009. The creation of fintechs has helped break this cycle by providing banking and lending options to the unbanked population. By combining AI and non-traditional credit data like rent, telecom, and utility payments, fintechs are better equipped to assess consumers’ creditworthiness and expand credit access to people who would otherwise be overlooked.

Almost 9 million households in low-income areas had limited access to traditional banking services before 2009.

Incorporating alternative data into the underwriting process can help banks and credit unions make banking more inclusive and expand their pool of prospective customers. Combining non-traditional data with credit scores will help banks better identify qualified and creditworthy applicants. This also benefits gig workers, who make up roughly 35 percent of the workforce, and SMEs, which face a $2.9 trillion finance gap annually. Both groups are often seen as risky applicants and are underserved by traditional banks – the inclusion of alternative data can help improve their credit profiles. 

In addition to expanding credit access, alternative data also supports online banking authentication, improves fraud prevention, and compliance. Digital access to customer utility bills provides additional insight into ID verification to minimize fraud attempts, accelerate the onboarding process, and adhere to KYC compliance. By streamlining these processes, traditional banks can positively impact the overall customer experience.

Improve the customer experience

According to a PWC global survey, 75 percent of banks are investing in more customer-centric business models. With customer expectations constantly changing, traditional banks and credit unions have had to adapt quickly. Consumers’ needs and expectations vary depending on their generation. Baby boomers still value in-person banking at branches, while millennials and Gen Z have taken to digital banking. 

Seventy-five percent of banks are investing in more customer-centric business models.

Traditional banks can consider a hybrid banking model to meet the demands of multiple generations by combining physical bank branches and digital banking. Traditional banks like Bankcorp Bank and MetaBank have seen success in incorporating technology into lending, deposits, and processing. Additionally, since the start of the pandemic, smaller FIs have turned to digital solutions to enhance their ability to scale and improve efficiency. If traditional banks can appeal to both sides, they can provide a better customer experience and gain a competitive advantage.

Tech and alternative data can help traditional banks level the playing field

Technology and alternative data sources are vital to the future of traditional banks. Reimagining their operations to streamline workflows and improve financial inclusion can give them the boost they need. Whether these banks and credit unions opt to incorporate a credit data API in-house or partner with fintechs, the outcome can introduce new qualified applicants and support post-COVID market recovery. 

Urjanet’s alternative data solution uses a direct and automated connection to utility providers to seamlessly integrate utility data into the credit decisioning and identity verification process. If you’re interested in learning more about how it can take traditional banking up a notch, speak with our experts today.

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