Banking-fintech partnerships can drive a new era of financial inclusion

In our post-pandemic landscape, banks are at an innovation crossroads. As demand for physical banking dwindles, focus has shifted to digital transformation to keep pace and grow into new markets.

Smaller banks especially face increasing pressure to broaden their reach as more customers look beyond community institutions for banking solutions. To remain competitive, many are turning to fintechs that can help deliver services more broadly.

By providing access to diverse audiences, bank-fintech partnerships also present an opportunity to tackle one of the financial industry’s most pressing challenges — expanding financial services to historically underserved communities. But doing so requires the right infrastructure, specifically embedded finance technology, to ensure fintech platforms are operating in a secure and compliant manner.

Through strategic collaboration, banks, fintechs and embedded finance providers can unlock new opportunities to deliver innovations that drive financial inclusion.

Untapped market requires measured approach

In 2021, 18.7 million U.S. households were estimated to be “underbanked.” While these households were banked in some capacity, they still required nonbank services to meet their transaction and credit needs. For instance, an underbanked household might rely on a payday loan — a short-term, high-interest loan — for quick access to funds prior to an established pay date. Or utilize prepaid debit cards as a substitute for traditional checking accounts.

Notably, a higher rate of underbanking exists among adults with lower income, adults with less education, and Black and Hispanic adults, underscoring financial marginalization for specific demographics. It is evident these communities require more tailored banking options that effectively meet their needs.

Simultaneously, many traditional banks are grappling with how to diversify their services to survive. Recently, bank closures have skyrocketed — reaching a record high of 38% in 2021 — due to a lack of foot traffic during the pandemic and the expense of maintaining and operating branches. Moreover, smaller banks are looking to corner their share of the market in response to growing consolidation in recent decades.

Fintech collaborations may offer a solution for traditional banks, and smaller banks in particular, to diversify their services and audiences through innovative financial technologies. However, for bank-fintech partnerships to effectively promote inclusion, a measured approach that prioritizes transparency is crucial.

3 essentials for boosting inclusion through bank-fintech partnerships

Bank-fintech partnerships can pave the way for greater financial inclusion by enabling banks to strategically extend their services to underserved markets. However, for these partnerships to benefit both banks and customers, banks must consider factors such as fintech compatibility and customer protection.

Several best practices can help banks forge new opportunities without compromising their key functionalities:

1. Keep your core mission front and center: With the rise of digital solutions, banks are no longer limited to the customer base that can bank at a local physical branch. Still, as banks are inherently service and relationship-oriented businesses, it is important to prioritize strategic alignment with any potential fintech partner. For smaller banks, this means homing in on their unique expertise. A local bank might regularly serve small business owners, but only have access to a limited addressable market. Partnering with a fintech that develops solutions for small business owners, however, allows the bank to reach new customers and further enhance support for this community. Evaluating a fintech’s ability to serve specialized markets enables smaller banks to reach new customers and communities, while still maintaining their core strengths. In other words, they can continue to do what they do best — provide personalized, community-focused support — but on a broader scale.

2. Offer practical solutions to real community needs: To further boost financial inclusion, banks should focus on fintech partnerships that can address demonstrated needs for underserved communities. Consider, for instance, underbanked populations’ reliance on payday loans. How can banks respond to this gap? One option might be to partner with a fintech that provides early wage access services, which allows customers to withdraw earned wages prior to their regular payday. This solution solves for a specific customer need (more immediate payment) while offering a less predatory alternative to payday loans. Furthermore, these practical solutions can support communities that are often sidelined by the traditional financial system. Take Greenwood, for instance — a fintech company focused on serving Black and Latino customers. Partnering with Greenwood would enable banks to provide tailored financial services that address unique financial challenges these communities face, such as a lack of generational wealth transfer. By considering community-specific pain points, banks can expand their offerings through targeted solutions.

3. Invest in secure, robust embedded finance infrastructure: Embedded finance technology provides connective tissue to facilitate seamless interactions between banks and their fintech counterparts. For banks to fully protect their customers, selecting an embedded finance provider that ensures necessary oversight is vital. In particular, embedded finance technology should provide banks instant access to all transactions and money movement. Direct-to-core integrations enable this visibility, providing features like real-time reconciliation so banks can monitor transactions as they occur. Similarly, visibility into a fintech’s KYC process allows banks to ensure onboarded customers are properly vetted. As evidenced by the recent Synapse controversy, neglecting technical details is high-risk, and can result in loss or misplacement of customer funds. But with strong governance technology, banks can effectively own compliance and extend their services without compromising customer safety.

Banks must rise to the challenge to drive inclusion

Looking ahead, bank-fintech partnerships have the potential to reshape our financial landscape. This movement toward greater financial inclusion benefits everyone.

Customers receive more tailored services, smaller banks gain access to new communities, and our broader economic system benefits. Through strategic collaboration, and with support from embedded finance, bank-fintech partnerships can drive a more accessible financial future.

Remy Carole is COO at Treasury Prime.