While we’re all familiar with traditional financial institutions, alternative banking solutions have made the financial world — and consumers — sit up and take notice. Fintechs are springing up in every corner of the world rapidly, with innovative offerings that include buy now, pay later; “cash advances” for salaries and invoices; and rapid credit decision making using “alternative data” to deepen and broaden financial services offerings.
As of November 2021, fintechs numbered 10,755 in the U.S. alone, with a footprint that reaches beyond our borders into the EMEA region (Europe, the Middle East, and Africa) and the Asia Pacific region. The market size of fintechs is projected to grow 47.7 percent until 2028, reaching a value of $722.6 billion.
Today, we’re seeing a trend wherein fintechs are starting in one country, mature, and then go global. The reasons for growth are many, including increased consumer appetite for innovative digital solutions, technological advances such as cloud technology, and of course, the pandemic — a major driver for digitization. Make no mistake, however, that traditional banks are also jumping on the digital bandwagon, with innovation “labs” and/or acquisition of fintechs. Case in point: American Express acquired Kabbage in 2020. Yet just as fintechs are expanding their footprint, so is the definition of “fintech.”
The Many Aspects of Fintech
Fintechs are typically startups with a focus on innovative technological solutions in the financial services industry. Under the fintech umbrella fall neobanks, sometimes referred to as challenger banks, which offer apps, software, and other technologies to streamline mobile and online banking. These up-and-coming challengers frequently partner with another financial institution (FI) as they offer innovative products designed to compete with larger and more well established players in the industry. Whether fintech, neobank, challenger bank — or traditional bank — the bottom line is growth.
Growth and Innovation Require External Data
It takes data to grow a FI — to drive key workflows, including customer profiling, onboarding, underwriting, credit decisioning, fraud, and collections. Each of these foundational workflows requires data that is real-time, up-to-date, and compliant. While there are more data providers than ever before, FIs must be thoughtful about which data they rely on to power these core processes. Missteps can be costly, not only because incorrect decisions will almost certainly result in losses, but because regulators are also keeping a keen eye on how FIs (fintechs in particular) are leveraging external data as they seek to safeguard the consumer.
Clearly, due diligence is mandatory, but accessing and managing data is not easy, especially as fintechs rapidly expand their product offerings and aim for global expansion. Even for those focused on just one geography, the pressure to automate processes and manage fraud risk requires FIs to constantly optimize their external data integration. With expansion, these issues are magnified as FIs need to maintain relationships with multiple credit bureaus and multiple IDV/fraud providers, and monitor the performance of these providers relative to risk requirements. Consider these all-too-typical scenarios:
- A fintech startup needs to verify customer identity, pull credit data and perform KYC checks. Which data sets do they need, and from where?
- A fintech expanding to other markets doesn’t have any knowledge of the data landscape or infrastructure in place to process the data. From which providers do they pull the global data? Is the data reliable? Who can help with deployment?
- An established fintech is witnessing a considerable number of fraudsters coming through despite existing workflows checking for transaction risk. Which data sets are needed to help circumvent fraud before it gets to the onboarding stage?
The Challenge of Managing Multiple External Data Providers
As both fintechs and incumbents launch new financial products (e.g., buy now, pay later; cash advance; virtual cards; etc.), the burden of managing external data can be challenging for FIs on several fronts.
3 Big Challenges Fintechs Face Managing External Data
- It can be overwhelming to find, test, and integrate the right external data providers for each use case among the sea of available data providers.
- As FIs scale, managing the overhead of data provider contracts across differing regulations is not a trivial task.
- FIs must constantly monitor external data integrations for up-time and performance to ensure the integrity of their workflows.
Ultimately, FIs that struggle to address these challenges will face significant product delays, which can be extraordinarily costly in today’s competitive environment. For example, an FI that struggles to deploy an additional data provider to help address increasing fraud may have to temporarily shut down a product line (or face heavy losses), which will weaken its relationships with customers.
Where an External Data Platform Excels
In these situations, an external data platform (EDP) streamlines the process of identifying best-in-class external data providers for each case, deploying these providers into workflows, and managing procurement processes with upstream vendors. In certain instances, we’ve seen product launch times shaved from months to weeks by leveraging an EDP.
More specifically, EDPs provides FIs with access to hundreds of data products “under one roof” and accessible via a single, configurable API endpoint. Other features include:
- The ability to waterfall and combine data providers,
- The opportunity to rapidly onboard incremental data providers and add them to a waterfall within weeks, and
- Transaction monitoring for errors.
EDPs also provide FIs with the ability to test and discover new data providers, then rapidly put them into production to address pressing use cases. A no-brainer for FIs.
For good reason, today’s financial institutions are turning to external data platforms. Aside from the convenience of one API, one contract, and one deployment, they help minimize risk and facilitate incremental lifts in key areas — whether to offer more loans to more legitimate businesses, more credit cards to more creditworthy customers, or launch new banking products faster. And that’s especially good for financials and users alike.