Banking-as-a-Service (BaaS) is no longer a buzzword within the financial services industry. Financial institutions, large enterprise firms, and non-fintech companies are all engaging (or at the minimum) considering a move into BaaS. With interest at an all-time high, the decision to be a bank partner OR offer bank products to customers is being closely explored at multiple levels within an organization.

It can be a way to ‘catch-up’ for banks that have delayed digital transformation within their organization. For non-banks, BaaS is way to build a deeper, ‘stickier’ relationship with customers that goes beyond payments. Both sides benefit from deposit, card spend, and transaction activity conducted on online/mobile devices without the need for physical stores or branches.

Success in Banking-as-a-Service is anchored in respective strengths of financial institutions providing licensing & regulatory guidance, and financial technology companies delivering a modern infrastructure and digital user experience. Risk management and compliance expertise from banks — marketing, product design, and customer acquisition from fintechs. Combining both has proved to be a winning combination in the last 5-8 years by reducing time to market, minimizing the number of vendors & 3rd party relationships to manage, and lowering the total cost of ownership.

However, not every bank may be ready to be a partner AND not every company may be ready to extend its digital channel with banking services.

REFRESHER ON WHAT BANKING-AS-A-SERVICE SOLVES

In order to financial products (i.e. deposit accounts, debit/credit cards, loans), some mix of licensing and registrations are needed at the federal and state levels. The time, costs, and process for application approval is lengthy, expensive, and uncertain. Financial institutions already have required licensing coverage via bank charters — working directly with a bank eliminates this application process.

The majority of today’s banks lack the tech infrastructure and agility to deliver a modern financial services platform virtually. Struggling with legacy architecture, banks point prospective firms to technology vendors that provide APIs (application programming interfaces) for back-end integration to apps & websites. In bridging the bank, technology partner, and others (e.g. payment & card networks, Know Your Customer vendors, card printer, etc.) — a program manager is needed. BaaS vendors and platforms vary in terms of these responsibilities, with some only having a tech-focus and others an all-inclusive platform (tech, compliance, and program management).

Multiple activities are taking place and being managed via API between a platform and the end-user. Functions that impact collecting/screening personal data from customers, and requirements necessary to fulfill regulatory obligations based on the Bank Secrecy Act, US Patriot Act, and ongoing monitoring.

Banking-as-a-Service removes the complexity and expense in offering and managing financial services, which allows businesses to go to market rapidly, with less capital, and in a manner that involves less in-house expertise. Companies working with BaaS providers have the potential to save on large upfront investments before onboarding their first customer.

WHEN THE TIMING ISN’T RIGHT FOR BANKS

Financial institutions easily see the revenue opportunity in working with fintech partners and their end-users. Expanding deposit and transaction volume outside of their physical footprint without opening new retail branches is a tremendous value driver. For regional banks and credit unions looking for growth opportunities, a Banking-as-a-Service playbook or division keeps them relevant and can help get them to the next level.

Unfortunately, the hierarchies within financial institutions can be blockers in gaining an organization’s commitment to BaaS. The notion of “banks moving slow” comes from the internal bureaucracy that needs to be maneuvered for change to take place. Compliance, operations, and legal divisions may not cooperate with one another. An executive leader (CEO or COO) is needed to spearhead this movement within the bank.

Once the departments and leaders within a financial institution are all on the same page, it comes down to operations and execution. Does the bank have the right personnel to launch and manage this new initiative? If not, who will they hire and what’s the overall process?

For BaaS providers, the optimal bank partner is one that can collaborate with them in an efficient manner and make continuous progress towards integration of their tech and operating stack. If a bank needs 18+ months to put an agreement in place, build up internal capabilities, complete a full-scope partner integration, and run testing — then it’s not ready to make the move to Banking-as-a-Service.

WHEN FINTECHS & OTHER companies aren’t ready for baas

Similar to banks, platforms see the clear benefits of offering banking services through their app or website. Customers would transact more often with added services and new revenue opportunities would be open (from interchange on card spend to deposit interest on user’s in-app balances). More companies are now embedding a deposit or credit function into their customer portal.

In adding this new functionality, companies must understand that in this partnership (with banks & BaaS providers) they also have new responsibilities. Businesses must own the customer relationship and user experience by designing their front-end to facilitate banking services — this isn’t provided by partner banks or providers. There’s also a joint commitment to user screening and fraud management being in place — companies should be wary of opening their platform to all customer segments, and put a plan in place to monitor and minimize fraudulent activity. Suspicious activity, payment returns, card disputes, and losses would all financially impact a company. The bank partner may be forced to suspend or terminate a partnership based on the amount and type of loss/return activity.

‘New-to-banking’ platforms may look to start off with more of a referral-type program with financial institutions, in which potential clients are sent directly to a bank for account opening (in exchange for fee). In this setup, a platform hands-off the customer and has no other obligation in managing/servicing a banking relationship. The downside comes with limited revenue potential (only referral fee) and no way to customize the bank’s digital experience. This isn’t Banking-as-a-Service, but a possible step in the right direction for companies who aren’t ready to commit funding and resources in launching their own program.

CATALYST in WORKING WITH BANKIng PARTNERS & PROVIDERS

There’ a breaking point coming this decade for both banks and businesses when it comes to Banking-as-a-Service, but more broadly with financial technology. Not making move can leave both types of organizations behind peers and competitors. Taking a chance before your company/bank is ready can be a waste of resources and lead to a failed initiative.

The upside can be massive in establishing a new revenue channel and staying ahead of the market in terms of products and services. Going through an implementation process early with a product launch will reduce time-to-market in adding new features and programs. A clear example comes from from companies providing a wallet can quickly add card issuance for their users.

Large banks may still hold bank in the short-term when it comes to Banking-as-a-Service as they still view fintechs as direct competitors to their core businesses. Offering BaaS would just be an additional avenue for them to chip away at their market share.

For non-fintech platforms, embedded banking and finance is pushing forward their decision process. Companies with high volumes of users and payment activity via digital channels stand to make considerable gains in switching to Banking-as-a-Service. Existing customers that are loyal to these companies with monthly payment/purchase activity would be more likely to create new accounts and use branded cards.

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