How Small Banks Gain a Fintech Advantage
It’s not often you hear of a licensed bank being a tech-first, mostly digital platform that also has a built-out Banking-as-a-Service (BaaS) component. Many of the well-known financial institutions (banks and credit unions) have existed for 30+ years and carry with them legacy processes and infrastructure. That’s not the case with the new generation of banks (such as Piermont Bank — a small, commercial bank that is state-chartered with less than 5 years of operations).
For decades, financial institutions have been profitable without having to overhaul their business model. Profitability led to executives rejecting high upfront costs in adopting the latest technology. In today’s banking landscape, maintaining the status quo with tech is leading to diminishing market share and companies ultimately closing down (or being bought out).
Banks across the US agree that evolving their business is no longer an optional, but mandatory. The struggle now is deciding and executing on how to bring about the necessary change in a timely manner. Transformation within banks happens in silos — separated by lines of business and management layers. Getting multiple divisions on the same page is the initial challenge.
In the dynamic between bank and fintech, startups have the edge when it comes to user experience and technology — banks have the domain expertise when it comes to compliance, risk mitigation, and regulation. Both sides can benefit from each other’s strengths and started to gain additional advantages. Fintechs have taken a step further and sought out bank charters and additional licensing to bridge the gap and become financial institution. On a smaller scale, certain banks have taken their shot at closing the gap with their own tech-first stack and offering — to do so, they’re starting from scratch.
a vision of a ‘CLEAN SLATE’ FOR small BANKS
Building a bank from scratch with a customer-focus approach eliminates the legacy infrastructure that plagues established financial institutions. The caliber and availability of today’s financial technology allows even the smallest of banks to build quality offerings and reach users outside of their local area digitally.
With this perspective, smaller can be better when it comes to dynamic change and quickly shifting with the needs/demands of customers . The traditional approach by banks of creating a product and then finding customers is no longer viable — today’s companies (across all industries) are customer-focused from the start. With a smaller team, there’s less difficulty in navigating multiple layers of management and gaining consensus in decision-making.
What’s the other advantage in having a ‘clean slate’? In offering a new BaaS program to fintech companies, banks can be better partners that directly help with back-office and critical user support. Startups aren’t left on their own to figure out necessary program management with vendors for reporting, transaction processing, and other compliance obligations.
With more of a robust structure, Banking-as-a-Service can be a core revenue source for small financial institutions. Building out the infrastructure and enrichment stack of a BaaS program with a fintech-first mindset becomes a winning advantage — speed and efficiency matches that of modern tech companies. Direct-to-bank partnerships aren’t known for speed and convenience when it comes to integration, but as this new model gains traction expect this to change.
WHAT BAAS 3.0 LOOKS LIKE
Banks are no longer running in the background with Banking-as-a-Service — only supplying BINs for card issuance and insuring deposits only. The industry has moved past this BaaS 1.0 model of ‘rent-a-charter.’ As small financial institutions build (or partner) with better tech stacks, the new model is becoming less white-labeled and more ‘partner-rich.’ Banks are actively working with new platforms to address support, compliance, program management and operational issues.
This 3.0 is especially helpful for non-fintech platforms interested in embedded finance. Credit and lending is the new frontier in expanding beyond cards, payments, and deposit accounts. Loans and credit cards will soon be readily available for launch through tech-enabled banks interested in expanding customer acquisition. These modern banks will also lead the way in cryptocurrency by assisting in custody and money movement responsibilities.
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