by Maria Schuld, Division Executive, Americas, Banking Solutions, FIS
BaaS defined
Innovative firms offering traditional banking products can provide traditional banks new revenue streams, valuable partnerships and other remarkable opportunities.
While fintechs, neo banks, big techs and other non-traditional players are enthusiastic about offering banking services, some community and regional banks have been timid to respond. These institutions should review the benefits of Banking as a Service (BaaS) and consider how to make them a reality.
BaaS is commonly defined as seamlessly integrating as many service providers as needed into one comprehensive process to complete a financial service in an effective and timely manner. As BaaS expands, consumers can begin using these innovative technology platforms to access services such as e-commerce, travel, retail, health and telecom.
Examples of embedded BaaS solutions include consumers taking out a small loan when they pay for a holiday on a travel site; the instant calculation and sale of micro-insurance for newly purchased jewelry; or a small enterprise mitigating its cashflow challenges through an instant working capital loan from an e-commerce site.
The opportunity for community and regional banks
Recent research from Oliver Weyman points out that for a financial institution, BaaS is an opportunity to reach a greater number of customers at a lower cost.
The traditional banking delivery model based on existing technology and operations has the cost of acquiring a customer typically in the range of $100 to $200, according to their analysis. With a new BaaS technology stack, the cost can range between $5 and $35.
Beyond customer acquisition, banks can leverage fintech partnerships to open new accounts, increase interchange revenue and cross sell traditional banking products.
BaaS models for traditional banks fall into two types:
- On-behalf-of accounts wherein the bank owns and manages each individual new account created from the BaaS partnership’s offering.
- One account with sub-ledgers to manage and record individual customer’s financial activity.
In the first model, the bank’s brand and products have more visibility. In the second model, the bank delivers services on a private label basis. Regardless of the model used in offering BaaS products, bankers must consider the following key elements of a successful BaaS strategy.
Foundational elements for BaaS success
- An understanding of your bank’s market opportunity, including the risk profile your bank is willing to tolerate. Savvy community bankers will identify potential fintech partners to offer BaaS. They will formulate thorough risk analysis to ensure business objectives align with their institution’s risk profile.
- Identification of the type of BaaS products needed for each partnership. Partnerships can need very different and sometimes customized financial service products. Bankers need to ensure their technologies are current in all areas including deposit accounts and KYC, loan origination, ACH, debit and credit payments and other relevant banking services.
- A robust library of banking Application Programming Interfaces (APIs) to facilitate communication between two disparate pieces of software. APIs provide the engine to enable BaaS. Community bankers should be able to leverage a deep, well-documented library of these tools to drive and create new BaaS solutions. APIs make it possible to expand service offerings without reinventing the digital wheel.
- Strong security and cloud delivery of services. From the earliest days of the pandemic, scam artists have worked to leverage societal disruption. Given the current environment, banks must deliver BaaS products in a highly secure and reliable manner to deter fraudsters while inspiring confidence with end-user consumers.
- Advisory services to jump start the effort. If your institution is evaluating BaaS products, consider reviewing the offerings of larger peers in current fintech partnerships, then look to the partners these organization have leveraged to create their initial solutions. As in most banking endeavors, a strong professional network becomes a powerful go-to-market asset.
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BaaS will bring together new digital technology platforms and finance services to change the shape of product integration for the foreseeable future. BaaS presents a significant opportunity for financial institutions to capture new revenue growth at a low cost.
As recent article in The Financial Brand states, “for much of the past five years, as more consumers use payments, lending and banking services that are part of non-traditional banking apps, the traditional banking relationship had been increasingly fractured.” The ability to engage with banking services without going to a bank is what consumers and businesses desire, especially for transactions.
There is too much at stake for banks not to jump in the water. BaaS-embedded banking solutions has taken time to catch on, but now – more than ever before – banks must get in front of the growing wave to remain relevant with their customers.