No Shortcuts: Banking as a Service (BaaS) Requires Investment, Commitment

The opportunity for leveraging fintech companies’ scale and customer bases can be attractive to banks, especially since fintechs account for a growing and meaningful share of new bank accounts being opened industrywide. As a result, many banks have chosen to engage in “Banking as a Service” (BaaS), through which they offer products such as checking and savings accounts, debit cards or personal loans to the customers of fintech applications. Users interact with the fintech app on the front end, and their accounts link on the backend to the partner bank on a mostly invisible, white-label basis.

The fintech companies avail themselves of the bank’s charter and related products. The banks, in turn, can gain access to fintechs’ captive markets as a means of accelerating growth, particularly in deposits.   These types of partnerships are beneficial for the bank and for the fintech company.

From the banks’ perspective, BaaS appears to be meeting that objective. A 2022 study by S&P indicated that, among a group of fifteen $1-$3 billion AUM banks engaging in BaaS, 10 were growing deposits at a rate far outpacing the industry.

The prospect of attaining meaningful deposit growth in a flat to modestly declining overall deposit environment, and often gaining geographic diversification for a bank’s deposit base, makes BaaS a seemingly obvious growth opportunity for banks. But, of course, it’s not that simple. The prospect of theoretically “easy,” reliable deposits cannot overshadow the requirements of building BaaS as thoughtfully as a bank would any other business.

And to maximize the opportunity for success, all of this should take place in the context of solid partnership between the fintech and the bank.

While the fintechs build the customer-facing technology, banks must link seamlessly on the back end. Whether a proprietary tech build or the use of an additional technology platform, the bank must allocate the financial and human resources needed to test, implement, sustain and adapt a reliable, state-of-the-art back office interface.

Should the bank engage a technology platform to support its interaction with fintechs, like we do at nbkc with Helix by Q2, it cannot abdicate the client relationship wholly to that provider; rather, it should be visible to and engaged with the fintech, side-by-side with the technology platform. In this way, the bank expresses its commitment to the fintech partner and also reinforces its partnership with the technology platform. This partnership with the platform and the fintech results in a shared, vested interest to achieve success.

This approach, which means committing to meaningful staff, requires investment and ensures that rather than being an indistinct product provider, the bank is a committed partner that has invested materially not only in BaaS but also in its BaaS relationships. Generally, banks that are not at the cutting edge of technology will not have the credibility or expertise to engage with what inherently is a technology-driven industry. And fintech partners cannot be force-fit into a bank’s existing operating structure. At nbkc, we have dedicated fintech partnership teams, along with BaaS-specific risk management and operations functions, to support our fintech partners.

Banks also must have a clear sense of the scope of their product offering, and generally should focus narrowly on core products that have strong standing in the competitive environment and are supported by perfected operating processes. For example, at nbkc, we have focused our BaaS our offering on deposit products, like checking account services with debit cards, traditional savings accounts and FBO services. We also offer Compliance as a Service. Yet even as the content of our offering is consistent, its use varies by partner. The ability to customize to each fintech’s unique product goals and implementation processes is essential.

Finally, and critically, banks must remember that fintechs are attaching to their bank charters and the related regulatory requirements and scrutiny. Regulators will rightly expect that banks have a hands-on approach and comprehensive familiarity with their fintech partners and their deployment of bank product offerings. Innovation can initially outpace regulatory oversight, but regulation, and regulators, inevitably catch up. With fintechs, this has meant that relationships between banks and fintechs receive the same degree of oversight scrutiny as banks’ other operations, with regulators indicating that products issued by the bank via fintechs are still subject to all banking regulations. At nbkc, from the outset of our BaaS initiative, we have taken a risk-managed approach, with a dedicated compliance team overseeing our fintech relationships.

All of this is to say that BaaS, while offering a new channel by which banks can grow their deposit bases, is neither simple nor a guaranteed pathway to growth. It is, rather, a complex business requiring investment, commitment, sustained focus, operating flexibility, dedicated staffing and a bias for technological innovation. A bank’s business approach must match the innovation mindset of its fintech partners; its operating, risk and compliance frameworks must support the requirements of its bank charter.

Those who pile in for the notion of “easy money,” without understanding these requirements, won’t gain the trust and reputation needed to be meaningful in fintech partnerships. Those who have the technology and product platforms to meet the needs of fintech partners, as well as the  the operating and risk management components in place, have a chance to reap mutual rewards.