Banking as a service is dramatically changing the roles of banks and fintechs


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Bank as a Service (BaaS) is the latest in a long line of tech trends that claim to save the traditional banking industry, especially small banks and credit unions. Like most hot topics, BaaS has become a bastion of technical jargon that often skews its origin, purpose, and nuance. Despite its somewhat confusing and evolving definition, there is no doubt that Banking-as-a-Service is here to stay and opportunities abound for banks, fintechs and non-financial corporations.

When defining BaaS, there are a few key things to include: a technology stack, an authorized financial institution, an audience or purpose, and a set of desired features. These two definitions help to better define what constitutes BaaS today:

  1. The end-to-end process, ensuring the full completion of a financial service, delivered via the Internet on demand and managed within a specified time frame, according to Dr Ulrich Scholten.
  2. Another way to update Dr Scholten’s definition is to say that BaaS is a technology stack that allows brands, fintechs, or anyone who wants to integrate financial services into their business to operate modular banking specialties through banks. approved and provide a specific set of features to an audience.

Chris Skinner, fintech consultant and popular blogger, noted that one of the reasons BaaS is so misunderstood or misrepresented is the fact that “it is not an open bank and it is not APIs.” He goes on to say “it can include both of those things.” Banking as a service can include APIs from popular fintechs, but for it to be the purest form of BaaS today, it needs to be backed by a licensed bank.

A charter is useful:

Banking-as-a-Service can only go beyond API technology. At the end of the day, you need a banking license for it to be a true BaaS.

How Banks Can Use BaaS

Banks regularly see frightening statistics about their future. Surveys have shown that 90% of Gen Z respondents would consider a bank account with a non-bank organization. Additionally, 53% of all people would choose Amazon, PayPal, and Walmart as their top three providers of non-bank financial services. While some bank executives may think the threat is overstated, it is undeniable that consumer awareness and sentiment has drifted away from a single financial partner. Banking-as-a-Service offers both direct and indirect connections to these new groups of customers who look outside the traditional financial system.

It is common for older financial institutions to suffer from legacy technical debt and a lack of technology and capital resources to indirectly connect and benefit from customer relationships that would otherwise be expensive or unlikely to attract.

“Smart financial institutions will find a way to enable integrated finance and see their balance sheets as their superpower. “

– Simon Taylor, Head of Business for 11: FS

So how are traditional financial institutions leveraging Banking-as-a-Service to their advantage? Simon Taylor, Head of Ventures for 11: FS, says “smart financial institutions will find a way to enable integrated finance and see their balance sheet as their superpower.”

But for many smaller banks and credit unions, their legacy tech stack doesn’t offer the highest degree of flexibility to allow brands or fintechs to tie their services seamlessly. Fortunately, technology providers like Nymbus are giving banks and credit unions a way to run a more modern and flexible environment that brings the full capabilities of financial products to fintechs and brands that want to integrate and scale financial functionality. .

Although core financial products have not changed in the traditional system due to regulation, the way these services are delivered makes the difference between large-scale client acquisition and stagnant client retention exercises. The next decade of customer growth may depend on using technology to enter new ecosystems, many of which may emerge from traditional geographic footprints.

Some community banks and credit unions are already taking action while others are seeking more traditional means of growth through mergers and acquisitions and de novo expansion. Given the pressures on the margins of small and medium-sized financial institutions, there is no doubt that connecting to new client environments will be essential in the future.

A community bank with an open, API-based architecture can power some of the country’s most progressive fintechs, as the charter remains the most powerful and defensible asset a regulated financial institution has today.

Becoming a fintech catalyst could protect and improve bottom line.

The promise of BaaS for Fintechs

The fintech community has seen explosive user growth over the past 18 months, and venture capital continues to flow into the space at an unprecedented rate. But the sustainable growth of these new financial tools is being tested. High-growth fintechs that saw interest rise as the world went all-digital during Covid, have experienced a number of growing difficulties due to infrastructure issues with banking partners and operational challenges given the lack of established and scalable banking service operations.

HM Bradley’s capacity through partner Hatch Bank was tested as demand increased and they temporarily reverted to an invitation-only model. Chime, in the midst of a soaring valuation, has faced challenges in deposit operations this year and more questions about how future neobanks will be regulated.

The good news for fintechs is the growing interest of customers and the use of non-traditional banking tools. With the users comes the desire to “oversize” the applications, adding new functionalities in different financial areas (payments, loans, treasury, payroll, crypto, cash flow, etc.). And while the desire to add functionality may be tempting, a key part of the expansion will be the use of Banking-as-a-Service.

Separate the winners from the losers:

The way fintechs choose BaaS partners and approach integration will separate them from the pack over the next decade.

As seen at HM Bradley and Chime, the complexities have already proven difficult for some neobanks and B2C applications as they begin to rely on different technology and financial vendors while trying to maintain the pristine user experience that has attracted many users in the first place.

The way fintechs choose BaaS partners and approach integration will separate them from the pack over the next decade. Others will fall into the same traps the financial industry faces today, with a stagnant reliance on a few vendors that prevents seamless and successful customer experiences.

Non-financial brands rely on BaaS

The latest entrants – and quite possibly the fastest growing BaaS user segment in the coming years – will be non-financial brands. You may have heard “every business is a fintech” and that is true in many ways, but the next generation of integrated financial services within other businesses will be much more complex. You have already seen common examples in Apple Pay and Google Plex as they integrate BNPL and various payment options into their business ecosystems.

Integrated finance companies are expected to reach a market capitalization of $ 7.2 trillion globally by 2030. In addition, the integrated finance market will reach just under $ 230 billion in terms of new revenue volume from the global market. ‘by 2025 in the United States, up from $ 22.5 billion in 2020, an increase of 922%, according to Business Insider. This growth reflects two key trends:

  1. Retailers want to take more ownership of financial empowerment within their business (and benefit from it). Whether businesses are integrating new payment options or short-term lending features, more and more businesses are recognizing that they need great partners to improve the way their customers “bank with them”.
  2. The “Grand Opening of Finance” is slowly taking place. As more universal APIs gain traction, consumers will expect seamless integration and connectivity between their financial service providers and their preferred brands.

Financial services integration presents a number of integration and customer experience challenges for non-financial companies, but access and ease of integration will continue to improve over the next decade. Already reliant on a variety of payment tools through companies like Square, Shopify, Apple, and Google, many businesses will need to hire stronger financial product strategists to truly create the best, most profitable financial solutions within. their services.

What’s the next step for BaaS?

The outdated concept that fintechs would end the traditional financial services industry has quickly been stifled over the past five years. Financial institutions and fintechs still need each other to deliver the most secure, compliant, and successful customer experiences today.

In the coming years, more and more banks and credit unions will enter the BaaS landscape through technology partners, and some will directly acquire fintech offerings that can be tied to their BaaS offering. Fintechs will continue to seek out BaaS partners who can demonstrate scalability, as users young and old alike seek better digital experiences.

Additionally, non-financial brands see a growing window of opportunity to embed financial capabilities into their services as BNPL, short-term finance, credit, and other digital payment opportunities emerge in non-traditional places. Banking-as-a-Service is clearly redefining when and where businesses provide financial services. The implications for bankers, fintechs, and brands are huge.


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