Dispel myths around a BaaS opportunity
Here are the myths that exist today when it comes to fintech partnerships:
Small vs. Large
We are a small CFI, hence not fit for a fintech partnership. Why would a fintech want to work with us?
- Fintechs want to partner with small CFIs as they find these organizations easier to work with. In addition, if a fintech is dependent on the interchange fee income then CFIs with assets less than $10B are preferred due to Durbin Amendment.
Rural vs. Urban
We are in a rural area; this may not be the right fit for us.
- Yes, location does matter. But, it’s more for the applicable state laws and compliance. That’s it. There are great examples of fintech partnering with CFIs that operate in rural areas.
We don’t have the right technology to drive the fintech partnerships.
- There are companies that specialize in taking care of fintech needs, reducing the burden on the bank. This also depends on the type of fintech and partnership.
We don’t have the technology talent to drive fintech partnerships.
- Executive-level sponsorship and innovation culture is what is needed. A chief innovation officer is a must-have, and while technology talent can help in certain fintech partnerships, it is not necessary.
Risk to my traditional banking business
Partnering with a fintech will cannibalize my existing business model.
The right marketing strategy can help you with this. Remember, if your traditional customer comes across services offered by the fintech partner, then it may not be a bad thing as you were about to lose the customer regardless. Example: An existing customer is shopping for a high-interest-rate money market account and comes across a CFIs fintech partner offering a higher interest-rate money market account.
Strategic dialog to ensure that BaaS is the right strategy for the CFI
We will provide a series of questions that you can discuss during your executive meetings that will help drive the conversation, as well as make the right decision.
Is there an executive-level sponsorship?
- This will require strategic focus and investment. It’s not a part time job, and a chief innovation officer or consultant is a must-have to drive the execution.
- Will there be a revenue target assigned for the initiative? This is must-have, as it will make it real.
Does a CFI have a niche or expertise that is a strength and can be leveraged for new opportunities?
- CFIs may have multiple niche areas such as efficient and effective card programs, business banking, or serving a specific segment like a non-profit. The goal is to leverage subject matter expertise to facilitate additional growth.
Is the CFI willing to challenge the status quo to innovate?
How good is the compliance and fraud management program at the CFI, and can it be leveraged for a fintech partnership?
How will the CFI stay relevant?
- Will the bank be successful in attracting a younger generation and new businesses that are familiar with doing things on demand, anytime, anywhere, on any device?
We highly recommend discussing the questions above in your strategy review meetings. Go offsite, keep your phones away, and engage everyone on your executive team to brainstorm the questions above. We guarantee that at the end of the exercise, at minimum, you will have a decision on if a BaaS strategy should become part of the business plan.
At the end of the discussion, if you conclude that a BaaS strategy is not the right fit for your financial institution, it’s fine! You can continue to grow organically and with mergers and acquisitions.
If the business strategy supports growth and keeps the bank relevant through other innovation initiatives, then you are on the path to success.
If the decision is to pursue a BaaS strategy as part of the business growth plan, then it’s time to decide which type of services your CFIs will offer for fintech.
Deciding on the type of BaaS opportunities your CFI wants to pursue
- Retail, business or hybrid
- Bank accounts – Deposits
- Payment services – ACH, Wires
- BIN sponsorship – Card Issuance
- Lending – BNPL (Buy Now Pay Later), Credit cards, Line of Credit (LOC), etc.
Which services to offer?
The type of services you want to offer to fintechs through the BaaS initiative depends on the goals of your overall business strategy.
- Higher non-interest income and the monetization of payment rails
- Debit cards – BIN sponsorship will increase interchange fee income
- Payment services (ACH and wires): Fee based model leveraging the FIs payment services
- More deposits at a lower cost of acquisition and interest expense: Bank accounts with embedded finance
- Lending: Buy Now Pay Later (BNPL) to increase the lending portfolio
- Existing compliance, risk and fraud management infrastructure
Working with fintechs directly or indirectly (using another BaaS vendor as an intermediary)
This topic will be addressed in a subsequent and more in-depth article on BaaS, however, here are some guidelines to drive the conversation about the type of BaaS partnership and fintech relationship the CFI may want to pursue.
- Fintech – Direct Partnership (on Core) CFI uses their existing core banking and API platform to integrate directly with the fintech
- CFI will hold most (if not all) of the data in their existing core or sidecar core platform
- Must have for such engagement:
- Modern, open, and cloud-based banking platform
- Technology talent
- Documentation and sandbox access
- Authentication and security
- Pricing model – Per API, Per account/transaction, subscription, etc.
- Separating fintechs from the traditional bank
- Data access and privacy
Fintech – Indirect Partnership, FBO (for the benefit of )
- CFI is engaging another BaaS provider to enable them for the fintech partnership
- The BaaS provider will hold most (if not all) of the data
- Must have for such engagements:
- A proven and well-established platform
- Financial stability
- An offering of APIs and BaaS services
- Terms and conditions
- A clear pricing model
- Compliance, oversight, and access to appropriate reports, forms, documents, and data
Make it real by having a clear roadmap for execution
Now, the last and most important step in creating the BaaS strategy document:
- Ownership – Chief Innovation Officer: Who wakes up every day thinking about the BaaS strategy? Simply put, if you don’t have dedicated resources to drive the strategy, then having a BaaS initiative may simply be a check-the-checkbox strategy. But let’s be honest, it is not real.
- Revenue Goal % Allocation – If a revenue goal from the BaaS initiative is not set, then there won’t be a sense of urgency. A specific target of the revenue goal helps keep the teams fully engaged and focused on the execution of the BaaS initiative.
- Investment – Allocating a required budget to hire resources, build the infrastructure, and get your name out there for fintech partnerships.