Let’s start simple.

You may be wondering if this is just another article discussing the partnership opportunity between community financial institutions (CFIs) and fintech. Rest assured, we have a different approach. Our objective is to offer practical and simplified guidance on aligning the world of BaaS with CFIs (with assets less than $10 billion). This raises an important question: Is such a partnership the ideal strategy for your community-focused organization? To find the answer, continue reading as we provide the necessary insights.

For the people. By the people.

We actively collaborate with CFIs in executing, exploring, and addressing the challenges associated with implementing a BaaS strategy. Our goal is to provide CFI-driven content that draws from our experience working with CFIs and the expertise we bring from our team members who have spent 25 years building open banking solutions and the past three years researching and developing BaaS offerings before joining Vitex Inc.

This multi-part article series will cover a range of specific topics aimed at guiding you through the journey of fintech partnership, leveraging our experience and expertise.

It is specifically designed for you if you represent a financial institution (FI) that falls into one of the following categories:

Haven’t yet considered BaaS as an opportunity.
Have considered it but have made limited progress.
Are interested and actively pursuing it but feel overwhelmed.

In this article we will discuss:

What is BaaS?

Why is it a big deal, and what are the opportunities for CFIs?

How can CFIs decide if it’s the right fit for them?

What is needed to participate in the opportunity?

What is BaaS for CFIs?

Simply put: CFIs enable fintechs to offer financial services that they otherwise cannot offer due to regulatory requirements.

With BaaS, CFIs can leverage their:

Charter:
Giving the fintech access to the fed’s payment system, allowing fintechs to take deposits and lend money on behalf of the bank
BIN Sponsorship:
Enabling the fintech to issue, process, and service debit cards
Compliance expertise and infrastructure:
The CFI can leverage their existing compliance oversight structure and subject matter expertise
Market access:
Access to its existing market and customer base

Why a fintech partnership with BaaS is a great opportunity for CFIs?

While some fintechs are competing directly with FIs, remember there is a partner FI behind those fintechs; sometimes multiple FIs.

Partnering with fintechs can help CFIs in many areas. Some are:

Monetization of the FI charter, existing processing and compliance infrastructure exists today. This is platform sharing business just like:

Airbnb – monetize vacation home/rooms when not in use.

Uber – monetize existing vehicles.

Expand beyond the geographic boundaries that exist today. System, process, and infrastructure exists already; why not get more out it?

Create a new recurring revenue stream at a fraction of the cost and reduce dependency on the traditional FI model.

Stay relevant and connect with demographics that may not otherwise engage with the FI directly.

Working with fintech’s will help CFIs challenge the status quo to provide superior innovations; even in the traditional brick-and-mortar FI services.

Partnering with fintechs will help to mitigate the threat to an FIs existence from other fintechs.

Success stories in BaaS and fintech partnerships

These partnerships are already happening, and many CFIs have seen rapid growth through fintech partnerships. There are many examples of successful partnerships between CFIs and fintechs. You will find a listing with the links at the bottom of this article.

Intrigued? Does this seem like a great opportunity? Is it the right fit for your organization?

Let us help you with a step-by-step process to guide you through.

Step 1

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.

Tech stack

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.

Technology Talent

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.

Step 2

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.

Step 3

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
  - API
    - Documentation and sandbox access
    - Authentication and security
    - Performance
    - 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

Step 4

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.