Banking as a service

How mutually beneficial partnerships within the BaaS ecosystem can help banks and fintechs expand into lending: Piermont Bank’s Rodrigo Suarez

  • In a conversation about BaaS relationships during Tearsheet Talks, Piermont Bank's chief banking officer shares valuable insights on the dynamics of bank-fintech partnerships.
  • Delve into the world of sustainable collaborations by learning how aligning incentives and leveraging expertise can reshape the future of banking.

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How mutually beneficial partnerships within the BaaS ecosystem can help banks and fintechs expand into lending: Piermont Bank’s Rodrigo Suarez

Banks, fintechs and technology companies all have important roles to play within the BaaS ecosystem. These partnerships, when structured correctly, can establish the foundation upon which to build additional opportunities to leverage data for credit opportunities.

As a part of Tearsheet' Talks: Lending x Credit x Data, Rodrigo Suarez, Chief Banking and Innovation Officer at Piermont Bank, will discuss how mutually beneficial partnerships within the BaaS ecosystem can help banks and fintechs expand into lending.

Rodrigo was appointed to his current position in March 2023. Previously, he served as Head of Innovation at Piermont. Rodrigo has 10+ years of experience as a strategist in the financial services industry. Prior to joining Piermont Bank in 2020, Rodrigo served as Principal of INV Fintech, a startup accelerator in partnership with Fiserv and more than 20 financial institutions. In this role, Rodrigo mentored multiple early-stage companies, significantly expanded the program’s corporate ecosystem, and supported both startups and incumbents identity and execute mutually beneficial partnership opportunities.

In this talk, we discuss:

  • What should banks look for in a potential fintech partner?
  • How to choose the right bank?
  • How banks and fintechs work best together.
  • Opportunities for banks to lend to fintechs and the value of data in these relationships
  • How to align incentives around credit decisioning
  • Things to look for when working with a technology provider
  • What a relatively new digital bank bring to ecosystem partnerships
  • Banking as a service vs. embedded finance.

Watch Rodrigo's talk

What banks should look for in a fintech partner

Rodrigo Suarez, Piermont Bank: I think a lot of it depends on what the bank is looking to do. Different banks that are either already in banking as a service and embedded finance space or looking to get into it should define what specifically they're looking to do. Those are very big spaces. So if you're looking to do consumer programs, or if you're looking to do commercial programs, even that high level distinction will lead you to look for different things in the partners that you work.

Obviously, with how the market has evolved and the pressure both on banks and fintechs,that are working together, it's important to look for experienced teams that have domain expertise, and that really understand what they're looking to do, so that the partnership can be long term sustainable. On both sides, there should be an understanding of the challenges that are involved in executing a partnership between a bank and a fintech.

On the bank side, I think understanding how fintechs work is important and understanding that they have a different culture, that they have a different way of launching products, is very important. And on the fintech side, understanding that you were operating with a regulated institution is critical. That really sets the foundation to then think about what exactly you're going to be doing, especially for something that may eventually evolve to lending. Having that clear alignment from the start is critical.

What should fintechs look for in a bank

It should also start with what the fintech is looking to do. So if a fintech is looking to launch a consumer card program and eventually evolve that into a consumer lending partnership, I think it's important for the fintech to look for a bank that understands how to operate within that consumer space, and then has experience doing not only what the fintech is looking to do at that point in time, but also experience with what the fintech is looking to do later on.

In our case, just to go a bit more specific on Piermont, we're really a commercial lender, not a consumer lender. So even though a lot of the work that we have done within fintech on the payments and banking side thing where we have commercial use cases, there is definitely more alignment for us to potentially evolve that into a lending program later on. So fintechs that are looking for a bank that has that expertise would hopefully look to us, but conversely fintechs that are looking for expertise on, let's say, a an unsecured consumer product, would not necessarily look to us, I think there are banks that are going to do that much better than than we can.

Regardless of what the bank's focus is, I think a demonstrated track record of having done partnerships with fintechs is very important. The first few ones are tricky. There are a lot of obstacles along the way. So working with a bank that has done it, that understands how to overcome those challenges is also one of the things that would matter most if I were on the fintech side.

BaaS moving into lending

We intentionally started with Banking as a Service and with a focus on payments and banking: you know, checking accounts, savings accounts, that sort of structure, but always with the intention of eventually evolving that into lending opportunities. And the reason why we did that is because when you launch a program that has all of the data, a Banking as a Service program, a debit card program -- that positions you to eventually think about opportunities to leverage that data for other things, including on the lending side.

We think of that in two different levels or two different flavors. First, there is like an opportunity for the bank to lend to the fintech as a commercial entity. So if you have data on the underlying card program and the revenues the fintech is generating through its payments offering, or the deposit and flow that you're generating through additional end user growth, that positions you as a bank to potentially lend to the fintech. Especially, in this environment, I think there is going to be more of a need for technology companies and fintech to look to banks that understand their business and to lend to them.

There's this other flavor, which is, how do you work with the fintech in partnership to lend to another user base? There are also a lot of things that you can use the underlying data for. And I think it all really boils down to really understanding certain nuances and the underlying end user segment that you're looking to potentially serve with data that you wouldn't necessarily have if you had not started with banking and payments under like a more traditional Banking as a Service model.

So for us, it's really the first step to eventually do something that's going to be, at least in our opinion, much more involved and harder to do than just payments or accounts.

Aligning incentives in BaaS relationships

I think there's always skin in the game, whether the bank lends to the fintech or not right, you're working very closely with a fintech to hopefully accomplish the same objectives. There's a lot of work that needs to be done by the bank and by the fintech to make sure that those interests are aligned and that risk is being managed appropriately. In a more traditional partnership, where the bank is lending to the fintech, it only increases that level of connectivity between the bank and the underlying fintech and the program, because, obviously, if you're lending to a fintech, you want to see the underlying program succeed.

So to the extent that you can be supportive of the fintech to keep generating that revenue and growth, to be hitting those projections that you're tracking, it will also help them on the credit side if you're basing certain credit decisions on those milestones. So it's something obviously tricky and hard to accomplish. But I think if it's done correctly, it can both increase the difficulty in executing the partnership, but also potentially make it richer and more interesting for both the bank and the underlying program.

How to choose technology partners

There are a number of things to look for. But primarily, I think it's looking for the right tools to leverage the data that you have to accomplish the objectives that you have. And I know that sounds very conceptual. But if you're looking to, for example, create a better underwriting model with specific segments within the SMB space, I think the the first thing that you should be looking at is a technology provider that has the ability to pull in all the data that you would need that would supplement your existing data to help you fine tune and improve on a unique model that you're working on.

A lot of the use cases that we work with, and the ones that I'm thinking through right now, traditional underwriting models may not necessarily work in serving an underlying end user base. So having that approach to iterate is very important in a vendor, both on the fintech side, or on the bank side if the partnership is looking to do something unique.

There's an intelligence layer on top of the data that the fintech may already have. But I think you need to also be able to extract data that will complement the data that you do have. So let's say you have a lot of transactional data, you may still need to pull in other, more traditional data, like credit reporting data, or if you're targeting a segment in the e-commerce space, you can also pull in like e-commerce data to enrich your models. So that intelligence layer on top of what you have is important, but the ability to augment it with adjacent and complementary data is also very important.

Piermont Bank's model

There are a few things. But the most important one is the fact that we're relatively new ourselves. We got our charter in 2019. And from the start, we began building a business that will enable us to do partnerships and have a robust ecosystem with fintechs. And technology companies have been very important for us. So there is really that cultural component that some other banks don't necessarily have and also buy-in across all levels of the organization to do this and do it well. That's where I think our focus is a bit of a differentiator.

That aside, I'm think it's also looking at these partnerships in a holistic way, and not just looking at one isolated component. When we look at Banking as a Service ,as an example, of course we want to do the underlying banking or debit program correctly. But we also want to identify where we can be better partners to the fintech. And that's where the lending piece comes into play. In many cases, we will be very well positioned to lend to the fintech and to enable them to grow as a company and to accelerate that growth. And because we have an understanding of the underlying program, we can also, in certain cases, step in and structure a partnership around a potential credit product.

To give you one concrete example, we work with a company called AngelList, mostly on the banking and payment side. But as we were working with them, we also realized that there is this intersection where they want to offer a capital call line of credit to some of their underlying funds. That's an area where we have expertise on, so we're partnering to also enable that capital call line of product through their platform. And that's really an example of how we can go from just a component of a broader partnership to eventually tackling a much richer set of problems. Some banks are very well positioned to do that, but others just look at some of those things in isolation in putting them together.

Where BaaS is headed

I think we're really now entering like a new phase of Banking as a Service, or embedded finance and banking. I think what will be different is that in the last phase, or the last iteration of Banking as a Service, we saw a lot of very a lot of models that were very product specific and product driven, but that were not necessarily solving an underlying need. There was a thesis that they were solving potentially like a unique need for a given segment, but it turns out that that segment did not have that differentiated need.

And right now, what I think is happening is there's a lot more awareness that the underlying value needs to be there first. And then you can think about how payments, how banking, how lending can enrich a platform's value. AngelList is one example of that -- AngelList's value does not depend on them being able to facilitate payments or do certain things in banking or offer like a capital call line through a partnership with us. They do a lot more than that. But all of those pieces fit nicely into their broader offering and make it even better.

That's what I expect the next phase of Banking as a Service and embedded finance to look like and lending will definitely play a component because when there's an adjacent banking or payments offering that will enrich the underlying product, with the lending part of it, you're able to leverage that data correctly as a natural extension. And within those models where there's a broader offering and the broader product that already derives value from a specific user base, it will be a lot easier to evolve from banking and payments to lending.

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