Embedded Finance, Member Exclusive

Embedded Briefing: Banks’ role in the BaaS ecosystem

  • The next stage of development in financial services requires fintechs and banks working together – to learn from each other, and collaborate to create next-gen products.
  • Also, as countries around the world find themselves at different stages of open banking regulation, the UK, EU and India lead the global race.
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Embedded Briefing: Banks’ role in the BaaS ecosystem

Fintech is today a powerhouse of an industry – globally, it is estimated to be worth $26.5 trillion, while also contributing the highest number of unicorns (roughly 1 in 5) across industries. The space has reached a level of maturity where experts see its convergence with the banking industry coming to the forefront. 

As much as innovation has spearheaded the industry’s growth, the next stage of development in financial services requires fintechs and banks working together – to learn from each other, and collaborate to create next-gen products.

While the value fintechs can bring to bank-fintech associations – with engaging customer experiences, robust distribution channels, and strong brand appeals – is apparent, there is less clarity over the roles banks can play. How a bank can bring value in the BaaS ecosystem is heavily dependent on what they’re good at, their unique model and infrastructure buildout.

“The approach Piermont takes is to foster a deeper relationship with the fintech companies we serve,” Wendy Cai-Lee, CEO and founder at Piermont Bank, told Tearsheet. “We focus on building a partnership with each fintech we onboard and providing value in a few key areas including risk management, operational excellence, and product development.”

Where Piermont sees itself bring the most value is in the regulatory and compliance components, especially in ensuring end customers (individuals or businesses) are served in a safe and sustainable manner. Sitting at the backend, part of their job is making sure their partners have what is needed in areas such as policies, processes, and procedures to address customer and operation issues. To streamline compliance, it must be integrated into every component of a bank’s decision-making process. 

Additionally, product development is a key area where the bank can assist its fintech partners. Fast-growing fintechs, often having scaled, want to remain relevant to their target audience while achieving sustained profitability. 

For banks to be able to serve fintech at such a capacity, however, fintechs need to themselves change how they think of working with banks. The need of the hour might be to move on from a supplier/vendor perspective of banks and see them as partners.

“On the flip side of the BaaS coin, the days of rent-a-charter for fintech are ending very quickly. So, for fintechs that are serious about building a genuine business, whatever the business may be, they should look for a true partner in banks versus treating the bank as a vendor,” Cai-Lee said.

This shift in perception is not only an operational need, but also soon to be a regulatory requirement. Regulatory agencies already have their eyes set on neobanks circumventing banking regulations by taking the rent-a-charter method. As a starter, neobanks are no longer permitted to market themselves as a bank.

While there is a recognition of the opportunity in BaaS throughout the banking industry, from traditional to digital-native operators, it is important to understand that BaaS does not fit every bank’s growth plan. Several traditional banks will have to revamp their tech and pivot internally to serve the space – both costly decisions in terms of time and money.

“The BaaS business requires significant investment in tech stack, compliance resources, and relevant experts. Banks that want to pursue opportunities in BaaS need to be committed to the business, or it’ll be unproductive for the banks and detrimental to long-term relationships with fintech,” Cai-Lee said.

However, even if every bank can’t become a BaaS operator, there are many other ways they can keep up with financial innovation. For instance, automation and machine learning today are critical to banking. Just as with consumers who have grown accustomed to digital banking and online payment services, commercial clients want faster and easier banking services.

Chart of the week

Source: Platformable

The world is looking at open banking from a regulatory perspective, understanding it to be an integral part of the future of financial services. As countries around the world find themselves at different stages of regulation, the UK, EU and India lead the global race.

Regulators in Europe and the UK are on a mission to formalize the environment for data sharing in the broader financial sector, and not just open finance. They plan on fully implementing open finance in the region by 2024, with the European Commission Digital Finance Strategy and the UK Smart Data Initiatives working together to achieve that goal.

Since India revealed its Account Aggregator Network last year, it has been witnessing a consistent growth in the accounts connected. Starting off with the 8 biggest banks in the country, the AAN intends to empower individuals with control over their personal financial data, which has historically sat in silos. The network is expected to help Indians in two key domains: access to loans and access to money management.

In the US, the upcoming steps in regulations are set to strengthen data portability rights in the sector. The CFPB is heavily involved with the public, hearing their concerns on consumers’ access to financial records and the data held by large tech payment platforms. While previously aiming for a full implementation of open banking by 2023, concerns over data privacy are set to delay that plan.

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