Banking-as-a-service (BaaS), or the enablement of banking and other financial services via APIs, is a game-changer for fintechs and banks. The growth of financial infrastructure providers means offerings like debit cards, payments and lending are no longer the exclusive preserve of the banks. Any company can be a fintech company, thanks to the plumbing being available to more players. It’s estimated that BaaS could become a $3.6 trillion market by 2030.
The flipside of this trend is the number of banks that want to work with fintechs – either directly or through intermediaries – continues to grow, with more than 30 banks currently supporting fintech relationships. This constitutes a small fraction of U.S. banks, and there are important considerations for fintechs looking for the right partnership model.
Two approaches to finding a bank partner
BaaS has often been likened to the AWS of financial services because it significantly reduces the expense and effort involved for fintechs that want to launch new products. It covers a range of products and relationships, but BaaS partnerships typically fall under two categories: the “invisible bank” model, in which the bank plays a behind-the-scenes role with relationships managed through an API provider; and the engaged partner model, in which a partner bank plays an active role with the fintech in determining the product direction and strategy.
In a successful bank-fintech partnership, the banks handle the regulatory and compliance components, and when both parties are aligned, the fintech can more effectively develop a product roadmap and bring new offerings to market. Cultural alignment is a key enabling factor.
Companies may see a more compelling rationale for one model over the other, but as we discuss below, an engaged, one-on-one bank-fintech partnership can ensure that both parties can deliver unique, custom product solutions for customers, create larger market share and enable scalability for the fintech.
The “invisible bank” model
In this “rent-a-charter” framework, fintechs work with banks through API providers which act as one-stop-shop platforms to allow them to roll out products like payments, deposits, loans or other offerings. This model has garnered considerable attention in recent months, with the growth of platform providers that pitch a turnkey approach to bank collaboration with a single point of contact through them and no contact with the partner bank. In effect, it’s a relationship whereby fintechs are provided “standardized access” to a network of banks through an intermediary, including access to solutions such as payment, deposit, lending and investment products.
The main advantage of this model is that the intermediary does the heavy lifting, allowing the fintech to tap into a range of banking capabilities without the necessity to build the underlying infrastructure or handle one-off interactions with partner banks. API providers using the “invisible bank” model argue that they allow tech companies to build financial features while cutting down on time, effort and expense. In turn, the fintechs, under this scenario, leave the technology and compliance functions to third parties and their outsourced partner banks.
Successful partnerships through this model depend on enabling factors, and there are risks.
Without a direct line of communication with the partner bank, fintechs could be constrained in their plans to develop new and unique product propositions.
If the API provider has clear processes and service-level agreements, along with a close relationship with the partner bank, the fintech can focus on its product delivery and customer need. But when something goes wrong, communication with the partner bank is routed through the API provider, which could interfere with the seamless delivery of products and harm ongoing customer relationships. As a result, some fintechs may want more control over their product destinies by also having the option to work directly with the bank partner.
The engaged bank-fintech partner model
A framework that allows partner banks to work directly with a fintech can allow for closer collaboration. It’s an approach that’s as much about culture as it is about technology. It offers the fintech direct access to the bank, in addition to the API layer, allowing the fintech to shape the nature of the partnership and get products to market faster.
With an engaged partner model, cultural alignment between the bank and fintech is key. It can unlock prospects for tailored product solutions that go beyond rigid parameters of what a “rent a charter” arrangement may allow. When goals are aligned, partner banks can respond and approve changes, and respond to client needs at a moment’s notice. In other words, what could take weeks or months can be achieved in a matter of days.
When direct bank-fintech BaaS partnerships work, they can act as foundations for deeper relationships, including access to cost-effective credit facilities and other collaborative opportunities down the road. They allow the fintech to creatively craft product roadmaps through continuous access to the bank’s expertise beyond the parameters of a “rent a charter” arrangement.
When something goes wrong, or when the fintech needs to build a solution outside of the standardized API layer enabled by the “rent a charter” paradigm, the bank can work alongside the fintech and the API provider in meeting this challenge. The bank can also work with the fintech to proactively address regulatory requirements and risk considerations.
Every engaged partner relationship, however, is not equal. For a direct partnership to work, both the bank and fintech’s visions need to be aligned, and the bank must be capable of making the relationship productive and worthwhile. Some banks may be less prepared to move quickly enough to support a fintech’s product timeline or may not have an appropriate grasp of the culture and technology capabilities to make a partnership work.
Instead of a “rent a charter” paradigm, an engaged working relationship with fintech partners from day one can help them bring their products to market faster. Fintechs that truly want to differentiate will benefit from the flexibility to craft products that fall outside of the set parameters established by platform providers that handle relationships with the “rent a charter” bank. It’s the reason why some fintechs prefer a direct relationship with a bank that’s adaptable, selective, and understands how to grow a business.
Ultimately, the choice of a partnership approach will depend on the circumstances and needs of each fintech and partner bank. From our point of view, the bank partner, and nature of that relationship, is critical to positioning a fintech for success in a competitive market.