A successful banking-as-a-service (BaaS) partnership between a bank and fintech is driven by a mutual desire to grow market share.
For the bank, the partnership represents new revenue growth and opportunities to increase earnings, with less risk and associated costs. Along with greater efficiencies and higher profits, data from a wider range of user interactions provide the bank with important insights into what consumers are doing with their money. Banks can use these insights to make informed decisions for future products and offerings to better serve their clients.
For the fintech, the BaaS partnership represents access to a bank license, charter, and the necessary infrastructure to support the interactions of users once the technology is launched. Most significantly, a fintech can leverage the bank’s existing workflows and protocols to achieve regulatory compliance. This critical competency opens the door for the fintech to bring its product to market.
What’s at stake with a BaaS partnership?
Since the bank is extending its license and charter to the fintech, it has a lot at stake. Many fintechs may come to the table with their own base of customers and a technology stack, but the processes they follow must still conform to existing regulatory standards.
For example, if money is withdrawn, deposited, or transferred within the fintech platform, these transactions must follow all of the mandated steps, including the requisite backend protocols such as anti-money laundering (AML), know your customer (KYC), reconciliation, and other oversight.
Failure to comply is the responsibility of the bank, including penalties, fines, and other measures — often with significant consequences. In 2020 banks worldwide amassed $15B in fines, with banks in the USA accounting for 73%, or $11.11B of this figure.
Preparing for a successful BaaS program
Follow these five steps before the bank-fintech partnership is finalized to ensure a well-balanced and profitable alliance:
- Be prepared to get buy-in
Before proceeding along the path of a BaaS partnership, internal buy-in for the bank must be solicited and obtained. Build a business plan that accurately scopes the partnership model, including regulatory and compliance requirements. It’s important that everyone - from leadership to the board - understand the commitments and responsibilities that lie ahead.
- Find the right partner(s)
Once internal stakeholders are on board, work begins to identify the best partnership. Look for a partner with similar alignment. For example, a bank that serves small businesses or consumers would partner well with a fintech that has a similar target audience. Conversely, some banks may not be comfortable partnering with a fintech operating in a high-risk vertical such as online pharmaceuticals, gaming, or gambling. Identify partner criteria upfront to ensure existing bank infrastructure, workflows, subject matter expertise, and even marketing strategies align nicely for both partners.
- Define the goals of the BaaS partnership
Now that potential partners have been identified, each entity must clearly articulate what they want to achieve in the short and longer terms.
Review the technology roadmap of the fintech, including plans to rapidly grow its customer base or introduce additional features and capabilities beyond what the product offers today. Is the bank willing to support this type of longer-term growth? If so, what must the bank do? New features and capabilities may require additional support from a compliance and administrative perspective. The bank must be prepared for this.
- Engage with third-party service providers
Once the goals of both partners are understood, it’s time to clarify the operational responsibilities. BaaS partnerships require that the fintech engage directly with the service providers the bank already has in place, for example, Socure, Marqeta, and others. The process of multiple negotiations, contracts, and integrations with these vendors can be particularly grueling for the fintech and may result in the failure of the partnership before it can even begin.
An effective measure is to introduce a fintech-as-a-service platform like Synctera to streamline these requirements. The Synctera platform takes all of the complexity a fintech must endure, limiting contractual obligations to a single contract and providing a single point of integration.
- Create efficient, day-to-day workflows
Along with the operational set-up, both partners must align on the necessary administrative and back-end workflows that will support the partnership day-to-day. Both must agree on how regulatory oversight will be managed and the responsibilities of each entity in consistently achieving compliance.
Often this step in the partnership requires a significant commitment of resources, especially for the bank. Once again, the implementation of the Synctera platform will alleviate the workload for both partners, automating and managing the flow of each transaction. Alerts are generated when an event falls short so it can be promptly remediated. All activities including KYC checks initiated by the fintech, are captured within an auditable log, meeting Federal Reserve regulatory compliance standards.
Whether you’re new to BaaS and bank/fintech partnerships or have an existing program already in place, we can help. Contact us today.