Written by: James Dornbrook
Technology is becoming a huge battleground in banking as a way to differentiate, offer easier-to-use services to customers — and stay in the game.
A term emerging from this struggle is "Banking as a Service" (BaaS), a kind of highfalutin way to describe a technology platform banks create to enable them to offer financial services to nonbank entities such as financial technology companies (fintechs). Banks see BaaS not only as a way to generate huge amounts of new fee income, but as a springboard to the future and a way to stay relevant in an environment constantly changing because of new technology.
But the concept behind BaaS has been around for decades, said Doug Pagliaro, senior vice president and head of fintech initiatives at UMB Bank.
“Our institutional banking group has already been providing these same types of services to the broker/dealer and investment firm marketplace for over four decades,” Pagliaro said. “Now we’re doing that with fintechs, and it is opening up a whole new channel for us. It aligns because fintechs are looking to tap into ways that will make their product offering an account that can manage payment services. So for UMB, it’s allowing us to tap into a new segment, and the hope is we gain a nice, new revenue stream for the bank."
Pagliaro said he considers providing BaaS to fintechs a revolution in the way traditional banking services are offered to customers in terms of how they access and use them.
Josh Rowland, CEO of Kansas City-based Lead Bank, said that as recently as five years ago, banks and fintechs basically had declared war as banks complained about nonbank entities being able to lure away consumer deposits without facing the same highly regulated and Federal Deposit Insurance Corp. rules. That has changed, and an armistice has manifested.
“There is understanding around who is better at developing software and the talent and ingenuity of technology company entrepreneurs who want to deliver mobile banking or cashless payments and things like that," Rowland said. "But fintechs are also understanding that they need banks. Their customers rely on the FDIC insurance for money being deposited. Their customers also rely on regulations to provide safe, effective and transparent services, and to ensure these innovations don’t become vehicles for crime.”
Rowland said the relationships between fintechs and community banks remains in its infancy, though it already shows lots of promise. Lead Bank used a partnership with an Austin, Texas, fintech called Self to drive a 99% increase in its loans to individuals, boosting its overall loan portfolio by 27%. Self helps clients repair or build credit by helping them build up their savings, then secure installment loans off those savings that get paid back and build better credit scores in the process.
Rowland sees services like Self as exactly the type of thing community banks should be open to exploring because it solves a major problem for their clients.
“Lead Bank is a community bank, and that means something other than just geography,” Rowland said. “We believe that community banks have always served ordinary people who need to build credit. People have always sought out community banks to do those kinds of things. So if I can say Lead Bank is going to apply that same idea, at scale, digitally, through a Banking-as-a-Service platform, then what we need to do is select those companies that we believe actually deliver on the promise of improving financial health for ordinary people because that is a clear crisis in this country and because we care about that.”
Pagliaro said banks not only need to keep engaging with fintechs to boost customer service and find new revenue streams for the bank, but to keep pace with challengers emerging in the market.
“Over the past year we’ve seen about 20 filings by companies wanting to get a bank charter for a fintech,” Pagliaro said. “We’ve also seen fintechs like SoFi go out and buy a small bank with a national charter. So everyone wants to get into the space. A general warning for the banking industry is that it should be paying attention to what’s going on with these challenger banks who are changing the ways the game is played every day. We need to stay on top of what is being offered out there, what’s changing and what different products are being offered.”