Banking as a Service- What it means for Community Banking

 

 

Introduction

 

One of the hottest topics in the financial service industry todays is the development of the are called “Banking as a Service” (“BaaS”).   Put in it most simple terms, BaaS is the combining of a financial services platform with digital access to a banking account.  Banking as a Service platforms allow non-bank financial institutions to offer all kinds of financial products.  You may have seen some of the products if you recently purchased an airline ticket, or large appliance.  When you proceed to check out, you get a notice that you can (on approval), finance the purchase and pay installments rather than paying the whole price right away.  

 

There are several firms that are no providing point of sale financing that allow for short term installment loans to pay for larger purchases.  This is a form of BaaS. 

 

For community banks, the growth of BaaS can present both an opportunity and a potential challenge.  As an opportunity, BaaS presents the ability to reach out to a much larger number of customers who have been unbanked and underbanked and offer services and products at a reasonable cost.

 

FinTechs as the Basis for BaaS

 

We hear a lot about fintech companies financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally, startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.

 

The overall goal of Fintech companies include:

 ·       Efficient and speedy delivery of funds

·        Development of alternate means of solutions for ongoing problems

·         Especially in the financial industry there are a lot of naysayers, but the fact of the matter is that there are structural reasons for the potential success of FinTechs.    Underbanked and unbanked people represents a huge potential market.   The FDIC produces a great deal of information about the unbanked and underbanked every two years. The study is called 2019 FDIC National Survey of Unbanked and Underbanked Households.   As of 2019, the combined number of unbanked and underbanked was almost 30 million people. 

 Fintech companies are pointed directly at the needs of the underbanked and unbanked

 

·         When thinking of a fintech, it is important to note that what they are trying to do is to get money to people is a manner that is both fast and cheap

·         FinTechs are also working on ways to meet the needs of a large group of people who are outside of the banking industry

·         Fintech companies understand that while not everyone has a banking account, mostly everyone has a cell phone or a similar electronic device

 

Using this technology, fintech companies are reducing the need for bank accounts. FinTech companies are really going after this population of people who for the most part are potential bank customers by providing solutions to problems that people have with banks.   One of the things that Fintech companies have focused on are the many uses of the smartphone.   For example, smartphones can be used for stored value.  That is, just like a reloadable debit card, the smartphone can be used to reload value repeatedly.  Fintech companies such as Zoom, Square and Amazon is making it possible to transfer funds and store funds.  Other Fintech companies are changing the way that credit is underwritten.  Fintech also has increased a small institutions ability to offer different products and services.  As traditional means for profit become scarcer, Fintech opens the possibilities for additional income streams. 

 

The 30 million people in the underbanked and unbanked populations are your potential customers!  The statistics show that this group is getting younger and more internet savvy.  The more that the customers use their smartphones, the less likely they are to rely on banks

 

Some examples of the many uses of a smartphone in the fintech industry includes the following:  

·        Stored Value  - A stored-value the card is a payments card with a monetary value stored on the card itself, not in an external account maintained by a financial institution.  Stored-value cards differ from debit cards, where the money is on deposit with the issuer, and credit cards which are subject to credit limits set by the issuer.

·         APIs - An open API is a publicly available application programming interface that provides developers with programmatic access to a proprietary software application or web service. APIs are sets of requirements that govern how one application can communicate and interact with another.

·         Nationwide Reach- Using data analytics, fintech companies can have access to customer behavior data and assist with marketing opportunities

 

For many of the unbanked, fintech companies represent a much-welcomed alternative to the use of high-cost check cashers.  In addition, there are companies that are taking on Payday lenders who up to this point have not had a great deal of competition. One of the other things that these companies do is give financial institutions the ability to offer products and services

Information is power and even for a small institution, if you are unaware of what your customers want and are going to want in the future, it is a problem.  The regulatory agencies that cover financial institutions have recognized this synergy and have issued guidance and taken steps that are designed to ease the process for relationships between financial institutions and Regtech companies.  These included:

 

·         Regulators are encouraging institutions to pool resources when it is feasible

·         Joint Statement on Banks and Credit Unions Sharing Resources to Improve Efficiency and Effectiveness of Bank Secrecy Act Compliance was issued in October of 2018

·         One of the main points of the statement is that there are ways that financial institutions can leverage what other banks or firms are doing

·         Fintech companies have the ability to help in a number of ways.  Some of these companies have developed programs that are help with analytics and security

·         The Office of the Comptroller of the Currency has initiated the Fintech charter program that was designed to allow Fintech companies to have special banking powers.  This charter has been called into question by a decision of a federal court that is now undergoing appeal. 

 

Regardless of the outcome from the appeal of the Fintech charter, the regulatory agencies have noted that fintech and banking are a natural combination that will continue to grow and in scope and activity.