Banks are missing out on a huge revenue opportunity through BaaS partnerships
Bank-fintech relationships have gone mainstream. Roughly nine in 10 financial institutions now consider working with fintechs important to their business, compared to 49 percent in 2019, according to Cornerstone Advisors.
But are those partnerships translating to increased revenue? The answer depends on how banks are approaching their work with fintechs — and in particular, whether they are engaging with banking as a service (BaaS).
Cornerstone Advisors projects massive revenue growth for banks that support BaaS, where their products get embedded in third party apps.
According to their research, banks that currently offer BaaS support an average of 1.3 million account holders through six partners. For a bank that supports a mix of consumer and commercial accounts via BaaS, that could mean $40 million in additional annual revenue. Cornerstone estimates the BaaS industry could grow to $25 billion in annual revenue by 2026.
But most banks aren’t engaging in BaaS. While many still partner with fintechs, they’re doing so in a limited manner: By using the fintech’s technology to improve the bank’s infrastructure or services internally.
This inward approach isn’t growing business. While many banks said increasing loan volume was an objective of their work with fintechs, Cornerstone found that only 28 percent of respondents said they’d seen a five percent or more increase in that area.
The problem, says Cornerstone Chief Research Officer Ron Shevlin, is that too many banks are viewing fintech as a way to cut costs by streamlining internal processes — rather than thinking about fintech relationships as a vehicle for growing revenue through BaaS.
“You’ve got to establish your strategy first, on where you are going to go after business to generate revenue — and then find partners who can help you do it,” he said.
Here’s how banks can do that.
Start treating fintechs like actual partners
Banks often refer to their relationships with fintechs as “partnerships,” but sometimes they’re just paying fintechs for services. For example, a bank might pay a fintech to build the bank’s online account opening portal.
“I think part of the challenge and confusion in this is that what the banks say are partnerships, really — for all intents and purposes — are just vendor relationships,” said Shevlin.
The difference is that partnerships help both parties grow revenue together. The way banks can do that is by offering their services — such as lending and payments — through third parties, enabling the bank to reach new end users.
Those third parties could be fintechs that center their business on chartered bank-backed services; or they could include businesses that don’t center on finance at all but want to embed banking services. The latter example is called embedded finance, and it’s expected to grow to a $138 billion market by 2026.
One example of embedded finance cited by Shevlin is Lyft’s debit card for drivers, which features seamless account opening within the Lyft app and enables instant payments to drivers as well as rewards.
“Behind Lyft’s debit card offering is a bank that: 1) provides the debit card, 2) manages the movement of money in and out of the accounts, and 3) handles the regulatory compliance requirements for providing the product,” he writes in Forbes.
Figure out your BaaS go to market strategy
So how do banks get past treating fintech partnerships as a box they need to check, and transition to a BaaS approach that actually grows their revenue? The first step, said Shevlin, is to get clear on your priorities.
“From a strategic perspective, the challenge that many banks are facing today is they need more revenue. Interest rates have been so low, the margins have been terrible, the economy's been down, that's depressed demand for a lot of things,” said Shevlin, adding that non-bank lenders have made inroads with mortgage lending.
That means that if banks want to make money from working with fintechs or embedded banking partners, they need to get serious about making their core systems available through banking as a service (BaaS). A survey by Cornerstone found most bank respondents were at least thinking about adopting a BaaS strategy, but only 11 percent already have BaaS offerings.
A lot of banks that adopted BaaS strategies early on developed their own BaaS platforms, said Shevlin. But he doesn’t think this is feasible for banks looking to enter the BaaS market now, and said that even banks with their own BaaS platforms are starting to look to outside BaaS providers “as they discover how challenging it is to maintain.”
“I don't think any bank getting into this strategy today has the luxury to take two to three years to build these capabilities — not when they can get them off the shelf,” he said.
BaaS providers like Treasury Prime that specialize in connecting fintechs directly to bank cores can cut integration times down to weeks. You will want to look closely at what potential BaaS platforms offer. How experienced are they with banking systems? How long is their track record of success? Will they facilitate a direct relationship between you and companies that embed your banking tools, or do they act as intermediary for everything, which may affect your control over risk exposure? How do they handle compliance and FBO vs. on-core bank account structure? What sorts of fintechs or other companies do they work with? And what other banks are on their platform?
Banks stand to gain significant revenue from embedding their tools in third-party apps. In fact, these partnerships are quickly becoming table stakes for future banking success. The right BaaS provider can connect you with partners that meet both your growth needs and fit within your level of risk tolerance.
As with any partner, finding a BaaS provider that is transparent is crucial. Treasury Prime is always happy to chat. To learn more about how we can help your bank grow through collaboration, get in touch with our team.