OBSERVATIONS FROM THE FINTECH SNARK TANK
Embedded finance—where non-chartered companies like fintechs and consumer brands provide financial services from chartered financial institutions—is projected to reach $7 trillion in transaction value by 2026.
Banking as a service (BaaS)—the services that banks (or other chartered financial institutions) provide to the fintechs and brands who want to offer financial services—is the flip side of embedded finance. Cornerstone Advisors estimates that BaaS will become a $25 billion opportunity for banks by 2026.
According to Cornerstone’s latest What’s Going On in Banking study, about 125 banks already provide BaaS services, with 50 to 60 in the process of developing a BaaS strategy, and an additional 200 considering a BaaS strategy.
Brand Risk From Baas?
Embedded finance and BaaS sound like a win-win for everyone, right? Maybe not.
At a recent conference, one session panelist warned bankers that BaaS could devalue their banks’ brands in the market. In an email clarifying his remarks, he told me:
“Banks need to have their eyes wide open to the potential negatives associated with a move into BaaS. For BaaS providers, consumers have brand loyalty to the fintech, not the bank. They usually don’t know or care who the bank underneath the fintech is and have no loyalty to the bank brand. The fintech may choose to take their business to another BaaS provider and the bank is left with no customer loyalty and no revenue from that fintech. That potential issue may devalue the entire franchise.”
The potential risk of fintechs taking their business elsewhere is real.
In a 2022 study from Levvel, many fintechs reported having issues with platform integration, data integrity, and their sponsor bank’s ability to scale. As a result, nearly half of fintechs said they’re considering switching BaaS providers.
This is clearly a business (i.e., revenue) risk for BaaS banks, but would this devalue the entire bank franchise?
Who Are You? Who? Who?
The tech CEO rightly points out that many fintech users don’t know who the fintech’s sponsor bank is. In fact, many might not know they’re interacting with a bank at all.
If a fintech—whose customers don’t know who the sponsor bank—moves its business to another bank, then yes, it hurts the bank’s BaaS business, but would that devalue the “entire” franchise? How would the bank’s existing retail and commercial customers even know that their bank was let go by one of its fintech partners?
Roughly three in 10 banks that offer BaaS services only have one fintech partner. It’s hard to believe that failing that one partner would result in brand devaluation for the whole franchise.
Keep Their Customer Satisfied
Two important points about being a BaaS provider that banks should recognize:
- The fintech or brand (i.e., the sponsor) is the bank’s customer.
- The customers’ customers are not the bank’s customers.
This is hard for banks getting into the BaaS space to understand. Many think they’re getting into embedded finance to grow their consumer base. They’re not—that’s just a by-product of the business. The primary goal of getting into embedded finance is to create a new customer base of fintechs and brands.
Here’s an analogy: My first job out of business school was with a hospital. The CEO pulled me aside one day and said, “I’m going to teach you everything you need to know about this business. Let’s start with who our customers are. Who are our customers?”
Naturally, I said “the patients.”
“Wrong!” said the CEO. “The doctors are our customers. They decide which hospital to put their patients in. Our #1 job is taking good care of their customers so they (the doctors) will be our customers.”
It’s the same with BaaS. The sponsor bank’s customers are the fintechs and consumer brands that want to offer financial products. Yes, the bank has to provide great products and service to the sponsor’s customers. But falling short of that doesn’t impact the BaaS bank’s brand with consumers—it impacts the fintech’s brand.
The Regulatory View
The regulators don’t see it this way, however. They—somewhat logically—conclude that consumers using products from a bank are customers of that bank, even if the bank’s services are delivered through some other company’s delivery mechanisms.
As one BaaS banker told me:
“Based on recent regulatory discussions, the expectation will become for BaaS banks to ‘own’ the CIP (customer information program) for the fintech’s customers. In the past, we could rely on the partner for that in some cases and now we will need to own the CIP piece and do the verification. This will add cost, negatively impact revenue, and add potential strains to internal resources.”
From a marketing perspective, however, the customers are the fintech’s or brand’s customers.
The Bank’s BaaS Brand Versus The Bank’s Core Brand
Falling short of delivering great products and customer service to a fintech’s customers does negatively impact the bank’s brand—among fintechs and consumer brands, not the end consumer. Conversely, a sponsor bank that does deliver great products and service enhances its brand value with fintechs and other brands—but not necessarily with end consumers.
What this means from a marketing perspective is that banks getting into BaaS are going to need new marketing departments with a different set of skills than they have in-house today.
Existing bank marketers are used to marketing directly to consumers and small (to medium-sized) businesses. BaaS marketing is about marketing to fintechs, SaaS software providers, technology marketplaces, and consumer brands—a totally different skill set.
Finding and attracting marketers with those skills won’t be easy—creating yet another human resource challenge for banks already struggling to find and retain talent.