A Community Bank's Perspective on Banking-as-a-Service

March 14, 2024
Sarah Sholar
VP, BSA Officer, Banking-as-a-Service

Are you intrigued by the world of Banking-as-a-Service (BaaS)? I'm Sarah Sholar, BSA Officer for Emprise Bank, focusing primarily on the embedded side and a panelist at the 2024 BaaS Spotlight: Banks-Fintechs Partnership Roundtable hosted by Unit21. With 17 years of experience spanning various sectors of banking, including roles in BSA for De Novo, military and traditional banks, and fintechs, I bring a diverse and unique perspective to the table. I'll be sharing my knowledge on Banking-as-a-Service from a community bank perspective as we navigate the intricacies of this ever-evolving landscape.


The Role of Community Banks in Fintech

In fintech, community banks are pivotal players, combining local insights with personalized services. Collaborating with fintech startups, they enhance offerings, embracing innovation while maintaining customer trust. Acting as a bridge between tradition and technology, these banks ensure a seamless transition to digital solutions. Their commitment to nurturing community growth positions them as essential contributors in the evolving landscape of financial technology.


Decoding the Shift in Banking Allegiance

As customer loyalty for traditional banks ebbs, the surge in BaaS adoption becomes a transformative force, particularly for community banks. Tech-native populations attracted to personalized financial options in fintech apps find this shift irresistible because true embedded finance goes beyond transactions by letting individuals bank their identity and profession in a single app where features and layouts are sticky.


For younger individuals, switching an entire banking relationship is easier, creating a dynamic where established institutions need to adapt to fintech for community banks. Emprise Bank, with its three generations of family-owned processes, excels in traditional banking practices but recognizes the need to integrate new technology. Partnering with fintech for community banks allows us to blend our established infrastructure with cutting-edge technology, paving the way for innovative solutions and driving growth.


A Community Bank's Stance on BaaS Regulatory Scrutiny

The rise in Banking-as-a-Service adoption in 2023 brought not only growth opportunities but heightened regulatory scrutiny. Enforcement actions became a reality, prompting community banks like ours to reevaluate our roles in partnerships. In my perspective, the recurring theme is clear—the financial institution is the regulated entity, regardless of whether the innovation originates from fintech partners. This means any issues found at any point in the partnership belong to the financial institution and are the financial institution’s responsibility to mitigate.


Emprise Bank, recognizing this responsibility, chose a proactive approach. We embraced primary monitoring as part of our architecture, ensuring quality assurance over our partners' activities. The delicate balance of being both guardrails and enablers for fintech for community banks required a commitment from our board and executive team.


Think: “Let’s innovate, but let’s innovate within this box of regulations.”


Banking-as-a-Service is not a fleeting trend; it demands a long-term dedication to hiring the right people, developing necessary programs, and establishing robust oversight processes. This is because everything in fintech is long-term. You can’t just dip your toe in and jump right back out. So, the board needs to be not only 100% aware but also involved and invested.


Best Practices for Growth and Compliance

Community banks like ours are adopting a strategic approach to find the right balance between business growth and staying on the right side of the rules.

1. Know Your Partner!

In financial partnerships, knowing your partner is the foundation for success. This goes beyond surface-level interactions; it involves a deep understanding of your partner's operations, goals, and approach to problem-solving.

2. Obtain a Comprehensive Risk Assessment

Request a risk assessment from your partners to ensure they are aware of their own operational gaps. This step is crucial as it may uncover issues that no amount of financial institution workarounds can resolve, necessitating enhanced oversight.

3. Conduct Your Own Risk Assessment

While relying on your partner's risk assessment is beneficial, it should not replace your own evaluation. Perform an independent risk assessment tailored to your institution's standards, grounded in the rules set by your regulator.

4. Operational Oversight at the Financial Institution’s Standard

Maintain operational oversight aligned with your institution's standards, ensuring regulatory compliance. Trust is crucial in fintech for community banks, but verification guarantees continued success in your partnership.

5. Foster Open Communication with Regulators

Cultivate a strong relationship with your regulators. Inform them of new partnerships before public announcements and engage in discussions about planned oversight methods. Don't hesitate to seek insights into challenges seen in other institutions. Recognize that partnerships extend beyond financial institutions, fintech, or Banking-as-a-Service partners. Foster relationships with regulators, bringing them into your initiatives, showcasing your work, and providing training for better understanding.


Let’s Shape the Future of Banking Together!

From decoding the shift in banking allegiance to addressing regulatory scrutiny and adopting best practices for growth and compliance, we hope you gained a better understanding of Banking-as-a-Service.


Want to learn more about BaaS from an Embedded Bank perspective? Follow me on Linkedin, and visit Emprise Bank.

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