Banks-Fintechs Partnership: Drivers, Challenges, and Key Considerations in BaaS

Greetings, Unit21 blog readers! I'm Dana Lawrence, one of the panelists for the 2024 BaaS Spotlight: Banks-Fintechs Partnership Roundtable hosted by Unit21. For the last decade, I've been working on building fintechs and neobanks, and currently serve as Senior Director Fintech Compliance at Pacific West Bank in Portland, Oregon. I'm thrilled to offer you insights into the drivers, challenges, and crucial considerations shaping the evolving landscape of BaaS.

Driving Forces Behind BaaS Growth

Let's kick off our journey by dissecting the underlying drivers fueling the remarkable growth of the BaaS market. As we navigate projections indicating a 15% year-over-year growth, reaching a staggering $66 billion by 2030, it's evident that several key factors are propelling this momentum.

The Challenge of a Compressed NIM

BaaS presents an attractive growth opportunity for banks, offering a pathway to navigate the challenges posed by a compressed net interest margin (NIM) environment. As someone who recently delved into the nuances of making money as a bank, I've come to realize the pressing need for financial institutions to shake things up and explore fresh revenue streams. It's not just a financial riddle; it's a strategic journey to adapt to the changing tides.

BaaS Beyond Monetary Considerations

For many banks, including the one I'm associated with—a benefit corporation for good—the appeal of BaaS goes beyond monetary considerations. It serves as a conduit to extend our positive impact into communities we haven't reached before. Aligning with triple bottom line values—people, planet, and profit—BaaS becomes a means to not just diversify revenue but also extend our bank charter and the work we’re doing by partnering with fintechs who share similar values.

Baas Regulatory Realities and How to Conquer Its Challenges

In the whirlwind of BaaS developments in 2023, I noticed a spike in regulatory scrutiny and enforcement actions, underscoring the need to balance innovation seamlessly with compliance. The feedback from regulators echoed a vital theme – board involvement isn't just about information; it's about active participation, acknowledging our collective responsibility in tackling the risks that come with BaaS.

“The bank can outsource activities but still owns all regulatory risk.”

Fintechs, sponsor banks, and BaaS partners often overlook the risks. This is why it's important to view the fintech and BaaS platform as an extension of your bank team – understanding, monitoring, and providing feedback for true BaaS partnerships.

Adding a layer to this discourse, it's crucial for those navigating the regulatory maze to understand the importance of compliance, especially in the realm of BaaS partnerships. Some may argue, "I'm not regulated, so I don't have to deal with it." Yet, from my standpoint, working at a bank means being intricately linked with the fintech partner. The bank isn't just a bystander; it's personally responsible for all activities tied to that account, encompassing prevention, management, and detection of consumer harm and illicit financial activities.

Key Considerations For BaaS Success

Before wrapping up, I also want to share some insights into what I believe are the keys to BaaS success.

1. Embrace True Partnership

This is the secret sauce that demonstrates who’s going to be in the BaaS business for the next 10 years and who will opt out.

“A partnership is not something you can explicitly demand in a contract; rather, it’s more of the idea that we're both coming to the table to collaborate.” 

Partnership is the spirit of both parties coming together, the fiber, values, and mission of your organization, and the ongoing communication and collaboration when problems happen and how you deal with it together.

2. Recognize Diversity in Collaborations

Different fintechs may align better with specific banks, emphasizing the need for adaptable and flexible baas partnerships. This approach promotes resilience in the ever-evolving BaaS landscape.

3. Bring Your Regulators Along With You

Yes, it's a bit of a challenge, but regulators need a seat at the table. Involving regulators is essential for safety and standards. Their participation is vital in navigating the complex BaaS environment, contributing to a smoother and more regulated landscape.

Transform BaaS Challenges into Triumphs

From exploring revenue opportunities in a compressed NIM environment to embracing true BaaS partnerships and understanding regulatory nuances, BaaS is multifaceted. So, what are you waiting for?
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