Banking as a Service (BaaS) is a business model that allows banks to offer white labelled banking processes to fintechs and other corporations through the bank’s secure and regulated infrastructure.
It empowers these companies to provide seamless financial services to their customers without having to obtain a banking license, or to build up the substantial balance sheet and reserves of an established financial institution.
Like many other fintech innovations, BaaS presents an exciting opportunity for incumbent banks to grow their digital portfolio. Instead of trying to go it alone, banks may do much better by focusing on their unique strengths and outsourcing distribution to the right partners instead.
One of those partners is Fintel Connect, a leading affiliate network, tracking and reporting technology, and marketing partner dedicated to the financial services space.
Founded in 2019 by Nicky Senyard, more than 80 financial service brands use the Vancouver-based startup to enhance their marketing through its curated financial affiliate network.
Fintech.ca sat down with Senyard to learn more about the importance of Banking as a Service.
Can you give a brief introduction to Banking as a Service (BaaS) and why it has become so relevant in the current financial ecosystem?
NS: Banking as a service has become incredibly important for a variety of reasons. One of the key factors is the remarkable advancements which have brought about greater flexibility in the realm of financial services, both in the back end where the technology infrastructure is managed and in the front-end user experience. With improved authentication methods, user experiences have become more secure, allowing a wider range of financial transactions to take place online.
As the number of online financial transactions has increased, there has been a parallel development of products designed to tackle specific challenges faced by different user groups. For instance, independent contractors or freelancers often encounter difficulties in obtaining loans due to their unconventional financial circumstances. This growing demand for financial flexibility has spurred the creation of products tailored to meet these unique use cases.
While traditional banks typically cater to a broad range of use cases, fintech companies focus on specific use cases through targeted product development. This distinction between general and specific approaches is where banking as a service truly shines— it serves as the engine behind these specific use cases.
Can you explain the importance of marketing, compliance and context or banking as a service?
NS: Banking as a service and fintech products still operate within the framework of financial regulations. While banks are designed to be highly compliant with regulatory requirements, fintechs are built to be agile by nature. However, fintechs are still subject to a strict set of rules within the regulatory context. So, when it comes to marketing compliance or content compliance, our goal is to ensure that fintechs adhere to the same rules as banks. Failure of fintechs to comply could directly affect both the bank and the banking-as-a-service platform. With content compliance, our aim is to provide banks with tools that reduce the labor-intensive nature of ensuring compliance.
What are the key strategies that you use to ensure marketing compliance in vast operations?
NS: Fintech partners engaging in marketing activities must abide by a variety of technical requirements. We need to make sure that we know what these rules and requirements are to begin with. One can stay up to date with the ever-changing regulations by following institutions in the US such as the Consumer Financial Protection Bureau (CFPB), American Banker, Equal Credit Opportunity Act, CAN-SPAM, Truth in Savings Act (TISA).
For those in Canada, look at Canadian Bankers Association, and Financial Consumer Agency of Canada (FCAC). These organizations will help you and your partners adapt to new requirements to overcome potential compliance risks and maintain a competitive advantage. As we have discovered, there are two sets of regulations governing different aspects. One set of rules is straightforward and clear-cut, covering factors such as interest rates and necessary disclaimers. These rules are easy to follow as they provide explicit instructions. The other set of rules is more open to interpretation such as guaranteeing certain rates or claiming that a service is entirely free.
We have identified certain trigger words and specific circumstances that fall under the black and white rules. In order to support fintechs and BaaS banks in complying with marketing regulations, we must acquire extensive knowledge about both sets of rules and ensure that our practices align with the regulatory framework.
How do you balance marketing, creativity and innovation with compliance in a fast setting?
NS: To address specific users with a particular product, there are no specific limitations. However, it is crucial to refrain from unfair practices or UDAAP (Unfair, Deceptive and Abusive Acts or Practices). It is important to avoid making false inferences or targeting and excluding specific groups. The regulatory environment mandates fairness and equality. The primary focus is on avoiding misleading information. While enthusiasm is allowed, it must not cross the line into exaggeration or become misleading, as this can lead to legal issues.
With potential marketing compliance issues, should BaaS providers be particularly aware of and how can they mitigate these risks?
NS: Be aware of the rules and understand both the straightforward regulations and the contextual words that should not lead to inaccurate inferences. It is important to be very clear in your communication. In our experience working with multiple BaaS banks, we’ve noticed that we play a significant role in helping them establish a strong framework. This framework enables them to clearly express their expectations to financial institutions, measure the fulfillment of those expectations, and receive valuable feedback. It also fosters two-way communication, ensuring effective collaboration between all parties involved.
In what ways can technology and automation tools contribute to more efficient and reliable marketing compliance?
NS: Automation serves as a catalyst in effectively monitoring marketing campaigns and materials for compliance and takes away the risk of human error and streamlines the whole process. Plus, with advanced analytics and machine learning, potential compliance issues can be spotted in advance, giving us the chance to take prompt corrective actions. Automated reporting systems help generate accurate compliance reports, ensuring transparency and accountability in our marketing efforts.
Our tool, Fintel Check, is designed to make a direct impact on marketing compliance. It sets up rules, keeps an eye on activities, and generates reports that we can take action on. With Fintel Check, we can empower compliance officers with intelligent insights and provide valuable feedback to fintechs using BaaS banking, letting them know about any necessary changes they need to make. It’s all about collaboration and improvement! This collaboration sparks industry-wide growth and evolution, creating a dynamic and exciting landscape for financial services.
How is Baas addressing some of the challenges and pain points in the traditional banking sector?
NS: There are multiple ways in which BaaS positively impacts the financial landscape. Firstly, it fosters innovation by enabling non-banking companies to incorporate financial services into their offerings, leading to increased competition and driving technological advancements. Secondly, BaaS enhances accessibility by providing digital channels for banking services, ensuring that underserved populations and remote areas can access financial solutions.
Moreover, BaaS promotes collaboration between traditional banks and fintech companies, leveraging their respective expertise to develop more efficient and customer-centric solutions. It is important to note that while a general approach may cater to a wide audience, it may not effectively address the specific requirements of fintechs. Therefore, specialized BaaS services are designed to provide tailored and distinct solutions that align with the unique needs of fintech ventures.
How do you envision the future of BaaS and its impact on the broader financial services industry?
NS: In the future, Banking as a Service (BaaS) has the potential to bring about a remarkable transformation in the financial services industry. BaaS enables non-banking companies to offer a wide range of financial products and services by utilizing the infrastructure and capabilities of licensed banking institutions. This innovative approach could revolutionize the delivery of financial services, making them more accessible, efficient, and personalized to meet individual needs.
One of the key impacts of BaaS on the financial services industry is increased innovation. By enabling non-banking companies, such as fintech startups or e-commerce platforms, to integrate financial services into their offerings, BaaS encourages the development of new and creative solutions. This creates competition and drives technological advancements, leading to improved customer experiences and better financial products.
BaaS holds the incredible potential to make financial services more accessible and inclusive for everyone. You see, traditional banking services aren’t always easy to access, especially for underserved populations. But with BaaS, financial services can be delivered through digital channels, opening up opportunities for a wider range of customers. This helps bridge the gap in financial inclusion and gives individuals and businesses access to essential banking services like payments, loans, and savings.
One of the other fantastic things about BaaS is how it encourages collaboration between traditional financial institutions and non-banking entities. By teaming up with fintech companies, banks can tap into their technology and customers to provide innovative services more efficiently. It’s a win-win situation, really. Banks get to benefit from the agility and innovation of fintechs, while fintechs can take advantage of the regulatory expertise and infrastructure of banks. This collaboration sparks industry-wide growth and evolution, creating a dynamic and exciting landscape for financial services.
However, with the opportunities come challenges. The regulatory landscape surrounding BaaS will need to adapt to ensure consumer protection, data privacy, and systemic stability. Clear guidelines and robust oversight will be crucial to maintain trust and ensure fair competition among market participants.
In conclusion, the future of BaaS is promising, with the potential to revolutionize the financial services industry. It will drive innovation, foster financial inclusion, and encourage collaboration between traditional banks and fintech companies. By embracing BaaS, we can build a more inclusive and customer-centric financial ecosystem that serves the needs of individuals and businesses more effectively.
How can BaaS foster financial inclusivity and provide better access to banking services for underbanked or unbanked populations?
NS: BaaS can foster financial inclusivity by leveraging digital accessibility, lowering costs, offering tailored solutions, promoting partnerships, and facilitating financial education. By providing financial services through digital channels, BaaS makes banking accessible to remote areas. Cost-effective solutions cater to individuals with limited financial resources. Collaboration with non-banking entities expands reach, while customized products address specific needs. Together, these efforts enhance access and promote financial inclusivity for the underbanked and unbanked.