Banking as a Service: A Potential Regulatory Storm on the Horizon

Taming the Jargon

Despite the hype of FinTech in recent years, the concept is nothing new.  Much of the attention garnered by the industry is due to its fast evolution, significant investment in the space, and tremendous adoption in the business world. Combining financial services and technology is an approach long seen in the finance industry, with credit cards in the 1950s, electronic trading desks in the 1970s, and ATMs, which gained popularity in the 1980s.  Personal finance apps and high-frequency trading are examples from more recent decades.   

FinTechs (FTs) can broadly be defined as companies which leverage technology to offer services related to borrowing, budgeting and financial planning, insurance, money transfer and payments, and savings and investments.  In some cases, FTs are the disruptors of certain industries and this has often been seen in the banking sector.

The borrowing category for FTs includes online loan providers and aggregators, while the budgeting and financial planning category is illustrated by online expense management or retirement tools.  In the insurance space, examples abound including quote comparison sites and app-based insurance purchase and management tools.

Many of us have come to rely on payment apps such as Zelle or Venmo and their convenience cannot be denied.  With the combination of credit cards and these apps, one can easily get by without cash for weeks or months at a time.  In the savings and investments category, most of us are familiar with big names like SoFi and Robinhood.

There are other classification systems or “taxonomies” for describing FTs.  Some use the term “as a service” notion for this purpose.  In the banking space, the latest trend for FTs is “Banking as a Service” or BaaS for short.

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Banking as a Service

The BaaS space is a huge growth area for FTs and continues to disrupt the traditional delivery of bank products.  According to a recent study, the global BaaS market size is expected to reach nearly $75 billion by 2030, growing at a compound annual growth rate of 16.2% from 2022 to 2030.¹

BaaS FTs serve as intermediaries between banks and the customers to whom they offer financial services.  These BaaS players offer digital-based financial services through data sharing, optimized process management systems, and specialized innovation.

BaaS FTs aim to lower “friction” in the user experience and enable faster and easier delivery of financial services.  BaaS has become the go-to dynamic solution to digitally deliver a customer-centric banking platform to the market quickly.  BaaS providers offer a banking infrastructure through the use of APIs (Application Programming Interfaces) which can be implemented in a matter of months.  Furthermore, this is typically accomplished without the need for monetary licenses or raising large amounts of capital.

When banks partner with BaaS FTs, the result is often a double-edged sword and the benefits often come with additional and significant risk exposures.  In the next article, we will explore some of these risks and discuss leading practice mitigation strategies. In the meantime, you can learn more about SRA Watchtower’s FinTech Risk Management solutions and services here.        

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Sources:

¹  https://www.prnewswire.com/news-releases/banking-as-a-service-market-size-worth-74-55-billion-by-2030---grand-view-research-inc-301616184.html