Deposit growth continues to be the number one business priority of bankers, according to BAI Banking Outlook: 2024 Trends, as it serves as the cornerstone of various aspects of banking operations, including profitability, stability, customer relations, and regulatory compliance.

To expand their deposit-gathering channels, banks employ various strategies, which commonly involve attracting new customers through existing channels, expanding physical presence via acquisitions or branch networks, and exploring partnerships with new distribution partners.

The industry often refers to the expanding distribution partners as last-mile partners, including brands or fintech within a BaaS or embedded banking model. While the initial BaaS landscape witnessed the influx of various players, subsequent developments have put banks in the driver's seat. Now, they can launch and scale responsibly-led programs, backed by the banks existing compliance and regulatory controls. 

New Platforms are Changing the Landscape

Innovative banking platforms are reshaping the industry and facilitating the launch of embedded banking and BaaS programs beyond core banking systems. These new direct-BaaS platforms address longstanding constraints faced by both core providers and BaaS entities.

For core banking platforms, these challenges have been the inability to reduce costs per account by migrating to public cloud infrastructure, the lack of support for a fintech multi-tenant environment, and technological limitations that often necessitate the creation of separate branches for fintech programs, leading to data, product, and rule co-mingling issues. On the other hand, BaaS providers have historically offered platforms tailored only for fintech usage, lacking the bank-grade functionality required to meet regulatory and compliance standards.

Alex Johnson, from Fintech Takes, highlighted this technology gap in the market, "Core Providers built a platform just for banks where the bank acts as their client and the end user. BaaS Providers built a platform just for fintech where the fintech acts as their client and the end user. What the market needs is a platform built for banks (the client) but with fintech as the end user."

Today, newer platforms are specifically designed for bank clients, empowering fintech users in a multi-tenant fashion. These solutions offer bank-grade resiliency, providing banks with comprehensive visibility into their fintech customers' activities, including KYC results, account status and ownership, transactions, AML monitoring, and more. This visibility is facilitated through a virtual account system that settles transactions to a set of core operating accounts. The key advantage lies in eliminating core dependencies and reducing the costly fees and timelines associated with legacy core providers.

There are Numerous Benefits

There are several clear benefits to adopting a direct BaaS model. For example, by cutting out the BaaS provider as an intermediary, banks gain an economic advantage, facilitating more efficient scaling of their programs and compliance staff. It's important to recognize that BaaS providers typically receive payment from both fintech companies and banks. With a direct-BaaS model, banks now retain the fintech fees, bolstering their revenue streams.

Furthermore, banks can seamlessly integrate their existing fraud, AML, or card providers into open platforms, thus avoiding redundant costs associated with BaaS providers. This flexibility allows banks to maintain their current ecosystem, including rules, limits, and fraud controls that align with their digital channels. 

What's more, through the implementation of Third-Party Risk Management (TPRM) protocols for fintech clients, banks can utilize modern platforms to conduct real-time customer vetting, transaction monitoring, and settlement automation based on customized configurations. These streamlined processes enhance operational efficiency and foster stronger communication with regulatory agencies such as the FDIC, FFIEC, OCC, and CFPB, ensuring compliance.

Final thoughts

When crafting your strategy, it's crucial to consider several interconnected factors. Firstly, carefully deliberate on whether a direct BaaS model aligns with your bank's objectives, ensuring alignment with anticipated benefits. Secondly, a thorough financial assessment should be conducted to evaluate the revenue potential against the costs associated with implementing such a model. 

You can also adhere to the FFIEC Third-Party Risk Management Guidelines, which establish stringent criteria for selecting distribution partners. Additionally, review your existing compliance controls and policies to determine their compatibility within the BaaS ecosystem, distinguishing between elements for reuse and those requiring renewal. Lastly, seek insights from other banks experienced in navigating both the initial stages and subsequent advancements in the BaaS landscape, leveraging their experiences to inform your decision-making effectively.