Neobanks And Banking As A Service: The Community Bank Opportunity


The term “neo” is used to describe something that is new, modern, revived or modified.  Neobanks are FinTechs that challenge the traditional banking platform.  Neobanks typically come to market as a fully digital offering, without a physical presence, focused on serving a specific purpose with a limited product set.  Although similar to digital banks, which are typically the digital arm of a larger bank with a traditional brick and mortar presence, neobanks typically don’t have a bank charter and offer their services through chartered institutions.

One example of a neobank is Chime.  Chime is a financial technology company that came to market with the idea of providing no-cost checking accounts with early access to direct deposit payments while paying a competitive annual percentage yield to accountholders.  Chime does not have a bank charter and, therefore, cannot legally provide banking products without a chartered partner.  In Chime’s case, they offer their services through The Bankcorp Bank.

Banking As A Service (BaaS)

This partnership of neobanks and traditional banking institutions has evolved to a model of Banking as a Service (BaaS). BaaS is a structure that allows FinTechs access to a traditional bank’s operating platform and bank charter.

There are many different models of BaaS but generically, the model allows banks to “white label” their bank platform that allows for neobank partnerships. While these relationships require some technology and compliance sophistication, there are many variations of models in this space ranging from working through a partner who provides technology integration and compliance solutions, to fully owning this independently.

What Is The Opportunity For Community Banks?

Neobanks who need a bank partner will pay for access to the banking platform. There are typically products and services that the bank can charge the neobank for using, like compliance validation and monitoring solutions. Additionally, the bank who offers this partnership will expect to gain deposits or loans as they are the true holder of the accounts in the arrangement, although that is not necessarily transparent to the end client of the neobank. Neobanks who offer debit or credit cards will also drive interchange income, that the bank can anticipate splitting with the neobank.

In short, community banks can grow loans, deposits and non-interest income through partnerships with neobanks. Additionally, by building relationships with FinTechs, the bank can expand its products and services through innovative partnerships and improve the bank’s ability to integrate with third party service providers.

BaaS allows banks to leverage emerging channels and build relationships with new clients who ultimately need a bank to service the relationship. Despite appearing like banks, neobanks need a bank sponsor, and community banks should be positioned to grow through new acquisition channels.

BaaS is a unique way for banks to acquire new growth, improve non-interest income streams, and build technological capabilities. However, entering the space requires a deep understanding of the structure, relationships and environment. If you are a bank leader looking for more information on neobanks and where to get started, please contact the banking IT experts at Hartman Executive Advisors to schedule a free consultation.



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