Why Banking as a Service may be your Best Survival Strategy

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A 2023 Finastra report revealed that 85% of surveyed CEOs are inclined to adopt Banking as a Service (BaaS). This surge in interest begs the question: why?  

 BaaS presents small community banks with a superior, faster, and more cost-effective solution. By sidestepping the need for extensive infrastructure, banks can instead establish partnerships with FinTech companies. These collaborations seamlessly integrate a suite of digital financial services into their existing offerings.  

 This modernization not only boosts their agility but also ignites innovation, enabling community banks to be competitive and meet evolving consumer expectations. Ultimately, it empowers them to provide the seamless, personalized banking experiences that modern customers demand. Let’s explore BaaS and how it can be your path to unlocking growth and creating efficiencies. 

Understanding BaaS banking as a service customer service

Banking as a service (BaaS) is when non-bank FinTechs partner with banks to embed digital financial services into their products. Examples include popular pay-as-you-go, lending, fraud management, and investment solutions.  The service is accomplished through API integration, giving users access to profitable artificial intelligence (AI), machine learning (ML), robotic process automation (RPA), and business intelligence solutions. When used well, BaaS levels the playing ground for small and mid-market financial institutions like credit unions, neo-banks, and community banks to compete with their large counterparts.  

Benefits of BaaS for Community Banks 

Enhanced Customer Experience 

A 2024 Juniper report shows how community banks can survive in today’s hyper-competitive environment by using AI to personalize their user experience.  Boston-based Finalytics.ai partnered with New York’s Visions Federal Credit Union (VFCU) to personalize their digital content.  In the first three months of using the solution, VFCU increased conversion rates by more than 270%. The company plans to utilize its new ML tools to identify additional market opportunities across its consumer base.  

Cost Efficiency 

The investment for a mid-sized financial institutions to completely digitize their core banking platform is significant in both cost and in the required resource lift. Expenses consistently mount as organizations try to maintain and update their infrastructure.  However, with the BaaS model, community banks pay only for what they use,  saving money by avoiding the overhead costs of hiring in-house employees, training, and maintaining physical office space. In essence, using the BaaS model allows banks to focus on what they do best while redirecting their resources to other initiatives.  

Agility and Innovation 

According to Jim Marous, CEO of the Digital Banking Report, it could take at least 36 months for an average-sized financial institution to digitize itself. With the BaaS model, in contrast, digitization occurs within days. Further, traditional banks usually struggle to keep up with rapidly evolving market demands, by which time modernized contenders have rushed their products to market. By partnering with FinTechs, community banks can now effortlessly scale their operations without worrying about infrastructure limitations or delays.   

Access to Advanced Features 

BaaS empowers community banks to leverage AI technology, ensuring they maintain a competitive edge in the market. For example, a credit union can utilize advanced analytics to gain valuable insights and deliver targeted content. This collaboration enables the credit union to effectively compete with numerous other financial institutions in their local area. Historical data shows significant improvements in application completion rates with the deployment of BaaS and AI, sometimes achieving performance boosts as high as five and a half times with the assistance of these analytics.

BaaS as a Growth Driver for Community Banks

Market Expansion

BaaS advanced AI

Banks are facing increased pressure to retain and expand customer acquisition. When The Cooperative Bank (TCB) partnered with Carefull, a FinTech that provides fraud-free financial services for aging adults, TCB realized they could tap a particular population that their competition missed. Carefull’s money-monitoring technology helped TCB expand its market to senior customers and their caregivers. “With this partnership, TCB will be the first bank to offer this service in the Nation,” said Pete Lee, SVP and CIO.   This is a great example of a market expansion that demonstrated a commitment to innovation and meeting the evolving needs of the bank’s customer base.  

Competitive Edge 

To stay relevant in today’s market, community banks need to find new ways to grow their business beyond traditional banking services. To mark its 2023 milestone anniversary, American State Bank partnered with The Postage, a digital estate and legacy planning platform, to address an overlooked need: Help senior customers protect their wealth for future generations such as through state-specific wills. By positioning itself as the sole banking platform that helps families navigate “their loved ones’ final wishes”, ASB distinguishes itself from competitors through its entirely new product line.  

Revenue Opportunities 

The APIs used in the BaaS business model facilitate the seamless integration of multiple systems and apps, which prove useful to banks that want to introduce new financial offerings. Banks can also partner with FinTechs to grow their revenue by innovating in other areas.  Ideas include co-branded products where partners develop products that blend both brands – or where the bank sells its offerings through its partner in addition to issuing them directly themselves.  This way, banks establish strategic, win-win relationships profitable to both parties.  

BasS: Taking Your Financial Institution To The Next Level BaaS Revenue Opportunities

Technology is evolving quickly.  For community banks, the rapid pace of change can be challenging, but it also presents a chance to innovate and improve processes. 

With so many options available, it’s important to have an unbiased IT advisor to help navigate the decision process.  Contact Hartman Executive Advisors to strategize on how to use technology as a catalyst for growth. Our team of experienced IT leaders will help you make the right technology investments to achieve your business goals at the most efficient cost. 

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