2022 Banking-as-a-Service Report

Introduction

Banking as a Service (BaaS) is a disruptive and popular technology in today’s financial services industry for many reasons. By providing plug-in banking products via integration, financial institutions (FIs) gain additional revenue from financial technology companies’ (FinTechs) customers. In turn, FinTechs can solve many of the constraints of traditional banking for those customers. These opportunities create wins for all parties, as banks get new business, FinTechs modernize banking, and end-users gain a more holistic, streamlined, and valuable financial experience.

The opportunities in the BaaS space are numerous, with companies starting new banks, retailers offering financing via buy now pay later, and corporations providing their customers with branded credit cards. As end-users continue to expect finance-integrated shopping experiences and shift more of their finances to FinTech-led banking, the BaaS trend is poised to become the standard in all areas of finance. In fact, a recent study of North American organizations conducted by Levvel shows that the majority of FinTechs surveyed are in the partner evaluation or implementation stage of adopting BaaS. These platforms offer FinTechs the opportunity to improve product stickiness and are a highly appealing way to scale.

However, there are some issues around selecting, implementing, and keeping BaaS providers that may slow down market adoption. Many companies are hampered by an incomplete understanding around available BaaS product offerings, compliance requirements, and how to interact successfully with BaaS providers. There is also a high likelihood of switching providers reported by respondents, which can be the result of insufficient planning stages, a partner’s responsiveness or ability to scale, and implementation difficulties.

In an effort to improve FinTechs’ ability to create optimal BaaS strategies, Levvel performed research on the usage of and sentiments toward BaaS technology. Using data from that analysis and expertise from current BaaS customers and subject matter experts, this report seeks to help streamline what is an almost inevitable part of a FinTech’s competitive strategy. The report serves as a guide to understanding BaaS, from the state of the market to how to select the right BaaS solutions. By educating FinTechs and reducing adoption friction, Levvel seeks to enable and quicken innovation in the financial services industry.

Executive Summary

The data in this report indicates that today’s financial technology companies are very interested in BaaS’s potential to their business, and that this is primarily driven by customer demand of banking services and the potential for FinTechs to increase their revenue.

The FinTechs surveyed bring a wide variety of banking services to market, including cards, money movement, and enhanced deposit accounts. Levvel believes that BaaS providers will not necessarily differentiate themselves with their product portfolio, but by going the extra mile for their FinTech customers. Strong partnerships will involve BaaS providers who offer reasonable and flexible pricing, openness and transparency, and a willingness to grow alongside their clients.

Data also shows that resistance to BaaS adoption among FinTechs typically stems from a lack of awareness of the product offerings available with BaaS, and concerns around security and compliance management. Once education of the specifications and benefits of BaaS spread, Levvel predicts that more FinTechs will pursue BaaS adoption

The Insights

The key takeaways from Levvel’s study include:

• 88% of organizations are either considering or are in the process of implementing BaaS. (Page 10)
• The desire to attract new customers, increase revenue, and customer demand are driving organizations to implement BaaS. (Page 9)
• The top BaaS products that FinTechs are currently using or implementing are financial management, investment services, and deposits. (Page 10)
• Among FinTechs considering adding additional BaaS offerings, the most popular are financial management, merchant services, cross-border payments, and deposits. (Page 11)
• Out of their banking partners, BaaS providers put high value on competitive customized pricing, flexibility and scalability, and BaaS-specific expertise. (Page 16)
• Of FinTechs that have already implemented BaaS, most have relationships with or are working with more than one partner. (Page 20)
• Integration issues, lack of scalability, partner responsiveness, and pricing are the biggest challenges for providers in their BaaS partnerships. (Page 16)
• 63% of providers are considering switching to a new BaaS partner. (Page 17)

Key Terms

• Banking as a service (BaaS): a model where licensed financial institutions (FIs) provide non-banks with products and services traditionally only associated with banks. In turn, non- banks provide banking services to the end customer (Figure 1). The financial technology company delivers pre-curated, out-of-the-box financial solutions to enhance traditional banking solutions, or as an add-on to existing services. These solutions include neo banking, cryptocurrency, insurance, international money movement, lending, payments, and Software as a Service. In this exchange, banks gain new customers, while FinTechs increase customer loyalty and provide them with access to new financial products.
• Financial institution (FI): organization with a banking license and banking services, such as a bank or credit union.
• FinTech: a financial technology company that delivers financial services through software.

Data Collection Summary

The data obtained for this study comes from a survey of over 200 North American companies, primarily FinTechs or companies with some use case for leveraging financial technology (i.e., retail, financial organization). The respondents identified themselves as knowledgeable about and involved in their organizational BaaS strategy. Most of the respondents also identified themselves as the final decision makers concerning their BaaS product or strategy.

Because of the size of the survey sample, the data represented in this report offers indicative insight into market trends, rather than conclusive analysis. Sample sizes vary across this report, due to logic that dictated which questions respondents were asked.

Who Should Read This?

This report is intended to assist FIs, FinTechs, and companies at large with designing a banking as a service strategy. Leadership can use this report to make decisions on investment and prioritization regarding BaaS. FinTechs can use this report to help assess and choose the right BaaS provider. FIs can use this report for client retention and product roadmaps.

The State of BaaS

In the past few decades, providing banking services seemed like an unrealistic proposition for non-bank companies, as holding a banking license is highly regulated, requires significant industry-specific knowledge, and is far outside of the core competency of most organizations. Yet today, BaaS is a consideration for many companies around the globe, as the BaaS model allows FinTechs to offer banking services to market without becoming a licensed bank.

Much of the appeal of BaaS for FinTechs is in the potential to extend the value of their engagement with their customers. FinTechs are already closely tied with their customers’ finances, offering products that enable end-users to use technology to invest in stocks, budget across accounts, and easily send money to friends and family. All these tasks necessitate a relationship with customers’ bank accounts, and implementing true banking services is a natural extension of the customer experience.

Survey data indicates that one of the most important reasons FinTechs are considering BaaS is simply that customers are asking for it. When asked about specific criteria for offering BaaS, survey respondents report a desire to attract and retain customers, increase revenue, and satisfy customer demand (Figure 2). While reducing costs is also important to many companies, it ranked lower than criteria related to company growth. The embedded finance experience has permeated the market to such a degree that BaaS offerings are becoming table stakes in a successful FinTech product strategy.

Providing BaaS to FinTechs is also an attractive arrangement to financial institutions, as it can increase customer loyalty and diversify the FI’s revenue stream. With the opportunity for FIs and FinTechs to work together, BaaS is also appealing to non- FinTechs who want a chance to make their customers’ lives easier and improve the duration and quality of the relationship. According to survey data, 88% of companies surveyed are considering or actively pursuing a BaaS partnership (Figure 3). Merely 4% do not currently consider BaaS at all.

When a company starts to consider BaaS, one of its first questions is which services it should offer. Common services include products around payment execution methods like ACH and wire, cross-border payment services, and other tools in the realm of consumer, commercial, domestic, and international financial services. The services that FinTechs choose to adopt will depend on their current product portfolio and future product strategy. Levvel’s data shows the most frequently adopted BaaS offerings among respondents are financial management (defined in this report as tools designed for end users’ financial wellbeing and activities, such as budgeting, tracking, spend analytics, credit builder products, etc.), investment services, deposits, and merchant services (Figure 4). This data suggests that FIs currently building BaaS products should prioritize these offerings in their own product roadmaps in order to appeal to potential FinTech customers.

When assessing current adoption data against the data in Figure 5, which shows the products FinTechs are interested in adopting in the future, one can calculate how some respondents are structuring their product roadmap. The FinTechs surveyed are prioritizing adopting services that have traditionally been outsourced, such as investment services, merchant services, and credit cards, and deprioritizing services that fall within the pure banking ecosystem, like loans. FinTechs will likely expand their BaaS product offerings to include core banking services to gain additional customer base, rather than solely to increase the value of their existing customer experiences.

Go-Live Timeline

With so many pursuing a BaaS offering, the question is: When will these companies go live with these services? The time between considering BaaS and bringing it to market can be months to years. These organizations must select a provider, define the strategy, negotiate an agreement, and then start integration and testing.

In an interview with Levvel, a Chief Operating Officer at a FinTech said that merely explaining the company’s solution for a banking product was one of the most time- intensive parts of the process. He had to explain the idea to multiple teams at multiple FIs. This is all prior to a formal partnership, and even if a potential partner understands the vision, it may not be something they can accommodate. Such conversations delay go-live significantly but cannot be rushed through, since for FinTechs, choosing a partner is one of the most important decisions the company will make.

Levvel data shows that most surveyed companies believe they will go live in under two years (Figure 6). Additionally, that timeline is consistent across segments, suggesting that many providers are looking to offer BaaS to a diverse set of companies, rather than specializing in one industry vertical or segment.

Implementation Barriers

While it is certainly easier than pursuing bank licenses, there are still many hurdles in the way of offering BaaS solutions, and few have gone fully live with a partner. According to Levvel data, the top three barriers listed by FinTechs currently considering BaaS are concerns about compliance, legal, or security; a lack of understanding of the products that are currently available; and worries about working with multiple providers (Figure 7).

A lack of knowledge or understanding is the underlying issue for many of these barriers to adoption, as many FinTechs and other non-banks have an incomplete view of the process of working with a BaaS provider. For example, concerns around compliance, legal, and security often come from uncertainty around the due diligence and onboarding process. There is validity to this concern, as compliance and regulatory requirements can be extremely complex, and there is risk if done incorrectly. However, BaaS providers perform stringent due diligence processesto protect themselves and their FinTech partners. As the license holder, banks are responsible for assessing the risk that all parties will pose to the bank, including all potential partners and eventual end-users.

In addition, thorough conversations with BaaS providers about their offerings help to clear up confusion about products and reduce the friction that may arise when identifying which providers to work with. Some BaaS providers do not offer all the services that the FinTech may want in their long-term portfolio, and therefore it is important to discuss product roadmap when selecting a provider, as well as align on product definitions and use cases. For example, while an aspiring BaaS provider may want to offer “payments” as a service, the actual payment methods and processes will differ across banks. The onus is on the FinTech to be as specific as possible in defining what is in scope. They may also have to be willing to work with more than one BaaS provider in order to execute that vision. This is often necessary because of competing technical priorities and implementation constraints, but it can also be advantageous to a company’s product strategy.

BaaS Partner Landscape

The market for BaaS is fast growing and rapidly changing, though still relatively new. Therefore, it is important for FinTechs to keep in mind that there is no-one-size fits all approach to working with BaaS providers, but there are best practices that can enable success in an evolving landscape.

Choosing a BaaS Provider

Selecting partner FIs that create mutually beneficial relationships requires communication, transparency, and a shared vision. Choosing a partner that misunderstands the vision and falls short can cost both time and resources. For example, when asked about previous partners in an interview with Levvel, a FinTech COO said that their first partner tried to push them into a different delivery model and failed in supporting them in terms of feedback and responsiveness. The contract was also very difficult to get out of, which pulled time and attention away from further product development.

When BaaS partnerships fail, it typically starts early and stems from an issue in the discovery and implementation stages. Over 20% of providers cite challenges that could have been rectified prior to implementation, and expensive pricing and limited product offerings also rank as some of the top issues (Figure 8). The top challenge is one that occurs during implementation: 33% said platform integration issues were a top hurdle to a successful relationship. Twenty-six percent of organizations said that their partners lack the ability to scale and 24% said their partners aren’t responsive, which are two challenges that are typically realized later into the partnership.

Survey data showed that there was also a high likelihood of switching among respondents using a BaaS provider— over 60% of respondent organizations indicated that they were at least somewhat likely to switch their current partner (Figure 9). This might be reflective of the still- evolving state of the industry and the constraints of some larger FIs to adjust quickly to their customers’ demands. As the market becomes more mature, technical and compliance concerns that create friction during implementation should smooth out, enabling wider adoption.

To avoid the cost and trouble of switching providers, FinTechs should properly evaluate BaaS offerings in comparison with their business and customer experience goals and ensure the partner’s offerings are able to support their vision.

What Makes a Good Partner?

When asked what the most important characteristics of a good partner were, respondents cited pricing as number one (Figure 10), but also selected many traits not strictly related to the bottom line. They want a partner who can grow with them, one that has experience providing services for other FinTechs, and one that has multiple product offerings.

At the end of the day, it is not enough for a BaaS partner to simply have a compelling, “modern” offering set, and while monetary investment is a key deciding factor, it is not the only one. Service providers must be able to integrate, scale, and commercialize partnership offerings to succeed. By contacting and comparing multiple FIs, FinTechs can get a clearer idea of what attributes will create a successful partnership.

Partner Analysis Considerations

The partner analysis phase sets the stage for the final product’s long-term success. Levvel recommends that FinTechs consider the following when choosing a BaaS partner:

• Capability & Reliability: FinTechs should critically evaluate a FI’s ability to work effectively and consistently with multiple types of BaaS customers. FinTechs should ask who the FI has partnered with before, what functionality they offer and how they offer it, and if they’ve implemented similar solutions. If a FinTech has special use cases, like an international presence, they should also be asking providers about feasibility. Signs of effective and experienced BaaS providers will be discernible from the depth of questions they ask during initial exploration, the quality of their communication and planning, and their adeptness at meeting their clients’ complex and unique integration and configuration requirements.
• Scalability: A scalable BaaS partner is one that can “grow” with the FinTech’s roadmap and vision, even if the FI doesn’t currently offer the product the FinTech needs. For example, a client might start a relationship with a provider that offers deposits initially but plans to include loans down the line. Discussing the future and validating that the BaaS can support that vision within the timeline with its platform and technology is key. Candor is also important here. For example, if the bank can’t provide a service that is important to the FinTech client right away, they should be willing to provide a timeline of when the service will be available—or be candid if it is not a possibility.
• Pricing: BaaS partners offer different pricing, both in terms of models and cost. Some have a model based on services provided, where others have fixed pricing that has a different impact on growth and profit over time. According to Levvel data, roughly three quarters of BaaS partners offer a customized model, and the other quarter uses a flat fee (Figure 11). Because BaaS requirements and customer volume vary, Levvel believes that leading BaaS providers will have a willingness to offer a customizable model depending on the preferences of their clients.

Additional Adoption Considerations

• Partner Count: Per Levvel data, most FinTechs are using more than one BaaS partner, and almost a third are using three or more (Figure 12). While some FinTechs listed concerns about working with more than one BaaS provider as a barrier to adoption, the option to do so can be advantageous to many companies’ strategic goals, especially since not all FIs offering BaaS have full-service platforms. Having the flexibility to work with multiple partners enables innovative growth and lets FinTechs use a best-of-breed strategy to construct their product line. They can compare BaaS providers based on attributes like pricing, offerings, data sharing, ability to scale, and quality of service, and select the providers that make the most sense situationally.

• Technical Preference: Banking as a Service provides third parties access to bank functionality so that non-bank companies can connect users outside of the bank’s existing footprint to banking services. This delivery occurs either by the traditional batch file process or real time through APIs. While banks have been built around batch file processing and many are still using it, the rise of modern banking cores, multiple payment rails, and the desire for immediate payments have made APIs crucial to industry progress. Some FIs provide modern REST APIs that can integrate with any web service, while others can only support batch file transfers that are harder to integrate with and more complex.

Survey data suggests that a substantial number of respondents have no preference for an integration setup (Figure 13), but Levvel believes this should be an intentional choice. For FinTechs, it is much more strategic and sustainable to implement BaaS technology that has the capability to provide—or plans to provide—API connectivity. APIs also speed up and simplify implementation and integration. Therefore, the technical specifications should be a high priority assessment factor when working with BaaS providers.

• Security and Regulations: When performing early due diligence and alignment with BaaS providers, FinTechs should include several considerations, including data management and security, geographical operating requirements, and customer data management. FinTechs should take a proactive approach to planning and prepare mindful, prioritized, and detailed questions for the provider. FinTechs should be clear on how the BaaS provider conducts its procedures and how this might affect operations between the FinTech and the provider, as well as the FinTech and its customers. Intentionality and careful exploration of this phase of implementation will ensure less risk and stronger relationships going forward.

Conclusion

Banking as a service is disruptive, exciting, popular, and complex due to the number of providers and lack of structure in this space. The current ecosystem is clouded, and the path forward is not yet clear. One thing is certain: “as a service” solutions are here to stay, and it would be unwise to discount the impact of plug-and-play and in-the-box alternatives to the traditional banking structure. All participants, including financial institutions, BaaS providers, end-users, and business and technology partners, must embrace the noise in this space and make sound decisions that will ultimately benefit their respective organizations and will support both short- and long-term strategic initiatives.

About the Sponsor

Banking as a Service (BaaS) from Webster Bank puts FinTechs and other non-bank institutions in a position to digitally deliver customized banking and payment capabilities and enhance their customer experience. If you’re looking to work with a flexible, progressive banking partner to create and scale customized solutions with the highest level of controls, Webster Bank is ready to help. You’ll be backed by a $60 billion bank with a proven track record of delivering superior relationship-driven products and services to commercial, small business, and consumer segments.

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You can create a dynamic customer experience with exceptional financial products.

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About Levvel, an Endava company

Levvel, an Endava company is a business and technology consulting firm. We help companies create great technology through human-centered problem-solving that is rooted in deep industry expertise. Whether you are reinventing your company, creating an industry-changing product, or making existing products even better with new technologies—we exist to make your endeavor a success story.

Levvel sits at the crossroads of strategic insight and the ability to design, build, and implement research-driven solutions. Our teams bring the gamut of business domain knowledge, design prowess, and technical expertise to create success for your business across the entire project lifecycle.

Learn more at https://www.levvel.io