June 8, 2022
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.
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 key takeaways from Levvel’s study include:
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
Webster Bank’s value to our partners goes far beyond providing best-in-class solutions.
You can create a dynamic customer experience with exceptional financial products.
Credit Card as a Service
Looking to launch or integrate impactful banking solutions? Sterling National Bank is now Webster Bank. Visit snb.com/SterlingBaaS.
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
Chief Strategy Officer, Head of Financial Services & Payments
SVP, Retail Banking
Major Bottoms Jr.
Senior Research Consultant
Meet our Experts
Chief Strategy Officer, Head of Financial Services & Payments
Scott Harkey is Levvel's Chief Strategy Officer while also leading the Payments and Financial Services work. He has 15 years of banking experience including leading the technology team that implemented digital wallet products at Bank of America along with 10 years of technology merger integration and IT operations outsourcing work at Wells Fargo. Scott brings a unique “insider” point of view combined with a proven track record of delivery to banks, technology providers, and merchants exploring the digital payments space.
SVP, Retail Banking
Fred Fuller has nearly 20 years of corporate finance experience with a focus on data analytics, process improvements, and strategic decision making. Prior to joining Levvel, Fred has held several senior leadership positions within the financial services industry at companies such as Cardlytics, Inc. and S1 Corporation. He currently manages a team responsible for all client engagements for the Financial Services & Payments team at Levvel, while supporting sales efforts with deep expertise in banking and payments. In his free time, Fred likes running, hiking, golfing, and spending time with his three boys in the Atlanta area.
Senior Research Consultant
Major Bottoms Jr. is a Senior Research Consultant for Levvel Research based in Charlotte, NC. He plays a key role in the analysis and presentation of data for Levvel’s research reports, webinars, and consulting engagements. Major’s expertise lies in the Procure-to-Pay, Source-to-Settle, and travel and expense management processes and software, as well as technologies and strategies across DevOps, digital payments, design systems, and application development. Prior to joining Levvel, Major held various roles in the mortgage finance field at Bank of America and Wells Fargo. Major graduated with a degree in Finance from the Robert H. Smith School of Business at the University of Maryland.
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