Hey, everyone! Kyle Costello from Treasury Prime's Partnerships team, where I oversee and manage collaborations with partners, including the team at Unit21.
Before we dive into a few insights from the 2024 BaaS Spotlight: Banks-Fintechs Partnership Roundtable, allow me to provide a brief introduction. My experience in the fintech banking sector spans approximately 13 years, kicking off with one of the first neobanks, PerkStreet Financial, around 2011. I've worn different hats, spent about six years in community banks, witnessed the acquisition of Radius Bank, and in recent roles, I've been navigating the banking infrastructure side of things. Now, I'm thrilled to share my unique perspectives with you all.
Unraveling the Growth Drivers of Banking as a Service
Let's get into the heart of the matter. The Banking as a Service market is making waves, expected to grow by 15% annually and hit a whopping $66 billion by 2030. What's steering this ship towards success? Well, from where I stand, traditional growth drivers like mergers and acquisitions (M&A) and new branches are facing headwinds.
Navigating M&A Challenges
In 2023, the M&A landscape took a hit compared to the previous year, causing ripples across the industry. The increased attention from regulators, especially after cases like SVB, has dimmed the once-bright outlook for mergers and acquisitions. Banks, initially eager to pursue acquisitions, now encounter challenges as regulatory oversight intensifies, adding complexity to the pursuit of attractive opportunities. We’ve seen some early signs of activity picking up, but we’re still much lower than the M&A activity of the prior decade.
Shifting Tides in Physical Branches
At the same time, the banking sector is undergoing a significant transformation in its attitude towards physical branches. The importance of these traditional brick-and-mortar establishments is now under scrutiny.
“Banks aren’t building as many branches, and closures are accelerating as banks question the value and need.”
A clear example of this shift is the rapid closure of branches, decreasing from 100,000 in 2009 to 78,000 by mid-2023. The changing financial landscape is challenging the conventional indicators of growth, leading banks to explore alternative paths that align with the evolving trends.
Expertise & The Sub-Scale Problem in the Long Tail
Beyond the biggest banks, a prevailing challenge emerges: establishing and scaling a robust customer acquisition engine is critical for banks who have acknowledged the M&A and physical branch growth challenges, yet requires two things community banks don’t necessarily have in spades: a deep bench of digital marketing talent and a plentiful marketing budget.
Even when banks attract great talent to set the strategy, the ability to learn what works quickly is a function of the scale of the program and the advertising budget that supports it. Without this, they remain at a disadvantage to the very largest banks in efficiently acquiring new customers to drive their growth.
Choosing the Banking as a Service Odyssey
Amidst these challenges, a compelling growth option beckons—Banking as a Service. For many, including us at Treasury Prime, the allure lies in the strategic bank-fintech partnerships, where each party capitalizes on its strengths. Not every bank will embark on the Banking as a Service journey, but for those seeking attractive growth opportunities and a chance to focus on their core competencies, it stands out as an enticing step into the future.
Navigating Regulatory Landscape in BaaS Adoption
In Banking as a Service, where partnerships are thriving, it's crucial to address the regulatory side of this growth. As Banking as a Service gains traction, regulatory bodies are taking a closer look, highlighting that a bank's engagement with third parties doesn't excuse them from following the rules. Recent events underscore this responsibility, making it clear that, in sponsor bank-fintech client relationships, compliance falls on the bank.
In June 2023, a pivotal moment unfolded as interagency guidance provided clarity on BSA/AML/CDD compliance for sponsor bank-fintech client relationships. Serving as a strategic roadmap, this guidance underscores the critical importance of a vigilant compliance approach within the dynamic Banking as a Service landscape. As we navigate these regulatory demands, precision and thoroughness remain our guiding principles. Committing to regulatory compliance not only safeguards our interests but also contributes significantly to the resilience and trustworthiness of the broader financial ecosystem. Staying vigilant and compliant is crucial for shaping a robust and responsible financial future.
Navigating Growth and Compliance in Bank-Fintech Partnerships
Bank-fintech partnerships are not transactional—they require a commitment for the long haul. The key lies in choosing partners wisely and ensuring they genuinely understand and prioritize compliance. It's a delicate balancing act that requires a discerning and thoughtful approach.
Now, let's talk about the ongoing discussion around speed versus depth in due diligence – the good news is, they don't have to be conflicting priorities. The magic happens when human insights join forces with the ever-evolving AI tools. Advancements in these tools offer a practical solution, facilitating a robust due diligence process without dragging it out over an extended period. Together, the experience of humans and the capabilities of Gen AI can create a seamless and efficient approach to due diligence, striking that delicate balance between growth and compliance in the dynamic realm of bank-fintech partnerships.
Ready to Shape the Future Together?
So, there you have it – a glimpse into the 2024 Banking as a Service landscape from my perspective. As we journey through these evolving waters of fintech and banking collaborations, let's stay vigilant, adapt to the challenges, and chart a course toward mutual success.
Want to learn more about embedded banking? Follow me on LinkedIn, and visit Treasury Prime.
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