What is the risk and who owns the customer?

OBSERVATIONS FROM THE FINTECH SNARK TANK

Embedded finance – where unchartered companies such as fintechs and consumer brands offer financial services from chartered financial institutions – is projected to reach $7 trillion in transaction value by 2026.

Banking as a service (BaaS) – the services that banks (or other chartered financial institutions) provide to fintechs and brands looking to offer financial services – is the flip side of embedded finance. Cornerstone Advisors estimates that BaaS will become a $25 billion opportunity for banks by 2026.

According to Cornerstone’s latest What’s Going On in Banking study, about 125 banks already offer BaaS services, with 50 to 60 in the process of developing a BaaS strategy, and another 200 considering a BaaS strategy.

Brand risk from Baas?

Embedded Finance and BaaS sounds like a win-win for everyone, right? Maybe not.

At a recent conference, panelists in one session warned bankers that BaaS could devalue banks’ brands in the market. In an email clarifying his remarks, he told me:

“Banks need to keep their eyes open for the potential negatives associated with a transition to BaaS. For BaaS providers, consumers have brand loyalty to the fintech, not the bank. They typically don’t know or care who the bank under fintech is and have no loyalty to the bank brand. The fintech may choose to take its business to another BaaS provider, and the bank is left with no customer loyalty and no revenue from that fintech. The potential problem could devalue the entire franchise.”

The potential risk of fintech taking business elsewhere is real.

In a 2022 Levvel study, many fintechs reported having issues with platform integration, data integrity and the sponsor bank’s ability to scale. As a result, nearly half of fintechs said they are considering switching BaaS providers.

This is clearly a business risk (ie revenue risk) for BaaS banks, but will this devalue the entire banking franchise?

Who are you? WHO? WHO?

The tech manager rightly points out that many fintech users do not know who the fintech sponsor bank is. In fact, many may not know they are interacting with a bank at all.

If a fintech – whose customers do not know who the sponsoring bank is – moves its business to another bank, yes, it damages the bank’s BaaS business, but would that devalue the “entire” franchise? How would the bank’s existing retail and commercial customers even know that their bank was being let go by one of its fintech partners?

About three out of ten banks that offer BaaS services have only one fintech partner. It’s hard to believe that failing one partner will result in brand devaluation for the entire franchise.

Keep your customers happy

Two important points about being a BaaS provider that banks should recognise:

1. The fintech or brand (ie the sponsor) is the bank’s customer.
2. It is not the customers’ customers the banktheir customers.

This is difficult for banks entering the BaaS space to understand. Many believe they are entering embedded finance to expand their consumer base. They’re not – it’s just a by-product of the business. The primary goal of getting into embedded finance is to create a new customer base of fintechs and brands.

Here’s an analogy: My first job after business school was in a hospital. The CEO pulled me aside one day and said, “I’m going to teach you everything you need to know about this business. Let’s start with who our customers are. Who are our customers?”

Naturally, I said “the patients”.

“Error!” said the CEO. “The doctors are our customers. They decide which hospital to admit their patients to. Our number 1 job is to take good care of their customers so that they (the doctors) become our customers.”

It’s the same with BaaS. The sponsor bank’s customers are fintechs and consumer brands that want to offer financial products. Yes, the bank must deliver good products and service to the sponsor’s customers. But falling short doesn’t affect the BaaS bank’s brand with consumers – it affects the fintech’s brand.

Regulatory View

However, the supervisory authorities do not see it this way. They – somewhat logically – conclude that consumers who use products from a bank are customers of that bank, even if the bank’s services are delivered through another company’s delivery mechanisms.

As one BaaS banker told me:

“Based on recent regulatory discussions, BaaS banks will be expected to ‘own’ the CIP (customer information program) for the fintech’s clients. Previously, we could rely on the partner for that in some cases, and now we have to own the CIP part and do the verification. This will increase costs, negatively impact revenue and add potential strain on internal resources.”

From one marketing perspective, however, the customers are fintech’s or brand’s customers.

The bank’s BaaS brand versus the bank’s core brand

Not going to deliver good products and customer service to a fintech’s customers do negative impact on the bank’s brand – among fintechs and consumer brands, not the end consumer. Conversely, a sponsor bank that delivers good products and services increases its brand value with fintechs and other brands – but not necessarily with end consumers.

What this means from a marketing perspective is that banks entering BaaS will need new marketing departments with a different competence than they have internally today.

Existing bank marketers are used to marketing directly to consumers and small (to medium) businesses. BaaS marketing is about marketing to fintechs, SaaS software providers, technology marketplaces and consumer brands – a completely different skill set.

Finding and attracting marketers with these skills won’t be easy – creating yet another people challenge for banks already struggling to find and retain talent.