Who owns the BaaS customer?

The popularity of Banking-as-a-Service (BaaS) business models is infiltrating many parts of a consumer’s life, with banks looking to adopt platforms to deliver products and services to their customers. The market value of BaaS is expected to reach $6.9 billion by 2030, growing at a CAGR of 32.9%. It is no wonder that banks are attracted to the as-a-service and embedded finance business models. One way to achieve this is to offer these value-added products and services through an ecosystem that banks can curate and control.

The rise of BaaS – licensed financial institutions offering products and services to external brands and digital fintech channels – has seen fintech and banks working more closely than ever in last-mile customer delivery. This sharing of the last mile of delivery has raised a new question in the industry: Who owns the customers?

With the popularity of BaaS, traditional banks, now acting as “sponsor” banks, have received deposits from fintech and BaaS providers, which the bank holds in For the Benefit Of (FBO) accounts. However, since many banks do not license software from the fintech or BaaS provider, the system containing the underlying virtual accounts may not be visible or within the bank’s control.

So is the end user a customer of the fintech, the BaaS provider or the bank? Would the fintech or BaaS provider as a bank actually be its customer?

While this may seem like a dilemma, regulators have recently focused on the issue. Their crackdown on uncontrolled fintech and banking relationships has opened up a new market for banking platforms.

What do the supervisory authorities mean?

Since fintech and banks first started their relationship, understanding who is responsible for what has been complex.

One of the big questions for regulators is: If banks rely on a third party to store customer and account data, and the bank does not license that platform, will regulators consider these as brokered deposits?

Grace Brasington, Senior Managing Director of Advisory Services at Asurity Technologies commented that “another layer of complexity is added when a fintech offers its own products and services that are not dependent on the bank’s charter … together with the banks. In those cases, the liability for regulatory requirements, such as privacy rules and data use, Banking Secrecy Act (BSA) and Anti-Money Laundering (AML) obligations become murky, mainly where fintech and the bank’s creations form an integrated whole.”

Over the past year, however, it has become clear that regulators expect banks to do the heavy lifting in terms of compliance and risk. This crackdown came after several banks were found to be negligent in their fintech partnerships.

Several banks have recently been called out by The Office of the Comptroller of Currency (OCC) for unsafe or unsound practices regarding third party risk management, BSA and AML risk management, information technology controls, risk management and suspicious activity reporting.

Brasington also stated that “regardless of branding … or who engages with the customer, regulators have largely determined that the bank is the entity ultimately responsible for compliance,” regardless of how the end customer or the various contractual actors can perceive the ownership of it. customer.

This now means that if a BaaS provider currently performs Know Your Customer (KYC) checks, the new regulations from the OCC will require the bank to perform its own KYC checks to meet regulatory requirements. This leads to a breakdown of the BaaS model as replicated processes, such as KYC, end up doubling the cost to the end customer. So what can banks do to improve their ownership situation?

How can banks make customer ownership work for them?

When considering embedded financial programs, banks need to consider how to build their strategy and maintain control and benefits of the programs.

When it comes to customer ownership, having full platform control can be banks’ most critical success factor. One way to achieve this is for the bank to license a BaaS platform to ensure ownership of its programs, customers and accounts rather than outsourcing its technology stack.

When a bank brings a customer through its legacy digital banking channels, that customer is usually stored in the core banking system. In this case, the bank owns the ecosystem, which includes the digital application and customer data. When banks license software to maintain their customers and accounts – such as core banking software or a licensed virtual ledger – the bank can retain customer ownership.

Therefore, banks that own or license a BaaS platform can have significant advantages over those that outsource. Modern platforms can run over the bank’s legacy core system, meaning there is no costly and time-consuming core modernization project to launch BaaS programs.

In the meantime, banks can still work with fintech and leverage their advanced customer experiences. Banks’ underlying infrastructure can dictate the success of launching an in-house embedded program. If banks go this route, the wrong infrastructure can limit their scalability, product offerings and finances.

So if banks are looking to update their relationships with their fintech and brand partners, some key questions for banks to consider are:

• Do you own or license a cloud-based, multi-tenant platform that can scale across your core?

• Who do the fintech providers work with to ensure they comply with the regulations since the bank is ultimately responsible?

• Regarding the impact on reserve requirements, does your partner meet the FDIC pass-through insurance requirements?

• If you outsource your program and maintain only one FBO account, how does customer ownership transfer if the third-party fintech shuts down?

The digital age is revolutionizing the banking industry. While fintech and banking ecosystems provide customers with personalized products and services, banks must ensure that the model works for them.

To ensure a bright future, banks and fintech must trust each other, but this joint venture can only succeed if the process is smooth and cost-effective. It is time for banks to take full ownership of their customers and build a framework with their fintech partners that is scalable, responsible and financially viable for all parties.