How to make a BaaS program work

Steve Mattus is chief investment officer at SigFig, a digital wealth management solutions provider. He was previously global co-head of investment management and head of advisory planning products for the Americas at UBS.

Once seen as a bright spot in the overall fintech ecosystem, the banking-as-a-service (BaaS) sector is now facing dimming prospects and growing questions about financial viability.

The most recent crack to appear, in the form of a bankruptcy declaration at San Francisco-based BaaS fintech Synapse, could eventually affect as many as 100 fintechs and 10 million end customers. The situation is serious. It rightfully deserves the scrutiny it’s receiving as financial support for the sector ebbs and partner banks voice their concerns. 

In light of this situation, it might be tempting for banks to reconsider fintech partnerships. Boardrooms and C-suites are already facing high interest rates and political uncertainty, so it’s naturally tempting to see in-house tech development as a way to take some of those challenges off management’s mind. 

The recent BaaS meltdown tells us what might seem like a promising strategy on the surface only works well under the right circumstances. For banks that are building their own proprietary trading algorithms, for example, in-house tech makes sense. Trading desks and technologists can work closely together to create, maintain, and adjust their models as needed. There’s a clear competitive advantage to such an approach. 

But not all in-house projects are created equal. For banks interested in using technology that’s already been developed by third parties such as client onboarding and financial planning tools, conducting the necessary due diligence and partnering with a fintech is still the most cost effective course of action and offers the quickest route for launching new capabilities. 

Here are some of the most common cases where banks — after carefully vetting what’s available to them and establishing strict ground rules — can partner with fintechs.

Client onboarding

Before undertaking their own client onboarding build-out, banks need to ask themselves if they have the expertise to construct a truly unique version of a client onboarding workflow, and if they can do it with a reasonable timeframe and cost.

Third parties have years of research and development in building client onboarding tools. They’ve already gathered and incorporated user feedback into their latest systems. They’ve developed configurable APIs that make CRM — and other common software applications, including Docusign  — integrations seamless, driving greater usage of existing software and delivering a truly integrated technology stack. By partnering with a third party, banks can deploy a time-tested, user-approved and integrated onboarding system.

Goals-based financial planning

How much are banks willing to pay to build a planning tool from scratch? Goals-based financial planning tools have been around for decades, with retirement and college savings goals becoming table stakes offerings.

Third-party fintechs have sophisticated layouts for inputting client goals, as well as follow-up tools that are reliable and ready for action. Instead of reinventing the metaphorical wheel, banks can select from a deep bench of third-party financial planning providers.

Automated portfolio selection and rebalancing

The right technology allows banks to provide in-demand, investor-friendly solutions at scale, but are they prepared to handle the complexity of building out this type of technology? 

Automated portfolio selection and rebalancing, the type that plugs into a financial planning tool, is convenient for investors and provides reliable revenue for advisors and asset managers. But coding and maintaining the programs that underpin these solutions is resource intensive and complicated.

With new edge cases emerging every week, third parties are in a better position to provide their investment management automation solutions.

Assembling a team of engineers, iterating through solutions, and eventually deploying a well-designed interface is a much bigger task than it seems on the surface. It is often not worth the effort, especially when there are third parties that have already built those toolkits. 

In some cases, the automation offered by third parties is the result of years of cumulative problem solving and case management. In these cases, turning to a fintech provider can be the quickest, most cost-effective option for banks.

Pricing

If you’re a bank, are you willing to devote the resources you’ll need to build — and maintain — your technology? Are you ready to have a team of non-experts hire a team of experts? In-house tech development, especially at a firm that’s not experienced with building certain technologies, can balloon in cost and stretch over years. 

Banks that partner with fintechs benefit from the expertise of a vetted vendor and their bottom lines are protected by working within the confines of a contract. 

Shifting management focus to what matters most

The recent meltdown in the BaaS sector should serve as a warning: not all fintech is ready for prime time. The right fintech providers have the expertise and experience on tools and workflows that are critically important for banks. They’re also better equipped to maintain system reliability and stability, and can do so at a more agreeable price point and without the costly overhead of sourcing and hiring new tech talent. 

Forward-thinking financial institutions choose fintechs that have deep experience working with large banks and are familiar with their rigorous data security and privacy requirements. They also work with fintechs that have a stable financial outlook. When done right, bank-fintech partnerships 

reduce senior management focus on commoditized services. In turn, those energies and resources are directed to exploring use cases for emerging technologies, executing on strategic priorities, and managing projects that are core to their mission.