Banking-as-a-service (BaaS) stands as a pivotal force reshaping the fintech landscape. Melissa Cullen, a division executive overseeing global strategy, product and commercialisation at global fintech FIS, provides profound insights into the transformative power of BaaS and its impact on traditional banking.
With her guidance, we navigate the strategic currents and emerging technologies that traditional banks must embrace to thrive in an era of digital disruption. She explains the nuances of the ever-evolving financial services landscape.
What advice would you give to traditional banks or other fintechs looking to adopt a banking-as-a-service model?
Banking-as-a-service can be an incredibly powerful offering for banks. Open banking and embedded payments are becoming increasingly important to meet the expectations of modern consumers, so the firms that embed these capabilities into their service model are better positioned to achieve stronger satisfaction and loyalty.
This can also translate into maintaining deposit levels at a time when fears of deposit runs persist. Additionally, BaaS can contribute to furthering customer acquisition. By partnering with third party platforms, added marketing touchpoints can open a bank up to new customers and the underlying revenue-sharing agreements can create new pathways to non-interest income.
As with any new technology, banks need to carefully consider whether the opportunities outweigh the potential threats and rely on their governance frameworks to determine how to best manage those risks. Beyond the third-party risks inherent to co-branded products, there’s also a new level of cyber security factors that can come into play, as well as data management, regulatory, and compliance considerations.
Ultimately, we stress that how you implement BaaS capabilities is what will determine efficacy, reliability, and ROI. The most successful investment outcomes will start with a clear view of a targeted end goal, followed by understanding which technologies and tools are best positioned to achieve them.
The crucial third step is to determine if you have the in-house talent and infrastructure to not just roll-out the capabilities, but also maintain and monitor going forwards. If not, finding a tech partner you can rely on can speed time to market and help identify risk considerations early in the process.
We find those clients that leverage FIS for BaaS capabilities ultimately do so because they want to ensure that they can de-risk their implementation strategy while maintaining a customer-first approach.
How do you see the role of traditional banks and financial institutions evolving in the current digital era? What are the opportunities and threats they face?
FIS’ recent Expectations vs. Reality research survey indicates that both financial services executives and the end consumer share a top priority of leveraging technology to improve the customer experience. However, the research also shows that consumers, more than anything, specifically want access to a single platform to manage all their financial services activity from all their providers. Yet only half of surveyed financial services executives plan to increase their investments in helping consumers manage held away accounts.
While there’s likely many contributing factors to the divergence between consumer preferences and executive priorities, the expense, complexity and competitive threats around platform integration surely plays a part.
Without a ‘super app’ to meet this need, the maturation of open-banking, embedded finance, and open-architecture platforms will be key to making today’s fragmented customer journey more seamless, customisable, and integrated—making it an important contributor to the industry’s evolution. It’s for these reasons that BaaS might well be one of the industry’s greatest emerging opportunities.
However, financial services, and banks in particular, are currently juggling multiple priorities that may impede BaaS roll-outs. Banks are simultaneously servicing more generations than at any point in history while facing a challenging economic environment, working to overcome a downturn of consumer confidence, and fending off new tech-enabled competitors.
Plus, they’re navigating tightening regulatory landscape that could affect both innovation and cost of capital. So while BaaS certainly represents untapped opportunity and one way to address some of banks’ most pressing needs, we have yet to see whether the industry will experience its full potential in coming years.
What are some innovative strategies or technologies that traditional banks can adopt to compete with fintechs and remain relevant in the new era?
Right now, all the buzz is about finding useful applications for AI, and rightly so. While certainly not new, AI and ML show great promise for elevating how we handle compliance tasks to the way we manage data to where and how we show up for our customers — all with the promise of doing it faster, cheaper, smarter. While there’s no miraculous way to use the same technology to solve every potential use case, we are encouraging our clients to begin making exploratory investments so they are ready to leverage AI to attract, service and retain future clients.
At the same time, we’re also helping our clients think carefully about how and where AI solutions are deployed. The same Expectations vs. Reality survey, for example, shows that while more than half of U.S. financial services executives plan to increase investment in machine learning and AI over the next 12 months, only 10 per cent of US consumers ranked AI-generated advice as a feature that would be the ‘most interesting’ to them among a selection of other choices when choosing a financial services provider.
The takeaway is that while the technology is bound to be useful for financial services companies, consumers are not ready to interact with it directly until it’s perfected, so it’s probably not the best investment for improving the customer experience today.
Finally, given that we are still in the earliest stages of generative AI, we often recommend that financial services providers focus this type of tech on improving internal operations. This allows for controlled experimentation and useful optimisations, while simultaneously collecting data that can help design client-facing use cases when the time is right. This is the approach we are taking at FIS.