3 Factors of Effective BaaS: Culture, Compliance, and Cost

Maximizing returns from BaaS initiatives requires properly assessing, defining, and managing the risks that can exist in bank-fintech partnerships. In performing due diligence, financial services organizations might find that the differences that can make partnerships fruitful also might create unexpected operational challenges.

Banks that tend to avoid risk more than manage it are more frequently working with fintechs whose business tactics are more risk-tolerant than what banks typically are used to. In many instances, the business tactics are more complex than the typical business models of the bank.

If banks and fintechs align roles, responsibilities, and operations sooner than later, they can have more bandwidth to focus on BaaS solutions.

Bank-fintech partnerships are a blend of platforms and technologies as well as cultures and compliance. Both organizations are responsible for making sure they are on the same page and compatible with established policies and procedures.

Such teamwork takes communication and, sometimes, compromise. Banks and fintechs should collaboratively consider three major factors with BaaS: culture, compliance, and cost.

Banks tend to prioritize – and take pride in – strong compliance, structure, and governance. Bank leadership might resist quick changes and avoid risk while embracing stability and reliability. As a result, their long-time customers know what to expect with reasonable certainty.

Fintechs, meanwhile, prioritize flexibility, growth, and investor demand. It’s not that compliance and structure aren’t important, but that fintechs generally tolerate more risk to focus on higher priorities.

Bank and fintech cultures can combine to appeal to customers who want reliability and to customers who want the newest digital benefits. The bank sponsorship team is the key to bridging the cultures and seeing returns within the limits of risk that each party is willing to accept. This initiative is typically led by the business and supported by risk and compliance.

Maintaining an aligned and well-blended culture between banks and fintechs should be an ongoing priority. Whether just beginning a relationship or already moving forward with a BaaS program, both organizations should regularly allot time to discuss acceptable risk. Some baseline questions to consider include:

• How does each organization define risk?
• How does each organization judge its risk appetite and tolerances?
• Which risk-based behaviors by a partner are considered most concerning?

Even with defined mission statements and risk limits, banks and fintechs should acknowledge that mistakes and failures might need to be addressed or accommodated. Learning is a necessary part of combining cultures.

Establishing compliance expectations in a bank-fintech partnership is another critical element of achieving harmony between the two entities. Each organization’s operations should establish an ongoing agreement specifically on where regulatory boundaries exist.

Banks often work directly within compliance boundaries that provide the most security and least possible risk. Compliance requires following strict rules and meeting deadlines for actions, and it also helps banks best serve customers as a matter of principle.

Fintechs do not always have as much experience distinguishing between the nuances of strict and principle-based compliance. Fintech leaders typically follow the strict rules as they must, but they don’t necessarily want to be locked into the more principles-based rules and bank-sponsor policies. The concern might be that if BaaS technology changes, then principles might need to be realigned as well.

But when a bank refuses to concede any flexibility with compliance or a fintech refuses to stick to any principles-based rules, BaaS efforts can quickly go sideways or nowhere at all. An ongoing discussion of culture must include decisions on compliance as well.

Some baseline questions to consider when discussing compliance expectations include:

• Who oversees handling different aspects of compliance risk, specifically on a task-by-task basis?
• How can the bank sponsorship team help the fintech address banking regulations that it is not currently equipped to address on its own?
• Which principles could a bank be more flexible about to benefit BaaS initiatives while meeting customer expectations and operating within regulatory boundaries?

It’s important to remember that a universal or bank standard on every single compliance rule might not always exist, and effectively navigating shifting regulatory standards can help improve overall BaaS ambitions. A RACI (responsible, accountable, consulted, and informed) matrix is a useful tool that can help clearly define roles and responsibilities and determine and communicate which standards should be followed.

Cultural alignment fosters compliance alignment, but how can organizations manage it with limited resources? Regulations don’t necessarily care about cost or affordability.

That said, bank-fintech partnerships that remain consistently on point with each other regarding culture and compliance can help each other make the best use of their resources as well. In many cases, proper forethought and planning can help keep costs from turning a sensible, mutually beneficial decision into something inviable.

Discussion can vary on which costs might be most beneficial for any given BaaS project, but there are some general “good” and “bad” costs that can serve as foundations for decision-making.

“Good” costs can include investments in:

• Infrastructure and compatibility between bank and fintech systems
• Efficiency
• Talent
• High-trust verification, in which trust plays a large role but specific, agreed-upon parameters are still verified

“Bad” costs can include:

• Work-arounds that take more time and effort than more fully integrated solutions
• Manual processes that can be automated
• Verification of every action a partner takes
• Remediation of preventable violations

Entering into a BaaS partnership with incomplete information, the wrong expectations, or a desire for one side to take total control can result in the worst incompatibilities instead of mutual benefits.

Planning and communication are vital to starting a BaaS partnership off on the right foot or getting more out of an already established partnership.

Crowe specialists can help foster better understanding between banks and fintechs with risk maturity assessments and strategic consultations on policies and resource planning. We can help concentrate the conversations and get to better, more actionable positions sooner.