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- Daily Deposit 3.7.2023
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Today in Banking
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Spade raises $5M in seed funding: cleaning and enriching transaction data
How ChatGPT changes Fintech
Banking 101
Should traditional banks use BaaS?
I love fishing as much as the next guy, but we're not talking about that kind of bass, we're talking BaaS, or Banking-as-a-Service. The banking industry has undergone a significant transformation in recent years with the rise of digital technology. And with this transformation, traditional banking models are being challenged by new and innovative approaches. Queue BaaS, a model for offering banking products and services through APIs.
A fintech startup might us a BaaS provider's APIs to offer banking services to their customers without having to build their own banking infrastructure. This is where a traditional bank comes in. Traditional banks have a tried and true expertise in finance and banking infrastructure, but as a general rule are stuck with clunky legacy systems and technology. Combine trusted banks with trusted tech (BaaS provider) and now we have a match made in heaven.
What are the benefits?
1. Revenue Generation: By offering BaaS, traditional banks have an additional revenue stream to profit from. BaaS opens the door for banks to provide financial services to other businesses and fintech startups, without taking on the risk of software develop and revamping their tech stack. They get to plug-and-play with a BaaS provider through API connections, and enjoy non-interest fee income.
2. Increased Customer Reach: BaaS will expand the customer base of traditional banks by reaching newer and more diverse portions of the market they could not achieve through their own channels.
3. Increased Agility: BaaS providers use a more modern, cloud-based technology that is more cost-effective and scalable than the native legacy systems used by banks today.
For banks that can embrace BaaS, they gain a competitive advantage by offering services that most other banks can't offer. BaaS is a growing market, and the banks that can offer these products can position themselves as forward thinking, innovative FI's. Mis this reputational gain with new revenue streams, increased customer, and increased agility, and you now have a deadly combo. It's like a Chipotle burrito bowl with tortilla on the side, but for banks!
What are the drawbacks?
It can't all be rainbows and gumdrops… There are some risks to getting in the game.
1. Regulatory Risks: Banks are subject to strict regulatory requirements and oversight, and BaaS most definitely increases this exposure. Larger and more spread out customer base = more regulatory scrutiny. Add to this that regulators have no idea how to navigate the space yet, and you're in for a big time headache.
2. Operational Risks: Banks using BaaS also have require new operational capabilities and processes. Being a new space, there is not much literature out there on how to manage BaaS. Banks need to invest in new tech and infrastructure to support these offerings. And if you screw this up, brace for impact. Reputational damage, customer dissatisfaction, and financial loss to name a few…
3. Security Risks: APIs and third-party connections are groovy, but please consider the risk of sharing sensitive financial data and information through these channels. Information security needs to be tight to protect against cyber threats and data breaches. Increasing the reach of bank makes it a much bigger target for fraudsters and bad actors.
In summary, be prepared to take the good with the bad if you’re a bank offering BaaS. Properly manage the increased regulatory, operational, and security risks and you just may be able to bring in more revenue, more customers, and do it all faster. Banks mixing in BaaS today are the pioneers of finance in 2023, and they have a chance to bring home the bacon. "With great power comes great responsibility." - Uncle Ben
LULZ
reply with a Cold Stone bowl score… did you:
a) like it
b) love it
c) gotta have it