In our work with fintech companies that serve retail customers, we help facilitate firms’ desire to integrate their offerings into customers’ daily financial lives. Generally, there’s no better way to do that than with deposit accounts and payment services, commonly referred to as embedded finance. These connect to customers’ daily lives and financial goals for the future.

In our Banking-as-a-Service (BaaS) or embedded financed partnerships, fintechs’ customers know they’re opening an account with UMB and using UMB payment services, but on a day-to-day basis they see the fintech’s own brand name through its website and/or app. We’ve seen this work extremely well from a customer-experience perspective.

Critically, we conduct the exact same account-opening due diligence for customers of our fintech partners as we do when customers walk through the doors of a UMB branch or open an account online.

Put bluntly, we are a bank, and we always conduct “bank-level” review. Bank account openings are subject to a litany of rules and regulations. Simply opening an account requires attention to Know Your Customer (KYC) and Anti-Money-Laundering (AML) requirements, among others. Fintechs need to depend upon a BaaS provider’s familiarity with regulatory framework along with a compliant operations and technology infrastructure.

In our experience, fintechs are often concerned adherence to rules and best practices will create friction in their user experience. On the other hand, they’re rightly wary of making regulatory missteps. What’s needed is a collaborative approach—the fintech and BaaS provider working together to meet all relevant needs.

To that end, we suggest fintechs ask several questions of potential BaaS providers as they conduct their own due diligence. In those conversations, fintechs may hear the phrase “regulatory playbook.” Not surprisingly, “regulatory playbook” can mean very different things.

1. Does the provider’s regulatory playbook include bringing experts to the table?

In our experience, everybody wins—and is protected—when legal and compliance experts are part of product meetings from the start. A consultative approach is the best way to ensure fintech product needs are met within regulatory requirements. In some cases, there are multiple ways to fulfill those requirements. Fintechs and banks can work together to define processes best aligned with fintechs’ objectives and their customers’ needs.

Over the last year-plus, regulators have placed more emphasis on how well sponsor banks are performing customer due diligence and how much they are relying on third-party providers to provide middleware to assist with integrating the fintech with the bank’s internal payments systems and deposit platform. As a result, ensuring the bank can engage with the appropriate IT resources—in addition to legal and compliance matters—has become equally important.

2. Is the bank applying the same standards for all new customers?

While there’s room for some discretion within account rules and practices, that doesn’t mean banks can treat BaaS accountholders differently than other accountholders in any fundamental way. Make sure the bank’s regulatory playbook is based on its broader practices.

Find out how—and how well—the bank executes new account opening and onboarding in contexts other than BaaS. Ask how that translates to the BaaS experience.

3. How seriously does the bank take protecting its own reputation?

In a BaaS relationship, both the bank and the fintech have obligations to fulfill with respect to meeting regulatory standards.

At UMB, we have a well-established reputation to uphold. That reputation extends far beyond BaaS to include all our lines of business, so we are committed to proceeding with diligent attention to regulatory requirements. This translates into UMB not being a fit for every prospect wanting to offer deposit and payment services.

4. Does the bank handle regulatory compliance internally?

Be sure to ask your potential providers about resources and how they approach compliance questions. These processes will impact the timelines and development processes you’re considering. Typically, having an in-house team is a more efficient and collaborative way to confront regulatory requirements.

5. Does the bank’s approach accommodate flexibility wherever possible?

Fintechs want to gather necessary information from customers in the most efficient way possible while also satisfying KYC requirements. We’ve worked with fintechs to establish an essential question set that’s proven to be clear and effective. A consultative approach provides an opportunity to evaluate specific wording, question order and other adjustments to support an optimized user experience.

6. Does the regulatory playbook apply beyond product design and account onboarding?

Customer communication (including disclosures), advertising, transaction monitoring, suspicious activity reporting and economic sanctions compliance are among the ongoing factors that require close attention by one or both parties.

Expertise and partnership

Ultimately, these questions for your BaaS provider boil down to expertise and partnership. Fintechs need to protect their brands, products and customers—as do banks. In our experience, any regulatory playbook should emphasize gathering specialists at the table—right at the outset of BaaS product development.

UMB began offering banking-as-a-service (BaaS) long before the term even existed. Decades ago, we began making it possible for broker-dealers to provide their clients access to a brokerage cash account that functioned like a traditional bank account. Broker-dealers can issue check books and debit cards to their clients to utilize funds in their cash accounts. Over the years we have added the ability to sweep that extra cash into a network of banks, expanding FDIC insurance coverage for these same end-users.

More recently, the concept of BaaS has expanded in scope as non-bank financial firms or fintechs have brought to market an array of products and services—many of which benefit from the deposit and payment services banks perform in the background.

In recent years, fintechs may have initially anticipated competing with banks, but upon navigating the rocky regulatory terrain, they often opt to collaborate with one or more established banks to provide behind-the-scenes processing. They typically opt to partner with an established bank rather than going through the regulatory approval process to become a regulated financial institution and building out the systems required to meet regulatory standards in the banking industry.

From budgeting and investing to health savings and insurance, there are thousands of fintech players seeking to serve customers in innovative ways. But these are not the only non-bank firms active in innovation. Our long-time broker-dealer clients and others are innovative, too.

Closing thought

Fintechs and other BaaS partners continue to innovate ways to improve the financial lives of their customers. We have been glad to be part of that progress for more than 40 years. Strict adherence to regulatory needs is part of the program—with the right collaboration, it doesn’t have to be painful.

Learn how UMB can support your financial institution or fintech with integrated banking solutions, insured deposit accounts and Banking-as-a-service. Contact us to schedule a consultation.