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 that banks perform in the background.
In recent years, Fintechs may anticipate competition with banks, but as they navigate 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.
From our perspective serving clients of all types, here are brief observations on what is driving innovation in the BaaS area.
1. Fintechs’ focus has shifted back to deposits.
When the pandemic initially hit, many of our clients and fintechs in general pivoted quickly to focus on lending to maximize their margin.
With the successive rate increases over the last year from the Federal Reserve Bank, deposit and payment services are again gaining focus. Many fintechs are evaluating the pre-pandemic benefits of offering deposit accounts.
The pandemic has taught consumers the importance of having emergency savings and highlighted a need for broader financial education that prepares households to effectively plan for their future and weather all types of economic conditions.
Fintechs see they can increase customer retention by integrating into customers’ daily financial lives, and there is generally no better way to do that than with deposit accounts that enable them to save for their future in addition to transacting daily through integrated payment services. Usually, these benefits are presented in the fintech’s core offering.
Although the technology has advanced, this process is functionally like the deposit accounts we have offered with our broker/dealer partners for decades.
We started the business by exchanging batch files throughout the day, and today we have evolved those same transaction types to be executed in real time using banking APIs.
2. Industry partnerships are fostering innovation and extended service offerings.
In our experience, it is important to make a full suite of banking services available. Foundational elements include real-time account opening, check clearing, ACH, remote deposit capture, bill pay and support for fully digital customer experience.
Beyond those basics, fintechs may benefit from more specialty services. For example, UMB is known for our FDIC sweep program, which enables fintechs to offer a competitive yield to customers while also expanding their amount of FDIC insurance coverage. Other examples of more specialized services are accounts payable and business financial management.
Today’s fintech world is about partnerships, not geography. A fintech based in one part of the country may partner with a bank located a thousand miles away.
As leaders in the BaaS space, we work together with other banks— participating in formal consortiums—to make that easier. For example, we are collaborating to set industry standards on how banks and fintechs integrate with real-time API technology and are working to improve industry identification and prevention of fraudulent activity.
Through these partnerships, UMB and other banks can further our competitive position by creating greater efficiencies and expanded service offerings for consumers.
3. Broker-dealers are incorporating banking-as-a-service support as they move from batch processes to real-time interfaces.
We have seen broker-dealers observe how we partner with fintechs and then they approach us to provide similar support as they update systems.
Broker-dealers are working to give clients—as fintechs typically do—real-time insights into their financial picture. That means shifting overnight processes to fully digital, end-to-end processing. This evolution helps mitigate fraud while also increasing efficiency.
For us, it is satisfying to see how our longest BaaS client relationships are benefiting from innovation in API technology.
Fintechs, broker/dealers 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.
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.
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