The popularity of Banking-as-a-Service (BaaS) business models are infiltrating many parts of a consumer’s life, with banks wanting to adopt platforms in order to deliver products and services to their customers. The market value of BaaS is expected to reach $6.9 billion by 2030, growing at a CAGR of 32.9%. It's no wonder that banks are attracted to the as-a-service and embedded finance business models. One way to achieve this is by providing these value-added products and services through an ecosystem that banks can curate and control.

The rise of BaaS—licensed financial institutions offering products and services into external brands and fintech digital channels—has led to fintech and banks working more closely than ever in last-mile customer delivery. This sharing of the last mile of delivery has posed a new question in the industry: Who owns the customers?

With the popularity of BaaS, traditional banks, now acting as ‘sponsor’ banks, have gained deposits from fintech and BaaS providers, which the bank holds in For the Benefit Of (FBO) accounts. However, since many banks are not licensing software from the fintech or BaaS provider, the system containing those underlying virtual accounts may not be visible or within the bank’s control. 

So is the end user a customer of the fintech, the BaaS provider, or the bank? As a bank, would the fintech or BaaS provider actually be its customer? 

While this may seem like a dilemma, regulators have recently focused on the issue. Their crackdown on unchecked fintech and banking relationships has opened up a new market of bank platforms. 

What do the regulators think?

Since fintech and banks first started their relationship, understanding who is responsible for what has been complex.

One of the big questions for regulators is: If banks rely on a third-party to store their customer and account data, and the bank is not licensing that platform, would regulators consider those as brokered deposits? 

Grace Brasington, Senior Managing Director of Advisory Services at Asurity Technologies commented that “another layer of complexity is added when a fintech offers its own products and services that are not reliant on the bank’s charter… alongside the banks. In those cases, responsibility for regulatory requirements, such as privacy rules and data use, Banking Secrecy Act (BSA) and Anti-Money Laundering (AML) obligations can become murky, mainly where the fintech and bank’s creations form an integrated whole.”

However, in the past year, it’s become evident that regulators expect banks to be doing the heavy lifting regarding compliance and risk. This crackdown came after several banks were found to be negligent in their fintech partnerships. 

Several banks have recently been called out by The Office of the Comptroller of Currency (OCC) concerning unsafe or unsound practices regarding third-party risk management, BSA and AML risk management, information technology control, risk governance, and suspicious activity reporting. 

Brasington also stated that “irrespective of branding… or who engages with the customer, regulators have largely determined that the bank is the entity ultimately responsible for the compliance requirements,” regardless of how the end customer or the various contractual players may perceive ownership of that customer.

This now means that if a BaaS provider currently performs Know Your Customer (KYC) checks, the new regulations from the OCC would require the bank to conduct their own KYC checks to meet regulatory requirements. This leads to a breakdown of the BaaS model as replicated processes, like KYC, end up doubling the cost to the end customer. So what can banks do to improve their ownership situation? 

How can banks make customer ownership work for them?

When considering embedded finance programs, banks need to consider how they’re building their strategy and maintaining control and benefits of the programs.

Regarding customer ownership, having complete platform control may be the banks’ most crucial success factor. One way to achieve this, is for the bank to license a BaaS platform to ensure ownership of their programs, customers, and accounts instead of outsourcing its tech stack. 

When a bank onboards a customer through its legacy digital banking channels, that customer is typically stored in the core banking system. In this case, the bank owns the ecosystem, which includes the digital application and the customer data. When the banks are licensing software to maintain their customers and accounts—like core banking software or a licensed virtual ledger—the bank can retain customer ownership. 

Hence, banks that own or license a BaaS platform can have significant advantages over those that outsource. Modern platforms can run above the bank’s core legacy system, meaning there is no costly and time-consuming core modernization project to launch BaaS programs. 

Meanwhile, banks can still work with fintech and leverage their advanced customer experiences. Banks’ underlying infrastructure can dictate the success of launching an in-house embedded program. If banks go down this route, faulty infrastructure can limit their scalability, product offerings, and economics.

So, if banks want to update their relationship with their fintech and brand partners, some essential questions for banks to consider are: 

• Do you own or license a cloud-based, multi-tenant platform that can scale above your core?

• Who are the fintech providers working with to ensure they comply with regulations since the bank is ultimately accountable?

• Regarding the impact on reserve requirements, is your partner meeting the FDIC pass-through insurance requirements?

• If you’re outsourcing your program and maintaining just an FBO account, how is customer ownership transferred if the third-party fintech is shut down?

The digital age is revolutionizing the banking industry. While fintech and banking ecosystems provide customers with personalized products and services, banks must ensure the model works for them. 

To ensure a bright future, banks and fintech must rely on each other, but this joint venture can only succeed when the process is smooth and cost-effective. It’s time for banks to take full ownership of their customers and build a framework with their fintech partners which is scalable, responsible, and economically viable for all parties.