Banking-As-A-Service Has Its Own ‘Build Vs Buy’ Conundrum

Banks’ digitization journeys have been a rocky road, to say the least. The spark of FinTech innovation in recent history has set off a catalyst of disruption for traditional financial institutions (FIs), with the status quo of legacy financial services no longer sufficient for consumers, small businesses or corporates.

There is a balancing act in today’s financial services market between collaboration and competition. Though FinTech firms have kick-started the competitive landscape, traditional FIs are also viewing these new market entrants as valuable partners that can enable the rollout of digital banking products more quickly than if those banks were to develop solutions in-house.

According to Daniel Haisley, executive vice president of product and design at Banking-as-a-Service technology company Apiture, bank-FinTech collaboration is an essential part of keeping pace with customers’ changing demands — including those of small businesses.

“If you look at the banking space today, the unfortunate truth is that most financial institutions out there have really struggled to be able to react quickly as they would like,” he told PYMNTS in a recent interview. “They struggle to be proactive in the marketplace where everyone wants to be, if not a leader, a fast follower.”

Accelerating Change

Decades of legacy infrastructure and underlying architecture mean traditional financial institutions can trip over the pace of change in the market today.

“It’s very difficult to be nimble and shift the direction of the Titanic,” Haisley said of legacy FIs’ struggle to adapt to a changing market.

Though consumer payments and FinTech may have initiated this shift, traditional banks are quickly realizing that their small business clients are adding pressure to their digitization initiatives, too. That’s because, as Haisley explained, while consumers fit nicely into banks’ retail offerings, and corporates fit into their commercial offerings, mom-and-pop shops and other small businesses fall somewhere in the middle.

Another one of the fastest-changing areas in financial services is, of course, payments — and how the acceleration of payments disrupts banks’ fraud initiatives, particularly in the area of ACH payments. It’s a risk that Haisley said has caught some traditional FIs off guard because “either they haven’t been hit with it yet, so they don’t know how to handle it, or they don’t know they need to be taking it as seriously as they should.”

The U.S. financial services market is moving toward faster and real-time payments, too, both within the ACH rails and other payment networks. This trend means financial service providers and FIs will face even more pressure to “get it right up front,” as the window to catch a fraudulent transaction before it settles gets narrower.

Build Versus Buy

As financial institutions explore the build-versus-buy conundrum, many are discovering that collaboration with FinTech firms can alleviate the pain of trying to internally upgrade infrastructure to develop more appropriate services for small businesses, embrace faster payments or keep pace with shifting fraud risks — often a more affordable and flexible strategy than building new architecture from the ground up. However, many of the FinTech firms and Banking-as-a-Service providers servicing these financial institutions face their own build-versus-buy dilemma.

It’s what drove Apiture to partner with ACH Alert last week, said Haisley, as the company sought out a fellow FinTech that specialized in addressing ACH fraud mitigation — rather than Apiture investing the time and resources into developing its own product.

“You have [FinTech firms that] are able to execute very well on a narrow strategy,” he said, pointing to payroll or peer-to-peer (P2P) payment FinTech firms that specialize in specific products and services. Banks and other financial service providers can more easily embrace those products because they’re built on flexible, digital architecture.

“Financial institutions and financial service providers are realizing you just can’t build everything,” Haisley added. “Partnerships [are] a win-win-win for the FinTech, the financial service provider and the financial institution — where you’re able to get best-of-breed services clearly integrated into a digital banking solution.”

As the U.S. progresses in its migration toward Open Banking business models, Haisley noted that data sharing agreements and application programming interface (API) integrations will proliferate, and change the way data is leveraged, for service providers and end users alike.

Collaboration Is King

Agility is essential today, as FinTech innovation continues to elevate expectations for banks and other financial service players to quickly react to changing customer demands. Not only are these companies tasked with digitizing their product offerings, but market shifts will lead to changes in providers’ exposure to fraud and other security risks.

Just as collaboration is key between banks and FinTech firms, as well as between FinTech firms and Banking-as-a-Service providers, Haisley said the entire financial services ecosystem will have to work together to combat the moving target of fraud.

“It’s really important you have the right tools, and the right partners, in place,” he said. “Increasing those lines of communication about fraud and risk, and being able to be that intermediary to create communication across all organizations experiencing the same thing in different capacities, is really important.”