Facing Fear and Exploring the New Frontier of Banking as a Service

“One thing I think a lot of people get wrong: Courage doesn't mean there's an absence of fear. That's not true. There is no absence of fear. In fact, if there is an absence of fear, you're not courageous.” -Nathan Baumeister

Banking as a Service (BaaS) is taking over the financial industry. How should banks view this trend? Is it a threat? An opportunity?

BaaS is the new frontier in banking, so it’s time for banking professionals to face their fears about this innovative economic model.

Nathan Baumeister, CEO at ZSuite Technologies and a thought leader in the world of BaaS, shares everything financial brands need to know on this.

New Excitement in the Banking Industry

Nathan says the takeaway from the COVID-19 crisis has been to "keep going."

"It is amazing to me how many people stop when it gets tough … When I look back over the last 12 months of what's been happening with COVID, we didn't have control over what was going on. We didn’t. Those businesses and those individuals that kept going, that kept looking for ways to innovate, kept looking for ways to grow, kept looking for ways to make a difference in people's lives, are the ones that now are stronger than they were 12 months ago.”

Nathan tells the story of leaving gymnastics when he was young, then rejoining the world of gymnastics in college. “It was tough. It was scary,” he said, but he didn’t give up.

Facing fear is about having courage.

“I love courage for a couple of reasons,” Nathan says. “First, one thing I think a lot of people get wrong: Courage doesn't mean there's an absence of fear. That's not true. There is no absence of fear. In fact, if there is an absence of fear, you're not courageous. It is about, in the face of fear, being willing to accept the consequences that might come and still go ahead and make the decisions that you're making.” 

Nathan draws a comparison between making tough business decisions and doing competitive gymnastics.

“There are six events that you do in men's gymnastics. One of them is called the high bar. That's the skinny one that you swing around. You're supposed to let it go and then grab it again. It's ridiculous. Even just talking about it, my palms get sweaty, my heart starts to increase. And I haven't touched a high bar in 15 years, but it didn't change the fact that when it was time to get up there and go for it, you had to get up there and go for it.”

The COVID pandemic has created a huge amount of fear in people, Nathan says, and this includes a fear of digital transformation.

How do you cope with new digital trends when you can barely cope with a terrifying virus?

When you face fear and embrace courage, this feeling is contagious to those around you and others can boost the levels of their own courage. It’s an important part of leadership.

In the financial sphere, courage sometimes involves things like holding technology partners and vendors to a higher standard than ever before. It means setting a higher bar for what’s acceptable and what we’ll do to serve our customers well.

What is BaaS?

For anyone not fully familiar with the term BaaS, Nathan uses the example of Salesforce.com. They’re the big player that jumped into SaaS, or software as a service, and are using it to revolutionize how companies sell. You don’t own it, but you license it out and it’s hosted somewhere else. Another company maintains it, and your company and customers can simply log in and get things done.

BaaS uses the same kind of capability, but specifically for the banking sector.

Many SaaS companies want to provide banking services, but they don’t have a charter. So they look for partnerships where they can still provide the types of services a bank provides, like checking accounts, savings accounts, loans, and so forth.

BaaS companies tend to be good at asking the question, “How do we create more value for customers?”

For this reason, Nathan says, some people in banking see BaaS as a threat. Some see it as an opportunity.

What’s unsettling is that it’s both, but your outcome depends on your perspective.

Right now, about 90 financial institutions are dabbling in the BaaS space, but imagine how many more banks and credit unions are actually in the United States alone!

Some of these companies will have to redefine who their customers are and what they can offer these customers. Could they provide the infrastructure a software company lacks? Could this be their entry point into the BaaS market?

A Shift in Perspective for Banking Professionals

Many banks are bristling at the idea of essentially becoming a behind-the-scenes support structure for a BaaS software company. They don’t want to be support staff for someone else. They don’t want to take the backseat in an industry they’ve dominated for decades.

This is where the fear comes in.

Nathan explains, “Let's say all institutions across the United States decided to do banking as a service. Well, first off, I'm going to tell you it's not going to work because what's the one rule that we've learned about infrastructure ever since the Industrial Revolution? Infrastructure, in the end, is scale play.”

This means if you’re going to build infrastructure, you have to build scale.

“So the first challenge is figuring out this new business model,” Nathan says. “Your client is no longer the law firm, the municipality, the consumer that lives down the street. Your client is now a software company who's using the most modern technology.”

This is a massive shift in thinking for most U.S. banks. It feels extremely threatening.

But Nathan believes the banks that can quickly cope with this shift in perspective are going to be the big winners in banking for the next few decades. It’s a major turning point in the banking industry as a whole.

“More than likely, the banks that go in there first, they're going to build up this capacity sooner than everybody else,” Nathan says. “And anyone that gets traction is probably going to do a merger with the rest of the banks that are able to do BaaS.”

Volume, Value, and a New Economic Model

Another huge challenge for banks that are considering BaaS is to understand that this is what Nathan calls “a volume play.” That means having a little piece of a big pie is better than having a big piece of a tiny pie.

“This is a very different economic model than what most banks are used to currently, where they’re in the front stage offering their products directly to the customers, then they get the bulk of the profitability that comes with those customers,” he says, and banks are somewhat addicted to the traditional model.

BaaS is a scary proposition for the average bank CEO, which is why Nathan proposes that the vast majority of banks and credit unions probably shouldn’t play in the BaaS space. They may have a better model in offering technology solutions where appropriate, while still capturing a large portion of the economic value each customer brings.

BaaS Takes Strong Commitment

Nathan points out that if you’re still reading this blog post or listening to the accompanying podcast, you’re thinking, “No, man, I want to play.” You’re facing your fear and you want to be part of the BaaS world.

If this sounds like you, there’s something important you should know:

Nobody dominates the BaaS space yet. There’s still room for someone to come in and own it.

That’s exciting!

But you need to commit to it.

It’s a deep dive that will require a huge amount of work and openness to new ideas. It’s a lot like joining Silicon Valley and deciding you’re going to talk the tech talk and walk the tech walk.

What does this mean for a bank? For one thing, it means sourcing talent outside of traditional business development or traditional banking technology. You need people on staff who truly understand the ins and outs of making a niche play in an emerging field.

The Biggest Pitfall in BaaS

So what's the biggest mistake a bank could make or a common belief in the industry that would lead someone astray?

Nathan says it’s viewing BaaS as “the panacea of next-stage growth for banks.”

While BaaS is a growth strategy for a company that goes all-in, it’s not something that should be within all banks’ strategic initiatives.

It’s certainly not something every bank is going to win, and it’s not something every community bank can just add on piecemeal to an existing strategic plan.

So don’t fall into the trap of thinking you can somehow just add BaaS to your long list of other banking services. Don’t dabble. BaaS isn’t just “the next cool thing.” It’s a complete shift in the economics of running a banking institution.

It All Comes Back to the Customer

Nathan advises a company considering switching to the BaaS model should make sure they’re actually talking to their customers first.

“Just go talk to them,” he says. “Watch them. Go see a day in the life of. Spend time with them. Say, ‘What's frustrating to you? Hey, you banked with me for the last 10 years. What’s the most frustrating thing about it?”

Find the pain points and be willing to face up to them. And as you do this, think about all the SaaS companies and BaaS companies that are going to be successfully solving these customers’ problems for them. Will these companies beat you to the finish line of solving your own customers’ problems?

“And so it’s about being intentional and then listening very, very closely,” Nathan says. “Find out how you could provide value in the relationships that you have with the folks you already have relationships with.” Learn what’s keeping your customer up at night. Gain clarity into what they really, truly need from a financial brand.

Nathan relates the story of working with a bank that started by telling him, “We need more deposits. We bank a lot of property managers and landlords, but we don’t have a lot of their deposits. They’re just on our lending side of the equation.”

Nathan’s company said, “Let’s go talk to them.” They discovered the landlords have a hard time collecting rent and managing tenant security deposit accounts. That was a solvable problem from the perspective of a bank but it’s something they weren’t already doing for landlord customers. A new tool was born. Then it became a tool that could work for other customer groups, and then others too.

This is the type of innovation that comes from having the customer’s best interests in mind. It’s not just saying, “This is what we assume our customers need.” It’s saying, “This is what we know our customers need because they told us.”

Start From Where You Are

Look inward, then look outward.

Talk to your customers.

Do a small test.

Get your footing. 

“There's nothing as powerful as a low-cost experiment,” Nathan says. “It's an amazing way to be able to learn and there are so many different ways to do these low-cost experiments ...You could just take a PowerPoint presentation with a couple of screenshots and just go out to some of your customers and be like, ‘I'm thinking of doing something like this. What do you think?’”

And remember, each of these interactions is also an opportunity to build a new relationship and find a new customer. Be like the SaaS companies that are always capturing names and email addresses. Build a database, send a message that says, “Thanks for the experiment,” and follow-up with a 15-minute conversation that dives even deeper.

The companies that are succeeding in the SaaS and BaaS spaces are the ones who can take tiny interactions like these and build them into something big. Ultimately, that’s the way to face your fear and, as Nathan says, “that’s the lesson of courage.”