And we’re back. The digital banking fanboy is back from an article sabbatical. In this one, we’ll be looking at digital banking, probably not much of a surprise at this point. In particular, we’ll be exploring the differences between having a banking license and tapping into a Banking-as-a-Service (BaaS) provider to grow a neobank.
So WTFinTech is a banking license? A financial company can call itself and is certified as a bank when it meets a set of strict government regulations and legal requirements.
“To get a banking license, the institution has to meet a strict list of criteria, including keeping financial reserves on hand, and ensuring data systems are securely protected,” N26.
A core component of having a banking license, the bank holds the customers’ money themselves, and deposits are protected up to a certain amount by the Deposit Guarantee Scheme. This means should the bank fail, the ‘certain amount’ protected will still be paid out to you. To obtain a banking license a FinTech has to contact its national supervisory authority, for example, the European Central Bank to start the process. Getting your hands on a banking license can be time-intensive, taking up to 18 months.
What are the benefits then? With a banking license, a neobank can operate like a fully-fledged bank. For example, it can offer its customers products such as loans or overdrafts. Non-active users, whilst not being ideal, are not as cost-intensive. A banking license alleviates the cost that goes to BaaS providers for the number of customers you have. With a license digital banks are also not dependent on the product/service offering of their partnered BaaS provider but instead can curate their own product range with freedom. Well, the most obvious one is trust. As a customer, it’s important to know whether or not your money is safe with a FinTech. Having a certain amount of your money protected by a Deposit Guarantee Scheme definitely provides a sense of security.
So what is Banking-as-a-Service or BaaS? “BaaS is the provision of banking products and services through third-party distributors. Through integrating non-banking businesses with regulated financial infrastructure, BaaS offerings are enabling new, specialized propositions and bringing them to market faster,” Deloitte. Examples of key BaaS players are Solarisbank, Mambu, Railsr, Enfuce, and Treezor. But what are some of the benefits of partnering with a BaaS provider? For FinTechs some of the key advantages would be a faster startup launch and gaining more customers. As BaaS companies provide you with the necessary infrastructure and security it’s easier and quicker to launch your FinTech. Their ability to provide Deposit Guarantee Schemes makes them a great partner for gaining customer trust and hence growing your customer base at a quicker pace.
Things to keep in mind when tapping a BaaS provider to launch your FinTech or grow your customer base are the cost of non-active customers and the flexibility to launch products and/or services. BaaS companies are for-profit businesses too so they need to make money. Charging you for the number of customers you have is one way to generate revenue. This makes non-active users of your neobank an expensive liability. Incentivizing your customers to engage with your product and/or service is a way to ensure that you’re getting the maximum bang for your buck. Things like cash back or discounts on premium accounts are a great way to keep customers hooked. Especially in Europe where cashback is not the most common.
So banking license vs BaaS provider? Both are great options but probably for different stages of your FinTech. If you’re just breaking ground and want to launch your neobank partnering with a BaaS provider is likely to be the better choice. If you’ve become a more established neobank, then applying for a banking license is probably the more suitable option. This will give you the necessary flexibility and will be more cost-effective.
Your Partner in Growth
As the FinTech industry continues to grow, so does the need for talent to facilitate this. At Storm2 we have specialized in connecting FinTech talent with disruptive FinTech players such as yourself. We can assist in any stage of your growth by connecting you with the right people. Please don’t hesitate to get in touch and we would be more than happy to see how we can help and support you in your journey.