Banking-as-a-Service is finding itself under some significant pressure. Carlos Netto, CEO of Matera, a core banking and digital payments platform, talked to BankBeat about this ongoing issue and how technology is helping banks and their fintech partners successfully — and compliantly — navigate BaaS.
Regulatory scrutiny around BaaS is likely to increase. Is there a future for it?
Carlos Netto: The popularity of BaaS is understandable. It’s incredibly competitive for banks to attract deposits, and it makes complete sense that many of them have turned to fintechs to attract new money. After all, fintechs are known for their quick onboarding processes and are therefore a perfect complement to banks, which excel at risk management and compliance. But we should expect change. The BaaS tech provider landscape is changing, and the recent problems have shined a light on the challenges of managing fintech partnerships. There is a sustainable business model here, but it will take time for things to shake out.
Ultimately, banks that pursue BaaS in the right way have a huge opportunity to leverage the skills of fintechs and grow in a sustainable and compliant way. However, they need to strike a balance between having better control over their partners and not forcing them to act like banks in the process and/or driving costs to an unsustainable level.
Will banks be discouraged or will there still be demand?
C.N.: Demand for fintech partnerships continues despite recent challenges. The global BaaS market is expected to grow from $36.4 billion in 2024 to $94 billion in 2028. Not surprisingly, banks will be more cautious when evaluating partners to avoid regulatory backlash. Last year, BaaS banks accounted for 13.5 percent of federal bank regulators’ severe enforcement actions, and 2024 has continued to see mounting consent orders.
The good news is that increased scrutiny is providing a blueprint for how bank-fintech partnerships and BaaS will be regulated in the future. Banks also believe that the current regulatory focus means an opportunity for the industry to develop best practices, which benefits banks, fintechs and customers.
Any advice for banks looking to get into BaaS?
C.N.: To stay competitive in BaaS, I recommend banks embrace modern, cloud-based technology. It will be tough and expensive to compete in BaaS while relying on legacy mainframe technology. While known to be sturdy, reliable and able to handle complexity, core banking systems were designed to handle a steady stream of transactions initiated in a branch between 9 a.m. and 6 p.m. This technology is insufficient to meet the demands of fintechs that require 24/7 mobile access and real-time transaction capabilities.
What technology do banks need to navigate BaaS successfully?
C.N.: One of the biggest challenges of BaaS is a lack of automated, real-time visibility into balances and transactions in fintech end-user accounts. Critical data fields are not included in API posting to the core and are extremely expensive to add, such as new remittance fields required for wire transfers. Balance reconciliation therefore becomes a headache. Put simply, multiple ledgers cannot be reconciled.
Matera’s ledger is called Digital Twin. Its API and event-driven architecture authorizes transactions with zero down time and updates balances in real-time, and can scale up or down as needed so the bank isn’t consuming expensive resources off-hours. Most importantly, it is one ledger that can be used by both the bank and their fintech partners, eliminating reconciliation headaches. Everyone knows the balances and transactions in the FBO and individual accounts. Additionally, regulators can be assured that the bank has clear visibility into the individual accounts originated by the fintech to support risk and compliance management programs.
By taking a Digital Twin approach, banks can lean into the best features of their core system, while also gaining the ability to connect to modern open payments systems that provide customers with better experiences in support of their BaaS partners.
This is the type of modern technology that can help fuel the BaaS business model going forward. It can be owned and managed by the banks, which gives them greater control over their partnerships in a way that doesn’t burden them with slow, outdated processes. Without this, the future of BaaS will be challenging to navigate.
