By GSBC President Michael L. Stevens
Second-year students at GSBC spend an afternoon working in small groups debating “hard questions.” The concept of our Hard Questions round table course is straight-forward: these leaders must work through the questions people don’t know how to answer or don’t want to answer. The Hard Questions topics for GSBC’s 2023 session were selected from strategic projects developed by the third-year students. The third-year students presented a synopsis of their work followed by small group discussions exploring the topic further based on each student’s experience, views on risks and thoughts on opportunities.
The first topic was “Banking as a Service,” or BaaS. ChatGPT defines BaaS as “a model that allows non-bank entities to offer financial services by leveraging the infrastructure and capabilities of traditional banks. In essence, it enables third-party companies, often FinTechs or other businesses, to access and use the banking infrastructure, including core banking functions, payment processing, and other financial services, without having to build these capabilities from scratch.”
Here are the second-year students’ best answers to the hard question, “What are the Pros & Cons of Banking as a Service?”
Considering community banking at its core is a relationship model, it is not a surprise that few students had experience with BaaS in their banks. There was consensus of potential opportunities for community banks that want to make the investment to provide the infrastructure and manage the risks.
Risk Tolerance
Pursuing a BaaS business line first and foremost must align with the bank’s risk tolerance and board-approved strategy. Banks must recognize that they will need to make an investment to provide the appropriate technological infrastructure and staff with the appropriate expertise to manage it.
The groups identified several key risks to engaging in BaaS: security, data ownership and liquidity. Adding new services and changing the technology infrastructure changes the risk profile and vulnerabilities, which is not something to take lightly.
The most significant risk is the management of the firm the bank is working with. These firms generally do not have the foundations in banking to appreciate safety and soundness or the role of corporate governance, supervision and audit.
Customer Service
The prospect of offering BaaS to provide additional services to existing customers and broaden the bank’s customer base had the greatest appeal, which is consistent with the culture and values of a traditional community bank. Without this connection to the existing customer base and community, there is concern that a BaaS business line will undermine or distract from the relationship business model.
The answer to the Hard Question: Banking is a risk business; the risk just needs to be identified and managed, because innovation does provide opportunity if it aligns with the bank’s values and expertise.