The rise of fintech companies means that it is increasingly possible for consumers to take out a loan, transfer money or perform other financial transactions without going through a bank.
This may be bad news for these banks, but Fishers-based First Internet Bank sees an opportunity.
First Internet is one of a relatively small number of US banks looking to do business with financial technology companies – fintechs – using an emerging business model called banking as a service, or BaaS.
In this model, a bank offers its expertise and capabilities to a fintech for a fee. This allows the fintech to provide its customers with services that require the intervention of a federally regulated and insured institution.
“The banking industry is really being revolutionized by the entry of fintechs,” said Nicole Lorch, president and chief operating officer of First Internet. “It’s vital to our very survival to be part of a growing movement like this.”
First Internet has been involved in BaaS to a limited extent in the past, but is now looking to expand this line of business. Last month, the bank announced that it had reached an agreement with Synctera, a San Francisco-based startup that launched in 2020. Synctera will act as a matchmaker to help First Internet find suitable fintech partners.
Lorch said she knows about 48 nationwide financial providers active in the space. First Internet and the Indiana Bankers Association said they were not aware of any other Indiana-based banks currently involved.
But First Internet, and others, say the BaaS model is poised to grow, in part because the pandemic has accelerated the pace of adoption of online financial services. And the rollout of the federal Paycheck Protection Program, with its ever-changing rules and regulations, underscored the value of fintech in helping banks respond quickly to customer needs, said Mike Horrocks, vice president of product management at Carmel-based Baker Hill.
Baker Hill is a fintech that offers lending software to banks and credit unions.
These and other factors have created overriding conditions for the BaaS business model, Horrocks said. “I think that’s a trend that’s going to get stronger and stronger.”
As fintechs go mainstream, he said, banking regulators and the federal Consumer Financial Protection Bureau are beginning to examine what fintechs do and whether they should be regulated.
Fintechs lack the ability to comply with onerous regulations that govern banks, Horrocks said. “These fintechs are going to have to find a partner who is already used to the pressures and the demands and how to deal with the CFPB and any other regulators.”
Partner or purchase
The partnership model pursued by First Internet is an alternative to what many large banks do, which is to acquire a fintech. Especially in today’s market, where valuations of tech companies have skyrocketed, acquisition might be out of reach for smaller banks.
“Occasionally, [the fintechs are] so expensive it’s prohibitively expensive,” Lorch said, adding that First Internet wouldn’t rule out an acquisition if the price was right.
With assets of just over $4 billion, she said, First Internet is one of the biggest banks to have jumped into the BaaS model.
The bank is currently working on forming partnerships with three different fintechs, two of which were discovered through Synctera. Lorch declined to name those companies because First Internet is still doing due diligence and hasn’t finalized the deals.
“We carefully track how we bring these partners on board,” Lorch said.
But in a recent interview with the American Banker publication, First Internet CEO David Becker broadly described two of those three potential partners: One offers workers a way to access their pay at the end of each working day rather than waiting until payday; the other works with immigrants who work in high-paying tech jobs but don’t have a traditional credit score.
Lorch said two of the pending fintech deals are expected to close by the end of this quarter, with the third closing by the end of the second quarter.
Once these partnerships are in place, First Internet will charge fintechs for the services it provides to them. The bank will then share part of this income with the matchmaker Synctera.
The arrangement offers a few benefits for First Internet, Lorch said. Not only will the bank earn non-interest income from the fees it charges fintechs, but it’s also a way for the bank to do more business while letting fintech do the work to attract those companies.
Although Lorch said First Internet hasn’t set specific goals for how much revenue it hopes to generate from BaaS, the bank has seen success with a few previous BaaS partnerships.
In October, the bank announced a partnership with San Francisco-based ApplePie Capital, which offers a marketplace that connects franchise owners with lenders. ApplePie interacts with lenders and borrowers and handles most lending services, while First Internet handles underwriting and lending. Last year, First Internet lent $85 million through its ApplePie partnership, and the bank expects that number to grow to $150 million this year, Lorch said.
And in 2017, First Internet announced a partnership with San Francisco-based Lendeavor, a technology lender for dental and veterinary practices. Lendeavor, which now operates as Provide, was acquired by Fifth Third Bank last year and First Internet is no longer involved with the company.
Even further than that, First Internet worked with Indianapolis-based ChaCha Search Inc., the now-defunct company founded in 2006 that offered a human-powered search engine. People who did this research for ChaCha could access their pay through a ChaCha-branded debit card linked to a First Internet account.
Another bank active in BaaS is Cleveland-based KeyBank, which formed an internal team two years ago to pursue BaaS opportunities. To date, the bank has formed around 10 fintech partnerships, said Kenneth Gavrity, head of corporate payments at KeyBank.
In some cases, Gavrity said, KeyBank has acquired fintechs. In others, he has invested in fintechs or has fintechs as clients, or both.
KeyBank has assets of $186.3 billion, does business in 15 states, and operates 19 branches and 26 ATMs in central Indiana.
Gavrity said BaaS is a way to enable what’s called integrated banking: allowing consumers to perform financial transactions within another app or experience. Ride-sharing app Uber was an early adopter of the concept, he said, because riders could both hail a ride and pay for that ride in the same app.
In five to 10 years, Gavrity predicted, the concept will become mainstream, allowing people to seamlessly do everything from paying a dental bill to receiving an insurance claim. In some cases, consumers may know the name of the bank involved in the transaction. In other cases, they won’t.
“It will transform financial services,” Gavrity said.
Nymbus, a Jacksonville, Florida-based fintech, offers a similar vision. The company, which works with banks to help them improve their digital offerings, launched a BaaS service late last year to help banks seek out integrated banking opportunities.
Katherine Murrie, vice president of BaaS innovation at Nymbus, said she expects the current low level of BaaS participation to increase significantly within 24 months.
“It’s a bet that Nymbus is also making in the market,” Murrie said.
Gavrity sees so much opportunity in BaaS that he has predicted plenty of deals for First Internet, KeyBank and other financial institutions.
And if banks aren’t already active in this area, he warned, it would be wise to start partnering with fintechs now.
“There are going to be significant haves and have-nots in banking,” Gavrity said. “If you are not [building fintech partnerships now]you can’t catch up. »•