Banking-as-a-Service Model Extends Hunt for Deposits to Fresh Markets

Branches don't pay off like they used to for building deposits and loans, so why keep sinking more money into them? Using application program interfaces, built on new technology instead of old core, can put banks and credit unions into new geographies without new bricks.

While strong demand for loans continues, banks and credit unions have been struggling to raise the necessary deposits in their local markets. For many institutions, growing deposits remains tied to the diminishing returns of maintaining or building more branches as the primary means of attracting depositors.

Falling traffic means that branches are no longer the revenue generators they used to be. Only about 25% of account holders visited a branch in 2018 to open a new deposit account, while only 19% visited to apply for a loan, according to Market Force. The vast majority of in-branch interactions today are confined to troubleshooting and transactions. This gives financial institutions with limited out-of-market digital capabilities little recourse in growing deposits to fuel lending activity.

But there are solutions. A key one for community banks and credit unions, which may not see enough ROI in building more physical branches, can be found instead in the more intensive adoption of banking-as-a-service solutions and models. This approach brings banking services like checking, savings and payments to other markets using APIs (application program interfaces).

These open a portfolio of growth opportunities in new markets. Turnkey deposit offerings that leverage flexible open APIs give financial institutions the tools to expand their out-of-market presence, bringing in additional deposits and thereby increasing their lending capabilities with a less-rigid cost structure and a better overall experience for account holders.

Banking-As-A-Service Addresses Tech Limitations

Existing legacy technology isn’t structured to support out-of-market — and therefore out-of-branch — deposit acquisition at scale. Its limitations, and the tremendous cost burden associated with decades-old systems that predate the internet, are natural growth inhibitors to out-of-market deposit- and customer-acquisition strategies. With these underlying factors firmly ensconced, traditional financial institutions seem confined to their local markets.

This is why new models become critical, and where exploring an approach similar to that of emerging direct banks, fintechs and the most forward-thinking community financial institutions becomes lucrative. Launching an out-of-market effort that is independent of traditional infrastructure creates new growth opportunities for institutions willing to invest in low-cost options that sit alongside — rather than replace — legacy tech.

This opportunity will become more and more prevalent as fintech adoption rates across all consumer segments continue to grow. Recent research from Cornerstone Advisors and Q2 indicates that 46% of all U.S. consumers already use financial services offered by fintechs or would consider doing so the next time they need a new product or service.

The most fundamental requirements for expanding a financial institution’s deposit business are more flexible, self-service digital options that reduce costs while enhancing customers’ ability to spend, save and move money.

A lightweight, cloud-based core system, for example, has little operational overhead; can easily launch competitive deposit products without geographical restrictions; and can leverage modern know-your-customer protocols like AI-based identity risk-scoring and verification that can give financial institutions confidence in the authenticity of new accounts.

This new, more flexible banking-as-a-service approach to tech strategy positively adjusts a financial institution’s business model, which previously made the cost of maintaining low-balance accounts prohibitive. Combined with a streamlined online account opening approach that reduces onboarding time, the possibility of developing a sticky, efficient out-of-market deposit acquisition strategy becomes much more achievable — and profitable.

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Building Strong Customer Relationships Remotely

Such possibilities also provide new avenues to deepen relationships with out-of-market account holders through deposit-based products like branded debit cards, not to mention the added benefit from the resulting interchange revenue for institutions that fall outside of the Durbin Amendment’s limitations.

Combined with powerful analytics that can offer more personalized experiences and products specific to an individual customer’s financial journey, an account holder who lives 1,000 miles away suddenly doesn’t seem so far at all.

It’s been clear for more than a decade that the financial marketplace is in a state of near constant change. Financial institutions that are open to new BaaS business models can do more than simply overcome changing market pressures. With the right tools — and a mindset that focuses on future possibilities using the latest innovations in financial services, rather than the more traditional and established methods for growth — financial institutions can thrive.

For deposit and lending growth specifically, customer acquisition strategies through self-service digital channels that deploy open technology provide the path of least resistance and lowest cost.

For those willing to consider new possibilities, there’s a world beyond their home region full of people expecting an easier financial experience above all else, whether that’s for a checking account, loan or something entirely different. Now, finally, institutions have an easy, cost-effective means of getting in front of them regardless of how far away they really are.

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