Small Banks are Turning to BaaS to Keep Pace With Larger Banks

NovoPayment has released a new research report, revealing factors impacting digitisation efforts at smaller banks and credit unions. The research, produced in collaboration with Forrester Consulting, also indicates a rise in leaders embracing banking-as-a-service (BaaS) partnerships to level the playing field against larger financial institutions.

Smaller financial institutions have had a reputation for delivering better customer service and offering higher engagement than bigger banks. However, this trend has not appeared as strongly in recent history. Instead, the larger banks have been making up ground as they win more significant numbers of customers – due to their better digital offerings.

The NovoPayment ‘2023 Nimble Bank Playbook‘ was created from the findings of a survey of over 200 digital transformation decision-makers at local and regional banks and credit unions with less than $10billion worth of assets under management.

The research found that leaders of smaller banks and credit unions are under increasing levels of pressure to catch up.  Eighty-seven per cent of leaders had seen an increase in demand for digital services in the last 24 months. Eighty per cent also expressed concern that their clients will move to larger banks.

Moreover, 71 per cent also found that their customers seek capabilities that smaller organisations can’t build into existing infrastructures. These findings may show exactly why partnerships with BaaS platform providers are on the rise.

As increasing numbers of smaller financial institutions turn to BaaS platform providers, the NovoPayment survey looked into exactly why they were valued.

Ninety per cent of decision-makers believed that their organisation’s smaller size enables them to build and implement changes to their digital interfaces more quickly than larger national and global banks. Meanwhile, 86 per cent believe their size enables much greater agility in the face of digital transformation.

How could BaaS change the face of smaller institutions? 

Research also found that smaller, local and regional banks and credit unions plan to partner with BaaS providers to implement the following next-gen digital initiatives:

• 51 per cent – plan to pursue integration with additional third-party providers.
• 50 per cent – plan to implement online account opening.
• 49 per cent – plan to implement credit decisioning.
• 49 per cent – plan to implement the creation of greenfield banks.

Josh Williams, EVP, chief banking officer and head of partnerships at digital boutique bank Seattle Bank, said: “Strategic partnerships are key to creating efficiencies in our work, attracting new customers and better meeting their needs.

“To make partnerships effective, it’s essential that smaller banks and credit unions develop an understanding of the tech ecosystem and build their capacity to identify, evaluate and ultimately onboard different partners to bring the solutions required to stay competitive.”

Rama Iturarte, chief technology officer at NovoPayment, also discussed the research findings regarding BaaS. Iturarte said: “In today’s rapidly changing financial services landscape, customers seek capabilities small organisations can’t build into existing infrastructures.

“This research underscores how mission-critical digital initiatives are for smaller banks and credit unions, and where BaaS partners can help bridge the gap between their own digital capabilities and those of bigger banks.

“Fortunately, smaller banks and credit unions are more agile, and stand to gain from BaaS partnerships that give them the infrastructure they need to meet customers’ demands and stay competitive in the market.”