The Language of FinTech: A Primer for Bankers

FinTechs can broadly be defined as companies which leverage technology to offer services related to borrowing, budgeting and financial planning, insurance, money transfer and payments, and savings and investments.  In recent years we have seen an explosion of bank/FinTech partnerships across a range of business models. This has also caused some confusion when defining a FinTech and differentiating them from a normal vendor or technology provider.  To help provide some clarity around this topic our FinTech Risk Management team of experts has put together a list of commonly used terms in the FinTech and Banking as a Service space.

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Banking as a Service (BaaS)

The Banking as a Service or BaaS space is a huge growth area for FinTechs and continues to disrupt the traditional delivery of bank products.  BaaS FinTechs serve as intermediaries between banks and the customers to whom they offer financial services.  These BaaS players offer digital-based financial services through data sharing, optimized process management systems, and specialized innovation.

BaaS FinTechs aim to lower “friction” in the user experience and enable faster and easier delivery of financial services.  BaaS has become the go-to dynamic solution to digitally deliver a customer-centric banking platform to the market quickly.

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Lending as a Service (LaaS)

Lending as a Service (LaaS) is one of the newer frontiers in FinTech and improves the lending process for consumers, businesses, and financial institutions (FIs). LaaS, a type of banking as a service (BaaS), gives financial institutions the technology, risk, and operational support to offer consumer, and business loans through cloud-based third-party platforms, instead of traditional banking channels. 

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RegTech

FinTechs work in a rapidly expanding space, including the proliferation of startups and other new entrants in the financial services industry.  Regulators are challenged by this environment of constant change and relatively few established rules and regulations governing this space.    

• RegTech is the use of information technology to enhance regulatory and compliance processes.
• RegTech is typically applied to regulated industries and activities such as FinTechs, financial services, gaming, healthcare, pharmaceutical, energy and insurance.
• RegTech has largely been focused on the digitization of manual reporting and compliance processes in the financial services industry but its application goes beyond FinTech.

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‍Platform as a Service (PaaS)

Platform as a Service (PaaS) is a product offering from third-party vendors that allows businesses to leverage cloud-based infrastructure within their own business offering. PaaS enables outsourcing the expertise of payment leaders, combined with the latest technology such as APIs, and allows for customization and modification based on a company’s specific needs.

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Technology Service Providers (TSP)

TSP is a term often used by the FFIEC in its Information Technology Examiner Handbook for technology service providers.  In addition to providing systems and processing, TSPs may also be retained by a financial institution to provide information technology (IT) recovery capabilities for the financial institution’s internal systems. In the Handbook, FFIEC points out that effective business continuity planning (BCP) and testing demonstrate the financial institution’s ability not only to recover IT systems, but also to return critical business functions to normal operations within established recovery time objectives (RTOs).

Many TSPs are highly experienced and well known, such as Fiserv. They provide core platforms for FIs and many are examined by the Regulators on a regular basis.

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‍FinTech Trends

FinTech has grown and changed in response to developments within the wider technology sector. In 2022, this growth was largely due to several prevailing trends¹:

• ‍Digital banking continues to grow: The ease of digital banking continues to improve. It is now common for consumers to manage their money, request and pay loans, and purchase insurance through digital banks. It can be expected that this simplicity and convenience will likely drive additional growth in this sector, with the global digital banking platform market expected to grow at a compound annual growth rate (CAGR) of 11.5 percent by 2026.

• ‍Blockchain: Blockchain technology has removed friction in the financial space by enabling decentralized transactions without a government entity or other third-party organization being involved. Blockchain technology provides a method of recording information which is very resistant to being changed, hacked, or manipulated.

• Artificial Intelligence (AI) and Machine Learning (ML): AI and ML technologies have changed how FinTech companies scale, redefining the services they offer to clients. AI and ML can reduce operating expenses, drive value provided to clients, and help detect fraud. It is safe to assume AI and ML will play an increasingly large role in FinTech’s continued evolution.

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Management of BaaS Risk to Banks

A bank partnering with a BaaS FinTech may expose itself to a variety of risks.  To properly manage these risks, and also demonstrate this activity to regulators, it is critical that the risk management approach:

• Captures key risks for existing FinTech partners across all risk categories including financial, operational (e.g., IT, failed processes), strategic, legal, and regulatory, and employs holistic due diligence prior to contract execution.
• Illuminates the nature of FinTech business models and their relationship to the bank’s core business operations, its data, its revenue stream, and the FinTech’s possible impact to the balance sheet and risk profile.
• Enables ongoing monitoring of a bank’s FinTech partners across all risk areas using consistent risk scoring, automation, and prioritization of management response through a portfolio risk lens.

The continued partnership between banks and FinTechs comes with both risks and opportunities.  It is essential to manage risks in a manner that protects against downside while allowing the bank to capitalize on the great potential of partnerships in the FinTech space.

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1 “What is Financial Technology(FinTech)? A Beginner’s Guide” [https://bootcamp.cvn.columbia.edu/blog/what-is-fintech/]