BaaS pioneer offers lessons from partnership experiences

When fintech became a buzzword with the potential to disrupt their industry, bankers had to come to terms with how they should react. Just outside Kansas City, community bank nbkc decided to enter the space, but cautiously. .The reason? "Probably as much as anything — that fear of absolute irrelevance," said Michael Bartkoski, current CEO/President of Leawood, Kan.-based nbkc but chief operating officer at that time. "We were trying to figure out how to be a stronger bank overall.".The nbkc bankers worked to determine how entering relationships with fintech companies might fit into their business model and opted to find deposit-oriented partnerships.."It was something we could understand," Bartkoski said. "Here's how we can actually add some value. We can figure out how to create revenue streams where it works for us, it works for our partners, and go from there." .Several years later, with some changes influenced by the pandemic and other circumstances, nbkc's move into banking-as-a-service is going well. ."We get to be part of a niche business that we have expertise around," said Melissa Eggleston, nbkc chief deposit and operations officer/EVP. "It's been a lot of fun and a really good challenge.".Emerging tech.Nbkc has long been a bank that is a little different than the expected, with a more casual vibe. One of its early steps into the BaaS industry was starting its own accelerator, Fountain City Fintech, which gave the bankers an inside look at the different ways tech entrepreneurs did business. .While nbkc no longer operates Fountain City Fintech — the project reached its natural conclusion after a key staff person left and the pandemic emerged — "it did exactly what we wanted it to, which was run a couple cohorts through and stand up some products and services with them," Eggleston said..About five years ago, nbkc's work in providing bank of record services to fintechs or brands was in its infancy stage, Eggleston recalled. Now, the $1.1 billion nbkc has a group of ongoing partnerships while it continues to explore future possibilities.."We have some stable partnerships, many of those that have renewed contracts, and we're still boarding new partners on the deposit side and would like to venture out into other areas of banking-as-a-service, like providing loans or ACH at scale," Eggleston said. .Previously nbkc's funding mix was higher-rate deposits to fund loan activities, a model that was more challenging to its margin. Now, its work in BaaS has changed the mix of its balance sheet in a very positive way, Eggleston said. .A potential reason for nbkc's success in the field is that a shift from having team members who split their focus between BaaS and other duties to employing a dedicated team. About 35 people now focus on the bank's BaaS efforts, out of its total workforce of approximately 360.."We knew that once we started onboarding partners and we started seeing growth and scale within those partnerships, that we were going to have to dedicate the right resources, not hire in arrears, and provide the right attention to those partners," Eggleston said. .Although the idea of fintechs disrupting banking could have been a threat, nbkc leaders saw it as an opportunity to learn and be part of the developing ecosystem. .It was also a natural fit for this tech-forward bank. .Entry into these partnerships — grounded in the security of knowing the banking industry and understanding the regulatory landscape — was a way to extend their expertise. ."Let's still focus on our brand. Let's still acquire customers nationwide and in our local market, but then let's also work in partnership with these companies who are forward-thinking and bring our banking expertise to the table," Eggleston said. .Though originated from a deposit-gathering lens, these partnerships have also generated fee income for the bank. .Strong partnerships.The BaaS model is perhaps not quite as unique as it was a handful of years ago, but it's still niche, Bartkoski said. At nbkc they've created a simple model that can be refined over time, while limiting risk and creating a positive environment and outcomes for employees, shareholders and both direct and indirect customers, he said. .Through Fountain City Fintech, "we learned something about how founders operate and what good looks like. We've also been able to grow up along the way in terms of understanding regulatory compliance," he said. .While those rules don't change day-to-day, when talking about a different delivery model there hasn't always been clear regulatory guidance. Some well-intentioned banks have faced trouble recently from consent orders around their work in the BaaS space, Bartkoski noted. Nbkc's earlier start in working with fintechs enabled it to grow into that field more slowly, avoiding missteps, he added. .Good tech-based partners are mindful about how they operate their business, understand the "whys" of regulatory compliance, know their responsibilities and what they need to do to manage that program, Bartkoski said. .Elements of regulatory compliance are in the bank's scope. Yet, if the partner is interacting with customers, building solutions and marketing that work, they need to be well-equipped to do those things. It's important to be tightly coupled with these partners, Bartkoski noted. .Nbkc remains hyperfocused on having a direct relationship with their partners, Eggleston said. ."I would say that has been one of the really foundational elements of providing bank services to our partners," Eggleston said. "We have one-on-one conversations. There is no one in the middle. If we need something from them, we call them. If they need something from us, they call us." .Some of the consent orders faced by other banks appear to be related to oversight, Eggleston noted. Nbkc bankers have studied their processes to look for blind spots, Eggleston said. The bank is also not working in more controversial areas such as crypto, gambling or marijuana. .An advantage for the bank is that their tech partners are focused on growth and enabling customer-centric experiences.."They're growing their customer base at scale, which has been super positive for us as those customers use their debit card and/or deposit funds," Eggleston said. .Keys to success.Eggleston's advice on entering the BaaS space: It shouldn't be someone's part-time job. It also shouldn't be done as a short-term strategy, she advised. It can take months to work through due diligence, a contract and onboarding. It may be six months or longer before recognizing any benefit. .Among the partners working with nbkc is Betterment, an online investment advising firm helping customers save for their futures. .The company uses low-cost ETFs with a digital interface to interact with customers. Betterment began working with nbkc because it wanted to launch a checking product as a complement to its core investing product. The company found a provider that worked with a number of banks. Nbkc was one of them. .They were a good fit for each other because of similar risk postures and compliance structures, said A.J. Kramer, senior vice president of operations for Betterment.."We are not a bank. We have lots of complexity on our own side of the house," Kramer said. "Working with a partner that understands how banking works has been really beneficial for us and allowed us to build a better product than we would have been able to do on our own at the start.".Betterment works with a mix of banks on its financial services products, including one for its core ACH processing to facilitate deposits into and out of its investment product, a suite of banks for its high-yield cash product, and partners for corporate finance functions. ."We have been able to benefit from nbkc's expertise and offer a great product to our customers," Kramer said. "I think nbkc has been able to benefit from our tech-forward posture. We give them access to a new set of customers, and together we can deliver a great product." .Investing the time upfront is key for success, Kramer said. .Betterment's partnership isn't unique for nbkc, which serves as the "bank in the background" for numerous brands, Eggleston said. It also maintains its traditional lines of business: Deposits, mortgages and lending. The bank's nationwide home loan division has originated mortgages online since 1999, and it offers consumer, commercial and small business lending nationwide and in-market across its four branches in Kansas and Missouri. .An additional benefit of these partnerships is the impact as an employer. Being a bank that's willing to try something new for the sake of creating a sustainable business model is good for recruitment, Bartkoski said. Leaderships' understanding about what's possible also changes as those possibilities are seen through the partner's eyes. .If this work is done well and is self-sustaining, it makes money, creating real value for all of the company's stakeholders, Bartkoski said. "We're here to take care of three primary constituency groups and those are our employees, our customers and our shareholders."