As financial innovation accelerates and regulatory oversight intensifies, the lines between fintech, banking, and infrastructure continue to blur. This timely American Banker Leaders episode will explore how this is impacting banks and their approach to navigating a new era of compliance, embracing diversified revenue models, and evolving with embedded finance.
In this video, Michael Haney, Head of Product Strategy, Galileo Financial Technologies sits down with Janet King, SVP of Content Strategy, American Banker to discuss:
• The uncertain regulatory landscape around Banking-as-a-Service (BaaS)
• How embedded finance is moving beyond cards into credit, savings, and lending
• What banks should look for in revenue diversification opportunities
• The future of sponsor bank partnerships and emerging BaaS model
• Why a modernized platform is vital for banks to expand in this landscape
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Janet King (00:09):
Hello everybody, and thank you for joining us. I'm Janet King. I'm the Senior Vice President of Content Strategy at American Banker, and I'll be your host for today's leaders episode. As the financial services landscape undergoes a structural shift, the traditional boundaries between banks, fintechs, and infrastructure providers are becoming increasingly fluid. And this convergence presents both strategic challenges and compelling opportunities, particularly in high growth areas like embedded finance. For banks, it means rethinking longstanding roles, forging new partnerships, and evolving their platforms to compete in an increasingly integrated ecosystem. Joining me today to explore how banks can unlock growth through embedded finance and to discuss what the journey looks like is Michael Haney head of product strategy at Galileo Financial Technologies. Welcome, Mike.
Michael Haney (01:06):
Hello everyone. Thanks so much for having me today, Janet. Looking forward to our conversation.
Janet King (01:13):
Me too. Before we dive into the core of our conversation, I wanted to ask you about something that really stood out to me while we were preparing for this discussion. In a recent blog post, Mike, you shared some of the key lessons from your career journey, and there was one quote that really stuck with me, and that was where you said there's no straight path to success, but don't let that detour you from achieving your goals. I think that mindset's especially valuable for banking leaders who are facing disruption. So I'd be curious, Mike, how that philosophy shapes your work at Galileo.
Michael Haney (01:49):
So that is a great fine, well done on digging deep. That was from a q and a session with the FinTech sandbox last year, a super great team co-founded by the amazing Sarah Biller, who is someone who could easily write her own masterclass on variable paths to success herself. So great quote to pick out. I think the most crucial concept in that quote is to have a sort of singular focus on outcomes. So prioritize the achievement of the goal, even if the process to achieve those goals requires multiple course corrections. So don't presume there's a predefined path to get there. Be agile, be flexible, be nimble. So what does that mean for Galileo? Well, our ambition is to be the one-stop platform upon which our clients can build the financial experiences they want for their end users. We started many years ago with a debit card offering aimed at the digital challengers here in the us, but the journey towards our vision has really taken to other markets.
(03:01):
It's required us to pursue new segments, launch new offerings well beyond our initial product. For me, maybe at a personal level, it's meant that I've had the opportunity to participate in this financial services industry in so many unexpected ways by not sort of locking my career path into a singular way of thinking or doing. So I've been able to work for banks, for software companies, for consulting services, literally around the globe and a wide variety of roles, engineering operations, product management and so on. So it's really forces you to be comfortable with uncertainty, embrace curiosity, and just constantly be refining your approach and then you start to feel like, okay, I'm really truly earning my success and not just following some sort of predefined ladder up to the top or something like that. So thanks for the question. That's a really interesting find.
Janet King (04:02):
Yeah. Well, thank you and I think that is really great advice and perspective, and I'm particularly excited to get your thoughts on this topic because you've had such a wide ranging set of experiences across the financial services industry. So the title of our discussion today is Partner Banking at a Crossroads. So to start us off, Mike, why do you think that we're at an inflection point when it comes to embedded finance? I guess more specifically, what do you think has changed in the market or the mindset of banks that's making this moment feel different?
Michael Haney (04:37):
Yeah, it's a very timely question, especially given a lot of transition that's happening this year. It's very salient to what we do here at Galileo and how I spend my time thinking about how this company should move forward. We really are coming out of an era that was sort of dominated by this FinTech sponsored bank partnership. It really exploded in the Covid era when we were all doing things remotely, digitally, even though a lot of early movers in this space go much, much further back in time. But it became very mainstream during that covid era a few years ago. A lot of these partnerships, they focused on sort of niche or affinity segments. These segments were largely viewed as underserved by the broader industry for whatever reason. And they focused on a number of factors that were relevant at the time, right? Better mobile first user experiences, pricing models that were simpler and more transparent, better rates than you could get from your local institution.
(05:46):
And so there was a heavy reliance on Durban exempt partner banks where they could get that debit card interchange fee to be their primary source of revenue. They could often have lower operating costs, maybe because the tech stack was cheaper to operate or maybe because they didn't have to operate physical branches. So that allowed them to provide better returns for their deposits depositors. So really it just represented an entire new generation of way to get your financial services and it's really paid off, especially in recent times. A lot of these partner banks or sponsor banks, we've been living in this sort of high interest rate environment and that's allowed them to capitalize on net interest income and not just that fee income from charging their FinTech partners or sharing in those interchange fees. And of course they can take those deposits and increase their lending activities, participate in deposit sweeping, and also negotiate increasingly better contracts with their FinTech partners that might emphasize deposit share over things like non-interest income.
(07:09):
But this business model is rapidly maturing. Winners and losers are emerging. And I think one of the key messages is that this is going to be a game of scale and these businesses are going to have to continuously diversify on all dimensions, right? Customer segments, product offerings, distribution channels in order to keep building that scale and winning this game. But that's going to bring about complexity and additional costs, areas like risk management, marketing, client servicing, are all going to increase in what's going to be needed to make these successful. Everybody's getting pickier, partner banks are getting pickier what fintechs they work with and vice versa. They may not want certain exposures, they may want to limit volumes. And we're also seeing fintechs of course, getting establishing relationships with multiple partner banks based on what those partner banks can do, their pricing, their limits and so on.
(08:10):
And we're seeing a great number of diversification across all these dimensions. So what's resulting, we're seeing partner banks get out of the game, what were previously significant players have just completely shut down their vast offerings. We've seen some of the vast enabler technology firms shut down or go bankrupt. And then we see the reverse too, where other banks are almost exclusively focused on the partner banking or banking as a service segment, and that's become the dominant part of their business. But I think what's really an overarching trend is that we aren't moving beyond this world, especially companies like ourselves here at Galileo. It's not just about the pipes, right? The APIs anymore. Everybody has to move into other areas to do some of that heavy lifting, managing risk managing operations, managing customer servicing, continuing to evolve the tech stack to drive down those cost and achieve those cost efficiencies. So we're going to see a game changer where banks are going to start moving some of this stuff. Others will still rely on third parties, but it's going to be clear that we're all providing more value added services. And it's also clear, I think from a regulatory perspective that the accountable party at the end of the day, no matter how many third parties are in the mix, is that partner bank themselves.
Janet King (09:41):
Right. And I know we're going to talk a little bit later about the interchange pressures and things that are impacting this market opportunity as well. But you just mentioned regulatory challenges, right? And we've seen regulators really turn up the heat on embedded finance partnerships and sponsor banks. So with that increased level of scrutiny, where do you think we are when it comes to progress? I guess I'm asking more specifically, has there been a full reset on embedded finance or are we making steady or at least incremental progress? How is it changing the game?
Michael Haney (10:19):
I think there's still a lot of uncertainty with respect to regulatory scrutiny and where the regulators are going. They're trying to balance out the need for industry innovation and financial inclusivity with also sort of safety and soundness of the whole system. We also are seeing a lot of larger, let's call them macro forces at work, the reversal of Chevron deference and what role these sort of regulatory agencies can and should play going forward. Shrinking of these federal agencies, particularly as the government agency, doge looks at operational efficiency within the government and lowering costs of the government, and of course new regulatory leadership whenever we have an administrative change, particularly if that involves a change in party. So I say let's divide this regulatory discussion into actual enforcement actions that have occurred. That allows us to look a little bit backwards as well as proposed rules which may not be finalized or may not ever materialize.
(11:25):
And that gives us kind of a bi-directional look. So everybody's kind of expecting going forward, we're going to have a bit more of a permissive regulatory environment. But in fact, the actual supervision of financial institutions, the other side of the regulatory house, that changes often more slowly. And so we know that the existing enforcement actions that are in place, banks are going to have to clear those out and remediate, including things like improving their risk management and controls and a lot of the other things they have to do to get out of their findings. And often these take on average two to three years to clear out, I was reading an analysis from the Claros group and they showed interestingly that nearly one third of all partner banks that have at least five partners, FinTech partners that operate under some kind of formal enforcement action today.
(12:26):
So there were over 40 enforcement actions between 20 and 24, which all translates into about 49. Almost half of all FinTech companies today are partnered with banks operating under formal enforcement, which is a really eye-opening number. And they vary in areas around managing third party risk, obviously B-S-A-M-L, which is about money laundering, terrorist financing, et cetera. And they probably have placed some restrictions on these businesses, like they may not acquire another firm or launch a new product without seeking approval from their board, from the regulator and various risk management committees. And sometimes these things aren't cheap. One of the banks that was cited in that report spent $30 million to remediate their findings. So it has both direct implications as well as sort of broader implications about how you can operate moving forward. So we always have to keep that in mind of what does it mean to be under consent order?
(13:32):
It can also delay some of the other sides of your bank and what your other parts of the bank want to do, like acquisitions. Now, if we look at what the regulators have been trying to do, and some of these rules are still in their proposal stages, and obviously we live in a very diverse regulatory environment here in the us so we'll start with the OCC, which primarily regulates the national banks. And way back, going back to 2016, they started looking at maybe we should have some kind of national FinTech banking charter, which could be used for non-depository institutions or uninsured non FDIC insured institutions. This never actually moved forward. It receives a lot of resistance in the industry. And so fintechs have been largely dependent on state level licensing or working with partner banks, or of course going down the harder path, which is seeking a banking license through more traditional means, acquiring a bank or just filing for a new charter.
(14:37):
So the OCC has shifted back to, again, that focus on third party risk management, which kind of brings up what the FDIC started talking about last year with their proposed record rule. And this is primarily focused on those so-called custodial or FBO accounts, which every partner bank provides to their FinTech customer. And so that's where we pool the deposits that are coming in from that particular FinTech. So you'll often have at least one pooled account for each FinTech client. And what we've learned, especially with some of the vast enablers, not living up to their contractual obligations and performing some basic duties like record keeping, this is really just kind of a reminder to the industry that there are some basic things you have to do, monitor customer accounts for real time balances and produce statements and things of that nature, and that the banks are ultimately accountable even if they're using third parties to assist this.
(15:40):
So very much this FDIC ruling, even though it's a proposed rule, it's kind of like a very obvious type of thing, like brush your teeth before you go to bed sort of thing or housekeeping stuff. But the FDIC has also had to revisit some of the older things they worked on are these fintechs considered deposit brokers in the traditional sense? So they spent a lot of time in 2020 kind of redefining and modernizing what a deposit broker is and creating a set of guidelines of when is a FinTech going to be considered a deposit broker and when is it not? And that has all sorts of ramifications for the bank and how it can use the deposits that it takes in and other ramifications. So they have to be very mindful of this as does the FinTech itself. And of course our last regulator that we'll touch upon today is the CFPB.
(16:31):
They've been kind of looking at this from a different angle recently with this proposed rule around open banking, really completing the task that began way back in 2010 with the Dodd-Frank Act and the section ten thirty three, as they call it, open banking has a different perspective slightly in that it was initially more focused on data. What data does my bank have about me? How do they use it? How can I request to see what's being done with it and opt out or even delete my data at my financial institution? But it's evolved way beyond that. As we start permissioning that data to be sent to third parties, we start using that data for all kinds of use cases for marketing, for payments, what have you, account verification. So it's really evolved. And now of course with the new administration, we don't know what's going to ultimately happen with this.
(17:23):
The CFPB of course has been significantly downsized from an employee perspective. There's been talk about completely revisiting this or scrapping this all together. So I think in some of these cases we're going to see the industry start taking the leadership over the regulators. They're going to continue, if we take open banking as an example, consumers are already used to sharing their data with account aggregators for the industry has already started rallying around API standards and data standards like FDX. So I think in this case, if some of these rulings don't ultimately pass or they get scrapped, the industry is going to keep marching forward, which may prove to ultimately be more robust and stable solutions.
Janet King (18:08):
That's a really helpful way of breaking down sort of the complexity surrounding the regulatory environment. Right now it's a lot for leaders across the financial services sector to keep up with how is Galileo helping their customers kind of keep an eye on what's happening in the regulatory space.
Michael Haney (18:28):
So two ways. One is we do have a dedicated, what we call product compliance team, which looks at how our offerings need to evolve to allow for regulatory compliance by our customers. Also recognizing that every bank policies are slightly different. Everybody interprets laws and regulations slightly different. They have different processes, procedures and systems. So we need to build that flexibility in our offering as well because we are also a subsidiary of a bank holding company. We have also within Galileo that traditional three lines of defense ranging from internal audit all the way to in business risk and controls. And also the Fed does examine us as well as part of a bank holding company. So we get the same level of scrutiny that a lot of our clients and partners do, and we have dedicated resources that are constantly monitoring for that regulatory change and trying to figure out not only how does does our business strategy need to adapt, but also how do our offerings need to adapt as well.
Janet King (19:46):
Yeah, that's really helpful. Thank you. And let's pivot slightly and talk about some of the opportunities we see in embedded finance. So certainly it's a complex environment. There's a lot to consider and a lot of things that you need to get in order to really be able to attack this opportunity competitively. But when you talk about embedded finance, it often starts out with a conversation about embedded payments, right? Because that was an early area of traction. But if you move beyond that, where do you see the most opportunity for banks with embedded finance in the future? And if you can tell us what do you think is the short term next three years versus the longer term opportunity out there?
Michael Haney (20:29):
Yeah, I think as we discussed a lot of this originally it was about that sort of emerging FinTech, some people call them neobanks or digital challengers. And that era, which was very much consumer focused, it was very much led by a debit card and corresponding, let's call it checking account or demand draft account. And that was a central offering and they were trying to solve problems like user experience and pricing transparency. But what we've seen is growth across at least three new dimensions. One is where are we going to see embedded finance going forward? It isn't going to be limited to that sort of FinTech partner bank consumer oriented scenario. We are going to see embedded finance scenarios happening all across the non-financial industries. And a lot of this is being fueled by those same APIs that these partner banks created for the fintechs. They're now able to plug them into experiences at all kinds of industries ranging from travel and hospitality, retail and e-commerce, transportation and logistics.
(21:43):
There's so many industries that are embedding finance in those journeys, and that is the goal. You don't want your user to have to interrupt their journey and require them to go somewhere else for their financial services, right? It should be an enabler of a larger journey or experience. A very simple example is can you imagine in this day and age, if let's say you were buying your airline ticket online that you were required then to stop that process, go to your local bank branch, secure the funds, initiate the payment, and then go back and complete your airline ticket purchase journey. It just doesn't make sense in this era, but it's not just those kind of merchant acquiring or point of sale types of experiences. It's popping up everywhere. I was recently reading about a SaaS vendor in the construction project management industry that they've now embedded a lending marketplace into that solution.
(22:46):
So imagine you are governing a major construction project and at some point in the process in that journey, you now need to apply for a construction loan. So you can start the project, go and buy the parts and start hiring the labor and so on. And instead of having to print out a bunch of material about your company or your project and taking a three ringing binder to the bank and giving a little presentation, now banks can bid on that information inside this project management SaaS software, which is fascinating to me. It's just popping up everywhere. We're starting to see it pop up and embedded into ERP systems that corporations use their treasury departments, their billing and invoicing teams, accounts payables and receivable processes and so on. So you don't have to again, leave that ERP environment to complete some of these financial journeys. Banks have also been enabling their own cash management and treasury systems to support these kinds of models.
(23:46):
Another dimension is, again, the proliferation of the types of financial services that get embedded, as you mentioned, removing past the card payment centric world into other types of payments account to account payments like a CH and wires. This is being further exploding because of the emergence of these realtime rails like RTP and Fed Now that's powering all kinds of new use cases like person to person or pay by bank at the point of sale. But we're going to start to see these realtime things impact the traditional sort of direct credit and debit use cases that we see from paying bills or government disbursements and so on. And the traditional card networks aren't standing still either. They're also launching all kinds of real-time money movement capabilities beyond cards, MasterCard move, visa direct and so on. Lending, we talked about a little bit about lending and not just payment centric lending like credit cards and buy now, pay later.
(24:49):
That example I gave was in the construction lending business. So lending is often a sort of lubricant of commerce and business. And so being able to embed lending in these journeys is going to be so important, but that also means that partner banks and their processors need to start growing a whole bunch of new skills, right? Credit risk from the origination journey all the way to delinquency management and beyond. So it's very different than managing risks associated with the payment, for example. And then I think lastly again is the last dimension I would highlight is that customer segments, right? Moving beyond the sort of consumer oriented, we're seeing a lot more emergence in how can we apply business banking and all these scenarios, how can we empower employees of corporations? And of course now even the government is getting in the game, and I think that's going to be exacerbated more as the government tries to get out of using things like checks as disbursements, for example. So the segment proliferation and diversification just like products is taking off in a big way.
Janet King (25:59):
So with so many choices, do you have any advice for banks and bank leaders on where to target their efforts or what to think about as they try to look at this landscape and identify this is an area that we want to try to become aligned with or take advantage of?
Michael Haney (26:22):
Yeah, I do think there's a number of things that you would have to consider if you want to get into this game or if you want to stay in this game. As I mentioned at the beginning, it's a game of scale. So your operations and technology, whether that's in-house or that is with a partner like Galileo, they have to scale with you. So you're going to have to continuously invest in and improve that infrastructure over time with some of the traditional infrastructure success metrics, like am I bringing down every year that cost of operations, you're going to have to embed in all of that the right risk controls, not just regulatory compliance, but operational risk, credit risk if you're getting into lending and so on. But you also have to recognize that this is kind of a unique space. You can't just assume that because today you might be in business banking or merchant servicing for example, that all those systems and processes are going to be well suited for partner or sponsor banking.
(27:27):
That has proven to be, yes, there's some overlap there, but has proven to be largely false. So you want to make sure you have a vast infrastructure that is fit for purpose for the types of scenarios and clients that you want to power. Now, because this isn't always a cheap investment to initially build or to maintain, you're going to have to make sure that you get to recoup that investment. So there's other costs like go to market costs, right? Sales and marketing. How do people know that you're in this game? So there's a brand awareness. How do you convince your first FinTech or non-financial brand customer to come on board? How can you make sure that they can trust you? So there's costs as well, and you start setting some goals. I mean, there's an amazing number probably in the dozens of partner banks that may only have one or two partner banking clients.
(28:27):
So that's clearly not going to be a long-term scalable business. You're either, even if those partner clients are quite large in terms of transaction volume, you risk that they might leave you. So you want to create a portfolio of customers that you're not reliant on just one or two customers, but you also have to be able to balance, right, do I have the client servicing the onboarding capabilities that you need to maybe have hundreds of these clients? You're going to have to figure out a way where even though we've been talking a lot about diversification, there are also a lot of synergies that you have to explore. So the programs that you're going after, you want them to have at least some level of commonality or synergy so that you're not having to build unique one-off solutions for every single client. And that also then starts to reinforce itself.
(29:22):
It becomes part of the DNA of your organization in terms of how they think about risk and operations and technology because it's so repeatable, which is such an important element of scalability. You have to figure out a way to differentiate. You don't want to be just a me too player. Are you going to find other niches people haven't explored yet? How are you going to stand out from the crowd? And one way people, interestingly, to bring it back to risk and regulatory, one way a lot of these partner banks and their processors are standing out is that they are investing in proactively in risk and regulatory compliance. So that's a really important thing. And again, to kind of bring it back to regulatory as well, don't underestimate the regulatory risk. Be really proactive. Regulators might require you to inform them, Hey, I'm getting into this business, or I'm signing up this new major client, or I'm launching this new product. A lot of the consent orders that we've seen over the last four to five years have been in areas like, again, B-S-A-A-M-L, so are your KYC processes up to snuff, are your anti-money laundering and counter-terrorist financing processes up to snuff? Because that's a lot of things that they're looking at in that sort of new product approval process.
Janet King (30:44):
Lots to consider there. I think that's good advice though. So I appreciate you kind of diving into that in some detail. Let's talk about partnership models. You hit on this a little bit in your last response, but how do you see those partnership models that we have in place today evolving, and do you think the current sponsor bank model will survive?
Michael Haney (31:06):
Yeah, I don't think it's going away. It will obviously keep evolving as industry trends evolve and what technology allows us to do evolve and so on. Banks have been providing these types of services for actually quite a long time, even before the API era, you might have seen sort of banks getting involved in helping other banks, correspondent banking, agency banking, private labeling of services. So like a money setter Bank for example, might have helped a smaller bank with things like foreign exchange operations because that smaller bank might only need that one time a year. And the larger bank does it on a daily basis. A lot of smaller banks use agency banks to do their credit card programs as opposed to doing it themselves because they don't have the talent to understand credit risk or credit operations. You might have been, let's say a wealth manager that wanted to cross sell banking.
(32:02):
So you work with some of the original players in this space, like the Bankcorp Bank to have private label banking into your wealth management client base. So these kind of concepts about how do I embed what I do into something, what else does, goes way back decades again before that API era also, this isn't going to be limited, right? There's also this sort of heavy focus over the last few years on that FinTech and often a very small bank that is Durban exempt, that sort of partnership going after consumers with a mobile first brand. But larger banks have been in this game as well. They might not be Durban exempt, so what they're offering might not be that debit card, and they're not necessarily looking for that interchange fee to be the main revenue driver. Often these big banks are working with big tech and big retail, the Apples and the Walmarts of the world providing consumers and merchants a really wide variety of financial services.
(33:00):
Everything from digital wallets, the Apple Pay that we all have, or Samsung Pay gift cards on Amazon purchase financing for both the consumer as well as potentially the merchant as well, who's trying to stock the shelves. So we're discovering that using these APIs, we can inject ourselves in all kinds of different ways. I think banks will continue in the short term to take advantage of their Durban exemption. These smaller banks, community banks, often under 10 billion in assets, but we've been talking about they're going to heavily diversify over time because they've been able to figure out how to play this game and they're going to want to stay relevant. And some of them are going to want to avoid acquisition, and this is really a way for them to reach customers nationwide. They don't have to spend enormously on brand awareness. They don't have to spend enormously on building a coast to coast branch network. So this allows those smaller banks to kind of play a much larger game and not just be yet another community bank that's been acquired and sucked up into something larger. So it's here to stay. It's just going to keep evolving and changing over time.
Janet King (34:11):
Yeah, and you mentioned in one of our previous conversations about how the fact that banks no longer exist in isolation, right? And consumer habits have changed, and that's certainly driving a lot of the demand for these kinds of products and services. I guess to close things out today, there's a lot of changes, regulatory, commercial, product related, a lot of things happening in this space. Do you have any final thoughts for the audience before we wrap this up?
Michael Haney (34:42):
Yeah, definitely. Think about the full gamut of what you need to consider if you're not yet into the partner banking or banking as a service business, because it is far more than just technology as we've been discussing. There's risk management and regulatory compliance. How do you do this at scale with your operations and technology team and operations also includes onboarding these clients and getting these programs started. What's your model going to be to generate revenue? Is it more focused on net interest income or non-interest income? What's your main focus going to be and partnering? Are you going to do it all yourself? Are you going to work with third party processors and other technology vendors and managed service providers? Because often you need help to get this up and running and you need people who've been doing this for a while, and again, don't think that it's once and done. These models that have taken us to this point are not going to be the models in the future in terms of customer segments or product offerings. We're seeing such a diversification of what people are going for, and you have to kind of decide what programs make sense for the risk and financial profile of your bank.
Janet King (36:01):
It goes back to your opening statement about needing to be flexible and agile and nimble and never just setting it. So all respect to your philosophy.
Michael Haney (36:12):
Yeah, that's true for us as well as our client base and the industry at WIDER evolves, Galileo has to evolve with it. So we're also diversifying very heavily into new offerings, new segments, because that's where the industry is going and we have to be there.
Janet King (36:31):
That's great. Well, thank you so much for joining me today, Mike. I think this was a really great conversation and I want to thank the audience for tuning in for this Leaders episode. If you dropped a question into our q and a, we will follow up with you directly in the follow-up email after this episode. So thanks again for joining us and have a great day everyone.
