In a recent episode of the Travillian Next podcast, Brad Hanson, former President and CEO of Pathward Financial, Sioux Falls, S. Dak., analyzed the evolution of banking as a service (BaaS), its regulatory dynamics, and the future of financial innovation. As a seasoned leader who helped shape the industry, Hanson offered valuable perspectives on navigating challenges, capitalizing on opportunities, and fostering trust in underserved markets.
The Genesis of Banking as a Service
Hanson’s journey in the banking industry began at Bank First, a small institution that would evolve into The Bancorp, Inc. Early on, Hanson’s work with credit card operations and IT systems laid the foundation for his pioneering efforts in BaaS. Reflecting on those formative years, he recounts the challenges and opportunities of creating one of the first prepaid card programs in the early 2000s. “Banks didn’t understand the risk profiles in this industry,” he explains. By establishing direct contracts with processors and emphasizing bank oversight, Hanson’s team created a sustainable model for integrating fintech innovations into banking.
This groundwork paved the way for the “program manager” model, where fintech companies handle customer service and operational elements while banks provide regulatory oversight. Hanson’s forward-thinking approach demonstrated the potential for banks and fintechs to collaborate effectively while ensuring compliance and risk management.
Building Trust and Reaching the Underserved
A key theme in Hanson’s career has been his commitment to reaching underserved populations. “I didn’t want to go where all the other banks were. I wanted to go where they weren’t,” he says, describing his focus on unbanked and underbanked communities. This strategy was not only altruistic but also a calculated move to tap into a largely ignored market segment.
Hanson’s experience in Mexico underscored the importance of trust and affordability in financial services. Observing long lines of people waiting to collect remittances, he was struck by the high fees they incurred. “If I could cut that fee in half, it would mean several days’ worth of pay to these people,” he says. By promoting cost-effective and accessible banking solutions, Hanson demonstrates the transformative power of financial inclusion.
Proactive Compliance: A Key Success in BaaS
The rise of BaaS brought increased regulatory attention, and Hanson’s insights on managing these challenges are invaluable. He emphasizes the importance of proactive compliance: “The regulators have developed a playbook for banks. If you follow it and pay attention, you can navigate the complexities.” He also advocates for regulators to take a collaborative approach, viewing their feedback as an opportunity for improvement rather than a hindrance.
Hanson’s perspective on the relationship between banks and fintechs is clear: trust and mutual understanding are paramount. “The regulators shouldn’t see fintechs as uncontrolled risky actors. They’re creating great technology and products that can be valuable assets to the country,” he states.
The Future of BaaS and Financial Innovation
Looking ahead, Hanson sees immense potential in the intersection of banking and technology. “AI in banking will be fascinating to watch,” he says, highlighting opportunities for improved security and enhanced user experiences. He also notes that the dynamics of BaaS have shifted, with greater scrutiny on asset strategies and long-term sustainability.
Hanson’s advice for banks entering the fintech space is to build a solid foundation before diving in. “Make the investments, bring in the experts, and have a little humility. Once that foundation is built, you can innovate more effectively with less risk.”
Key Takeaways for Bankers
For those navigating today’s financial landscape, Hanson offers several actionable insights:
- Stay in Your Lane: Focus on core strengths and excel at what you do best.
- Prioritize Expertise: Invest in the right people and systems to manage new ventures effectively.
- Embrace Collaboration: Foster partnerships with fintechs and regulators to drive innovation.
- Understand Your Customer: Consolidate data across platforms to gain a holistic view of customer relationships.
The Essential for Success in the Financial Industry
Brad Hanson’s current industry advice can be encapsulated by his accent on innovation, strategic thinking, and a customer-first mindset. For bankers and fintechs alike, his advice resonates soundly: “Build your highway before you drive on it.”
The full interview can be found on Travillian Next.
