Banking-as-a-Service: Navigating the Upheaval

The Banking-as-a-Service (BaaS) model is currently experiencing significant challenges, as highlighted in PYMNTS’ monthly “What’s Next in Payments” series. Synapse has declared bankruptcy, and Evolve Bank and Trust has been issued a cease-and-desist order, requiring Federal Reserve approval for any new FinTech partnerships.

Despite these setbacks, Lydia Inboden, Chief Revenue Officer of Ingo Payments, remains optimistic about the longevity of the BaaS industry. Inboden noted that the current turmoil does not signify a systemic collapse but rather a combination of factors shedding light on vulnerabilities within different business models. «These incidents highlight the vulnerabilities in different business models,» Inboden commented during the interview for the series.

Regulatory bodies are now developing additional frameworks to better govern FinTechs and their partnerships with financial institutions. Inboden predicts a shakeout among some players in the industry, particularly those that have commoditized bank charters and disintermediated banks from FinTech programs. «That’s where we’re starting to see things break down,» she observed.

In the early days of BaaS, there were only a handful of sponsor banks focused on money movement and card issuance. Today, there are over 30 sponsor banks, and 76% of banks view FinTech partnerships as a future growth area. This trend suggests a shift towards a direct business model, where FinTechs maintain direct relationships with financial institutions holding consumer funds.

Direct relationships offer several advantages, including enhanced vetting of FinTechs through anti-money laundering and compliance programs. «The financial institution needs to be able to show proper oversight into all those downstream partners,» Inboden explained. These relationships also help ensure FinTechs have the capacity to manage fraud and marketing activities, and assess whether their bank partners have adequate liquidity and capital.

The current climate may also impact open banking. Larger financial institutions might become hesitant to share data with riskier downstream FinTech partners. Early Warning, for example, does not allow FinTechs or neobanks to access their banking data through APIs. This could hinder money mobility, necessitating clearer and more transparent communication from digital-first brands.

«As the tea leaves ‘fall,’ I think we’re going to have a better framework for operating [these partnerships] … The banks need a playbook,» Inboden concluded.