Back in December, I wrote an article for Forbes titled, “Where Is Banking-As-A-Service Headed In 2024?” The premise of that article was that in order for BaaS — by which a licensed institution enables a nonbank, often a fintech, to offer financial products — to survive, the bank-fintech relationship would need to be at the center of all operations, eliminating an existing reliance on BaaS providers or middlemen to manage those relationships. Now, it appears the industry is moving in exactly that direction.
Two recent developments serve as evidence of this:
- BaaS provider Treasury Prime announced that it will start selling its technology directly to banks and no longer sit between a bank and its fintech partners operationally. This move is in recognition of increasingly little room for ambiguity in who owns the relationship in a BaaS arrangement. According to the press release, “…Regulators are calling for more rigorous oversight and compliance, and have made it clear that banking institutions — not intermediaries — are best positioned to manage the fintech customer relationship.”
- Meanwhile, well-known BaaS player Piermont Bank is exiting its relationship with BaaS provider Unit to focus on direct relationships with fintechs. Rodrigo Suarez, the bank’s chief banking and innovation officer, said on LinkedIn, “A TRULY DIRECT relationship between bank and fintech is the foundation for a long-term sustainable program. We look forward to continuing to grow our embedded banking business with this strong foundational structure.”
This shift is a long-time coming and as a result of considerable turbulence in the BaaS arena. BaaS rose to prominence during the fintech boom in 2021 when fintechs were pulling in record funding and looking for sponsor banks in large numbers. Today, though, the whole space is pretty taboo. Consent orders from financial regulators seem to be coming down by the day, hitting BaaS banks hard for lack of compliance and oversight, and some are exiting entirely. A major cause of this trouble is the structure of these relationships, specifically, the way BaaS providers can abstract the relationship (to varying degrees) between banks and fintechs to make things simpler.
Greater emphasis on the bank-fintech relationship could be what saves the BaaS paradigm. Regulators are homed in on BaaS banks because of concerns they aren’t properly monitoring their operations. According to acting comptroller of the currency Michael Hsu, “The OCC expects banks to prudently manage credit, liquidity, lending, compliance and operational risks in third-party arrangements in order to mitigate risks posed by nonbanks to the safety and soundness of the banking system.” The flood of regulatory actions from the OCC and others suggests such expectations aren’t being met. However, if BaaS banks own relationship management (and some already do), they can better position themselves to stay ahead of oversight demands.
One elephant in the room is business development. As banks take more control and ownership over their BaaS businesses, they will likely become responsible for driving sales. That is a potential issue, as banks and fintechs rarely speak the same language, and the former isn’t exactly known for its business development acumen when it comes to innovative propositions. They will also need to up their due diligence capabilities.
On the bright side, though, there is probably enough business to go around for those who are willing to put in the work and get it right. In fact, long term, the market will likely consolidate around such banks, leaving a small but strong cohort of sponsors for which BaaS is a core competency, one they’re fully invested in and committed to.
