Banking as a Service Faces ‘Slowdown’ as FIs Wait for Regulatory Clarity

For the banking as a service (BaaS) firms, the Synapse bankruptcy, the cease-and-desist order against Evolve, and the wait for regulatory clarity are all proving to be headwinds for the burgeoning business model.

This week, BaaS embedded finance company Unit, which serves tech companies, banks and brands, said it was laying off 15% of its staff. That move comes amid “slower than expected revenue growth.”

In a Monday (June 17) blog post detailing the layoffs, company co-founders Itai Damti and Doron Somech said that “banks in the fintech ecosystem have slowed down in the last year due to increased regulatory scrutiny.”

They said that they believe the slowdown would be temporary, and that  “while we could choose to raise additional capital in the future, we’re executing on a plan to become profitable without the need to do it.”  The company had raised capital through several funding rounds; in a series C in 2022, it raised $100 million at a $1.2 billion valuation.

Back in March, Synctera, focused on serving FinTechs and sponsor banks through its BaaS platform, also laid off 15% of its staff.

The Path Forward?

As PYMNTS reported in March, Treasury Prime let go of about half of its staff and now is shifting its focus to sell directly to banks.

Unit had said in a separate blog post that “we think direct relationships between banks and technology companies should form the foundation for most types of embedded finance …we have learned that additional communication and alignment between banks and their partners are becoming increasingly more important. The primary reason is clearer regulatory expectations and best practices around third-party programs.”

The pivots seem to point to the model where banks themselves manage their joint efforts with FinTechs.  The consent orders that have been coming in from regulators are signs of the regulatory oversight that will only increase.

In an interview with PYMNTS, Jim McCarthy, CEO of Thredd, noted that within the BaaS sphere, “too many people are focused on the ‘as a service’ part — but have ‘minored’ in the banking part, if at all … if you’re going to play in that space, I’d argue that if you fail at the banking, the service piece doesn’t matter.”

Collaboration and transparency are keys to success, McCarthy said — but in come cases, problems occur when the BaaS provider is not cognizant of its obligations to the bank, or the bank did not quite understand what needs to be examined from an audit and risk perspective.

“I want to make it clear that, when done well, there’s a great opportunity here in terms of making it easier for third parties to connect to the larger financial services ecosystem,” McCarthy said.

And, as he added, “at the end of the day, it’s the banks that sponsor these banking-as-a-service programs that will be the ones that are impacted … so they will take this all quite seriously.”

The banks, girding for more regulations, may be slowing things down a bit.