Trending: Banking-as-a-Service Upheaval Will Stabilize

One of the themes in PYMNTS’ monthly “What’s Next in Payments” series is that the Banking-as-a-Service (BaaS) model is under pressure right now.

Synapse declared bankruptcy, while Evolve Bank and Trust was issued a cease-and-desist order, which in part requires the company to get approval from the Federal Reserve to set up any new FinTech partnerships.

Ingo Payments Chief Revenue Officer Lydia Inboden told PYMNTS in an interview that the BaaS industry might be going through a period of upheaval — but there’s long-lived staying power. Inboden’s take is that while Synapse doesn’t represent a systemic shutdown of BaaS, it also doesn’t represent a one-off event, but rather a confluence of different scenarios that shed light onto an overall picture.

“These incidents highlight the vulnerabilities in different business models,” she said for the “What’s Next in Payments” series on BaaS.

Regulators are just now creating additional frameworks governing how FinTechs — and partnerships with financial institutions — should be governed, she said.

A shakeout of at least some players is looming, said Inboden. The models that have traditionally been in place — the commoditizing of the bank charter, the disintermediation of the bank from the FinTech program, which she called the “marketing arm for consumers … that’s where we’re starting to see things break down.”

Only a few years ago, in the early days of BaaS, there were maybe a half dozen sponsor banks that focused on money movement and card issuance. We’re at 30-plus sponsor banks, and 76% of banks are now saying some form of FinTech partnership is where they see their future growth.

As a result, more firms are moving or should move, to a direct business model.

These are the relationships, she said, “where the FinTechs have direct relationships with the FIs holding consumer funds. I also think the commingling of consumer funds within these tech platforms has got to stop and there needs to be more of a one-to-one correlation between the FinTech program and the financial institution.”

Advantages of Direct Relationships

Direct relationships, said Inboden, make it a bit easier to vet FinTechs more thoroughly through the various lenses of anti-money laundering and other compliance programs — along with the third- and fourth-party relationships that occur across the FinTech ecosystem.

“The financial institution needs to be able to show proper oversight into all those downstream partners,” she told PYMNTS.

The direct communications will ensure and shed light on whether FinTechs have the “runway” to manage fraud and marketing activities. Likewise, the FinTechs can gauge whether their bank partners have sufficient liquidity and capital on hand — and what their FinTech and other committees may look like.

“There needs to be more scrutiny and oversight of these partnerships — bi-directionally,” she said.

Impact on Open Banking?

Asked by PYMNTS what the impact might be on open banking, Inboden noted that larger financial institutions might shy away from data sharing with what they perceive as being riskier FinTech partners that are operating downstream. Early Warning does not enable FinTechs or neobanks to access their banking data through APIs, directly or through resellers. The ultimate impact might be the hindrance of money mobility.

“There needs to be some education on the consumer side of the equation,” said Inboden, who added that most consumers aren’t reading terms and conditions.

As she put it, “there’s no way for that end consumer to know if this is really an FDIC-insured account.”

To help redress that gap, digital-first brands will need to communicate more clearly and transparently, as FinTechs claim their spot as the “face” of the bank services offering.

Looking ahead, she said, “as the tea leaves ‘fall,’ I think we’re going to have a better framework for operating [these partnerships] … The banks need a playbook.”