BaaS (Banking as a Service)
What is BaaS?
Banking as a Service (BaaS) allows non-bank companies—like fintechs, retailers, or tech companies—to offer banking services by partnering with licensed banks through APIs.
In this model, the bank operates in the background, providing the infrastructure and their charter, while the non-bank company offers services such as loans, payments, or accounts under its own brand.
Sounds a little like open banking. So, what’s the difference between open banking and BaaS? The line can get pretty fuzzy. But the main difference is in how APIs are used.
- In BaaS, APIs are used to access banking functionality. Non-bank companies leverage a bank’s infrastructure to offer financial services—like opening accounts or issuing loans—under their own brand.
- In open banking, APIs are used to access customer data. It’s about allowing third-party providers to use customer information (with consent) to offer services like financial planning or payment processing.
So yes, they do look similar because they’re built on the same foundation: APIs. But while open banking focuses on data sharing, BaaS is about providing the actual banking products. If it feels like you’re looking at the same picture, it’s because they’re made from the same elements.
Examples of BaaS
To illustrate what, exactly, qualifies as BaaS, let’s take a look at a couple of examples of companies that offer banking products on a non-bank platform
Stripe Treasury
Stripe, a well-known payment processing company, now offers financial services like bank accounts and payment solutions to its business customers. Stripe doesn’t own a banking license but partners with banks that provide the regulatory infrastructure through APIs.
Uber’s Driver Debit Card
Uber offers its drivers a debit card with financial services like direct deposits, payments, and instant payouts. These services are powered by a partner bank using the BaaS model, with Uber acting as the brand interface.
BaaS Opportunities & Challenges
How should community banks think about BaaS? How can they fit in?
There could be a couple of opportunities for community banks similar to open banking: expanding their market presence and tapping into new revenue streams.
Community banks can generate additional income without building new products internally by providing the infrastructure for non-bank companies to offer banking services. BaaS enables community banks to extend their services to new customer segments by embedding financial solutions into third-party platforms. This approach can access users who may never have interacted with the bank otherwise.
Recent News in the BaaS Space
While BaaS opens up a few interesting opportunities for banks, the model also comes with risks. In April 2024, the bankruptcy of Synapse, a major BaaS provider, highlighted systemic issues when BaaS providers are unregulated. Synapse’s collapse left tens of thousands of customers unable to access their FDIC-insured funds.
A major cause of the crisis was the lack of supervision over non-bank and non-regulatred BaaS providers like Synapse. Unlike traditional banks, Synapse wasn’t part of a bank holding company, meaning regulators like the Federal Reserve could only oversee the banks partnering with Synapse, not the company itself. This gap in supervision allowed problems to fester, eventually leading to a full-blown crisis.
The collapse of Synapse has demonstrated the dangers of allowing non-bank companies to operate banking services without proper regulatory oversight. Without supervision, these companies can expose customers to significant risks—whether through poor management, data breaches, or system failures. In Synapse’s case, the company faced regulatory scrutiny and compliance challenges, particularly related to anti-money laundering (AML) and know-your-customer (KYC) processes. As Synapse worked to enhance these measures, some accounts were temporarily locked or suspended, leaving depositors without access to their funds for weeks.
Challenges of BaaS for Community Banks
- Regulatory and compliance risks: When non-bank entities offer banking products, the licensed bank remains responsible for compliance with regulatory requirements. If the non-bank partner fails to manage risk or uphold security standards, the bank is still on the hook, potentially facing fines or penalties.
- Reputation risks: In BaaS partnerships, the non-bank provider is the face of the service, but when things go wrong—such as with Synapse’s bankruptcy, data breaches, and AML & KYC concerns—the bank’s reputation can also take a hit. Customers may be unable to differentiate between the fintech partner and the bank, and they could lose trust in their bank.
