Is Banking-as-a-Service (hashtag#BaaS) the future of financial services (FS)

"Is Banking-as-a-Service (hashtag#BaaS) the future of financial services (FS) or a business model increasingly in trouble? Looking at last week’s events, both could be true. Let’s take a look.

The need for open, scalable, flexible, efficient and fast set-ups in FS – together with the decoupling of the back-end from the front-end - have brought to the fore the SaaS principle, which in hashtag#banking we call BaaS (banking instead of software).

The majority of fintechs were built on the back of a BaaS model, i.e. using the infrastructure and licensing of partners while they focus on the customer relationship.

US-based Synapse was one of the first and leading BaaS players. What we would call a full-stack platform provider, i.e. an end-to-end BaaS player that would take care of all the back-end stuff on a modular basis and rely on partner banks for the licensing piece.

The model worked well until BaaS players like Synapse were challenged by increased regulatory scrutiny. Railsr is a characteristic example going from being one of the most successful BaaS players to bankruptcy and a revoking of their license in Lithuania due to compliance failings.

As a result, many of the BaaS providers’ (fintech) clients left and sought direct relationships with the banks, to mitigate the risk of their BaaS provider going out of business.

Last week Synapse filed for Chapter 11 bankruptcy with its assets being acquired by TabaPay, in a play that was some time in the making following Evolve Bank & Trust, Synapses’s primary banking partner, ending the relationship last summer.

At the same time, Stripe, a hashtag#fintech that helps merchants and platforms to accept payments has used the BaaS model to enable its customers embed a range of FS:

— Stripe Connect allows business to embed multiparty payments and offer a variety of FS, like collecting payments from customers and paying out third parties.

— Stripe Capital enables businesses to access financing based on their cash-flow.

— Stripe Issuing allows businesses to instantly create and issue white-label virtual and physical cards.

— Stripe Treasury enables businesses to offer accounts to their customers.

Up to now Stripe required businesses to be hashtag#payments customers to be able to use the embedded finance offerings. Last week it announced a significant strategic shift by:

— de-coupling payments from the rest of its FS stack

— broadening embedded finance functionality

Essentially, it's a doubling down on Stripe’s BaaS hashtag#strategy that now becomes independent in order to be able to expand scope and grow faster.

My take-aways:

— Embedded Finance will continue to take FS by storm and BaaS will remain the enabling infrastructure behind.

— The failure of providers such as Synapse or Railsr is not a failure of BaaS but of a specific implementation approach that failed to adapt.

— Scale is critical.

— E2E, integrated business models will win. "

Author

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