Fintech

Banking-as-a-Service middleware is going “straightforward.” What does it mean?

Published

8 months ago

15 May, 2024

Banking-as-a-Service middleware is going “straightforward.” What does it mean?

The middleware banking-as-a-service, or BaaS, space is all straight forward.

The definition of “direct” is still confusing. Some players in this space – in general, providers that connect banks to fintechs and provide matchmaking services and technologies – let’s say that tripartite agreements between a bank, a non-bank provider and a middleware provider are still straightforward when the bank has oversight of its BaaS customer. Other vendors say this means selling software to banks that will boost their BaaS capabilities, but leaves fintech involvements entirely in the bank’s hands.

Regardless, the role of financial institutions in this space is widely recognized require more supervision of their partners.

“Direct or indirect is not the issue,” said Jonah Crane, partner at Klaros Group, who notes that most middleware companies have largely facilitated direct relationships between banks and fintechs over the past couple of years. “The real question is: who is doing what?”

Regulators are worried about how little banks understand theirs fintech partners and the confusing arrangements are over which party is responsible for which aspects of risk and compliance.

“The easiest way to manage risk is to get closer to it,” Crane said.

Suppliers including Synctera, Treasury Prime and Unit have adapted in recent months and have increasingly shied away from such tripartite contracts. But the question of how middleware vendors can survive in a space where banks are more reluctant to offload some degree of oversight looms larger after one of the early players in this space, Synapse, filed for bankruptcy. Instant payments company TabaPay then pulled out of the deal to acquire Synapse’s assets. (Synapse founder Sankaet Pathak did not immediately respond to a request for comment.)

However, industry observers find it Synapses era uniquely problematic.

The BaaS middleware model isn’t broken, said Kirsten Muetzel, who advises banks on financial risk management and compliance as founder and director of KLM Advisory and was previously chief risk officer at Synctera, where she still has options.

“The problem is that regulators have found that some banks have completely abdicated responsibility for overseeing these middleware vendors and partners,” he said. For community banks, which tend to lack large, sophisticated risk management staffs, the BaaS provider “[is] augmenting, not replacing.”

The economics of business are also changing. If they maintain their efforts in this area, banks may face increased compliance costs.

“Middleware vendors will need to focus on the core value they provide, which is the transfer of data and information,” said Jason Henrichs, founder and CEO of community banking consortium Alloy Labs Alliance. “It is not possible to charge costs for services that the bank will have to duplicate anyway.”

What does it mean to go direct

Itai Damti, co-founder and CEO of Unit, founded four years ago, sees three elements in Unit’s role in the bank-fintech relationship.

One is technology services, where non-bank customers will use Unit’s application programming interfaces to download customer statements or apply for a debit card. Another is managed services, such as producing and filing 1099-INT tax forms on behalf of the fintech client. The third is the exchange of communications between banks and fintechs in a standardized way. For example, if the fintech wants to increase ACH limits for a specific customer, Unit will explain the reasoning to the bank, obtain approval, and pass this approval to the fintech using its template.

The third piece is changing so that banks and fintechs can communicate without as much participation from Unit. Banks can apply any template for launching or modifying the program instead of using the Unit template. Unit is also introducing more features in its supervisory dashboard that allow banks and customers to communicate without contacting Unit so that, for example, a fintech can possibly request a limit change for its customer in the Unit dashboard and receive the approved by the bank, with a verifiable check. extra paper trail.

“We are increasingly breaking out of the communication loop and asking parties to speak without relying on us,” Damti said. As he has seen regulators increase their expectations of partner banks, “We don’t want to run the risk that Unit might forget to say something or ask a question. This direct exchange allows the bank to have full control and visibility over the line of reasoning customer,” he said.

Blue Ridge Bank, Choice Bank and Piermont Bank they are all former clients of the Unit.

Treasury Prime, founded six years ago, sees itself as a software provider that allows banks to put rules in place to manage relationships with fintech partners. Fintechs use its APIs to open bank accounts, issue cards, send ACH, wires, and more.

“When Jim [Brusstar] and founded Treasury Prime, we had the idea that we would focus on managing the operational, legal and contractual risks associated with the broader banking industry and would not explicitly handle any compliance ourselves,” said co-founder and CEO Chris Dean “Our first customers were the banks. Banks had their own fintech relationships.”

About four years ago, banks started asking Treasury Prime to also act as a sales arm, so the company struck some deals through tripartite agreements between the bank, the fintech and Treasury Prime. Towards the end of 2023, that business sector began to fade away as banks preferred to wind down their operations for compliance reasons. Treasury Prime eliminated this arm entirely in February, which led to the layoffs reported that month.

“We started to see the cost of the relationship increase dramatically as the regulatory environment tightened,” Dean said. “Regulators didn’t like this three-way deal at all.”

Synctera describes itself as a marketplace where banks and fintechs create relationships and a system of record when those relationships are formed. It provides APIs for accounts, payments and loans, and tools to manage operations, compliance and data needs. Coastal Community Bank in Everett, Washington, was his first customer.

Historically the company has signed tripartite agreements with the bank, the fintech partner and itself. More recently, it has offered other contract models, including the ability for a bank to contract directly with a fintech and for fintechs to use the Synctera platform by seeking relationships outside of their banking network. In all versions, the bank retains direct oversight rights and compliance responsibility for fintech partners, Synctera says.

“Direct bank supervision, in its most abstract terms, means: Does the bank know what is happening to end consumers, and do they understand KYC and all their transaction obligations?” said Peter Hazlehurst, co-founder and CEO of Synctera. “Technology has positioned itself in the middle to make this possible.”

Some new entrants into the overall BaaS technology space structure “lead” differently.

Braid, launched in November 2022, licenses software to banks that want their fintech payment processing operations in-house rather than using a third-party processor or BaaS middleware platform. Portage Bank in Bellevue, Washington, has partnered with Braid, while another bank and a credit union have signed contracts.

Randy San Nicolas, co-founder and CEO of Braid, describes it as a parallel core, where the retail business remains in the existing core system. “This is an on-premise installation. The banks will install it in a cloud environment that they control,” he said. “The most important thing is that they can kick us out. We are a seller of the bank and not of a third party.”

For him this is the key to “going direct”.

“Everyone says ‘we will give control to the banks,’” San Nicolas said. “We define control as giving the bank full ownership of the software and all the technology surrounding it.”

Infinant provides embedded financial technology to banks in a cloud-native software-as-a-service model that overlays their core systems, including capabilities to open accounts, issue cards and move money. Banks can use existing fraud monitoring, customer insights and anti-money laundering software or Infinant’s vendors. It has been on the market for more than a year and has five banks as clients.

“Fintechs have a direct relationship with the bank and we do not take part in that relationship,” said Riaz Syed, founder and CEO of Infinant. “There is no tripartite agreement.”

Their entry into the market suggests there is unmet demand, Crane notes.

“They position themselves by telling banks we’re not trying to disintermediate you, we’re a technology layer for you,” he said.

The next direction middleware will head

In recent years the Unit has moved toward larger deals, such as public or more mature companies with “significant distribution,” Damti said.

“Banks don’t want to serve smaller companies these days,” he said.

Hazlehurst says Synctera has added banking partners in just the last year and a half and regularly signs two to three new fintech clients every month.

“The market is fundamentally supply-constrained,” he said. “There are not enough banks ready to take on fintech programs and launch them.”

Like Unit, Synctera is raising the bar for which fintech clients it will accept as banks tighten their risk appetite. Most of the non-bank companies it signs tend to be at Series C or higher, or are public companies. In the past, Synctera has most commonly signed startups in the seed or pre-seed stage.

Even as compliance costs for BaaS banks increase, “these partnerships are imperative for them to be integrated into the system. VCs funding fintechs will need to factor this into their estimates,” Crane said. “Some form of technology layer is going to be critical because community banks are not going to build that layer on their own.”

Some suppliers have cut staff to move forward in this new reality.

Treasury Prime has laid off employees after closing the part of its business that sought fintech partners for banks. Synctera laid off employees in March to streamline the business and give it more financial autonomy. Meanwhile, the company has strengthened its payment operations and compliance teams.

The unit did not carry out any layoffs. In the future, it plans to add loans beyond banking to the services it facilitates; perhaps monetize forms, such as 1099-INT filing, which charges no additional fees for today; and sell Unit as a lateral core system so banks can launch their own white-label digital experiences.

The layoffs at Treasury Prime and Synctera may be more of a temporary bump in the companies’ trajectories than a serious sign of trouble.

“It’s the recognition of the change between what you can charge and what your core business is,” Henrichs said. “It’s an acknowledgment that the model has changed.”

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”