Fintech
Trend: The disruption of banking as a service will stabilize
One of the themes of PYMNTS’ monthly “What’s Next in Payments” series is that the Banking-as-a-Service (BaaS) model is under pressure right now.
Synapses declared failureWhile Evolve Bank and Trust was released to cease and desist orderwhich in part requires the company to obtain approval from the Federal Reserve to start any new FinTech partnerships.
Incoming payments Director General of Revenue Lidia Inboden told PYMNTS in an interview that the BaaS industry may be going through a period of upheaval, but there is long-lasting staying power. Inboden’s view is that while Synapse does not represent a systemic shutdown of BaaS, it also does not represent a one-off event, but rather a confluence of several scenarios that shed light on a bigger picture.
“These incidents highlight the vulnerabilities of different business models,” he 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, he said.
A purge of at least some players is looming, Inboden said. The models that have traditionally been in place – the commoditization of bank paper, the disintermediation of the bank from the FinTech program, which she called the “consumer marketing arm… that’s where we’re starting to see things break down.”
Just a few years ago, in the early days of BaaS, there were perhaps half a dozen sponsor banks focused on moving money and issuing cards. We’re at over 30 sponsoring banks and 76% of banks now say some form of FinTech partnership is where they see their future growth.
As a result, more and more companies are moving, or should be moving, towards a direct business model.
These are the relationships, he said, “where FinTechs have direct relationships with financial intermediaries who hold consumer funds. I also think that the commingling of consumer funds within these technology platforms needs to stop and that more one-to-one correlation between the FinTech program and the financial institution is needed.”
Advantages of direct relationships
The direct relationships, Inboden said, make it a little easier to examine 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 in the FinTech ecosystem .
“The financial institution must be able to exercise adequate oversight over all downstream partners,” he told PYMNTS.
Direct communications will ensure and shed light on FinTechs’ ability to manage fraud and marketing activities. Likewise, FinTechs can evaluate whether their banking partners have sufficient liquidity and capital and what their FinTech Boards and other committees might look like.
“Greater control and oversight of these partnerships is needed – in a two-way way,” he said.
Impact on Open Banking?
Asked by PYMNTS what the impact might be on open banking, Inboden noted that larger financial institutions may avoid sharing data with what they perceive as riskier FinTech partners operating downstream. Early warning does not allow FinTechs or neobanks to access their banking data via API, directly or through resellers. The ultimate impact could be the obstacle to the mobility of money.
“There needs to be some education on the consumer side of the equation,” Inboden said, adding that most consumers don’t read the terms and conditions.
As you said, “there’s no way for the end consumer to know if it’s really a FDIC-insured account.”
To help bridge this gap, digital-first brands will need to communicate more clearly and transparently as FinTechs reclaim their place as the “face” of banking services offerings.
Looking ahead, he said, “as the tea leaves ‘fall,’ I think we will have a better framework to operate [these partnerships] … Banks need a program.”
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