Forbes | Sarah Kocianski | Feb 27, 2023

Image: Unsplash/David Dvořáček

Banking-as-a-Service was a major beneficiary of the recent fintech investment boom, but as we move through 2023 it’s an area facing increasing challenges.

• BaaS In The US:  is the provision of core banking services to third parties by a company holding a full banking licence. Well-known examples include Cross River Bank, The Bancorp, and Sutton Bank.
  • These banks sit behind customer-facing fintechs, such as Stripe, Chime and Kabbage, and handle key operations like loan agreements and holding customer deposits. Crucially by doing the latter, they offer customer protection in the form of FDIC insurance.
  • Another key point to note about the US system is that, for now, the third parties offering the services directly to customers do not have to be regulated in order to do so.
  • often these companies serve non-financial companies, enabling them to “embed” finance into other propositions — Square issuing debit cards to customers is one such example, Uber offering them to drivers is another.

See:  Top 10 Trends Reshaping Banking for 2023

• Regulatory scrutiny is here:  Regulators present the biggest challenge for BaaS companies in the US. One, the Office of the Comptroller of the Currency (OCC), started taking a renewed interest in the fintech industry as a whole in 2022, and BaaS, or rather “fintech-bank partnerships” have been singled out for particular scrutiny.
  • Last year the OCC had taken action against Blue Ridge Bank which had grown its deposit base rapidly through 2020 and 2021 by offering its services to increasing numbers of customer-facing fintechs but had failed to maintain proper governance. The parties came to an agreement, more details of which can be found here, but suffice to say, the OCC found numerous areas for improvement and Blue Ridge has a lot of work to do.
  • More regulators: It’s worth noting that the OCC only has purview over nationally licenced (chartered) banks, while many BaaS providers are licenced at a state level. That said, these banks have their own federal regulators, which, while not in thrall to the OCC, are still likely to be turning an eye to such a segment that’s grown so quickly and which is responsible for such a large volume of consumer funds. The Consumer Financial Protection Board (CFPB) has also made its thoughts on BaaS known for example, having creatively found a way to bring nonbank companies into its remit back in April 2022.
• The result will likely be increased complexity and slowed growth for the segment as BaaS providers become more choosy and have to dedicate greater resources to partnership oversight. There will be fewer new customer facing brands and banks looking to BaaS as a quick way to boost deposits.

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