One of the themes in PYMNTS’ monthly “What’s Next in Payments” series is that the banking-as-a-service (BaaS) model is currently under pressure.
Synapse has declared bankruptcy and Evolve Bank and Trust has been issued a cease and desist order, which requires the company to get approval from the Federal Reserve before entering into any new fintech partnerships.
In an interview with PYMNTS, Lydia Inboden, chief revenue officer at Ingo Payments, said the BaaS industry may be going through a turbulent time, but it has staying power. In Inboden's view, Synapse doesn't mean a systemic shutdown of BaaS, but it also doesn't mean a one-off event, but rather a confluence of different scenarios that reveal the bigger picture.
“These incidents highlight the vulnerabilities of various business models,” she said in her “Future of Payments” series on BaaS.
Regulators are currently developing additional frameworks that will dictate how partnerships with fintechs and financial institutions should be managed, she said.
Imboden said a shakeout of at least some players is on the horizon. Traditional models — the commoditization of bank charters, the disintermediation of banks from fintech programs — are what she called the “consumer marketing arm,” and that’s where things are starting to break down.
Just a few years ago, in the early days of BaaS, there were around six sponsoring banks focused on funds transfer and card issuance. Today, there are more than 30 sponsoring banks, and 76% of banks say some form of FinTech partnership is key to their future growth.
As a result, more companies are moving, or need to move, to a direct business model.
These are relationships where fintechs have direct relationships with financial institutions that hold consumer funds, she said. “And we think the commingling of consumer funds within these technology platforms needs to stop and we need more of a one-to-one correlation between fintech programs and financial institutions.”
The benefits of a direct relationship
Imboden said the direct relationship makes it a little easier to vet fintechs more thoroughly from a variety of perspectives, such as anti-money laundering and other compliance programs, in addition to the third- and fourth-party relationships that occur throughout the fintech ecosystem.
“Financial institutions need to demonstrate appropriate oversight capabilities with all of their downstream partners,” she told PYMNTS.
Direct communication will inform and shed light on whether a fintech has the “runway” to manage fraud and marketing activities. Similarly, fintechs can gauge whether their banking partners have sufficient liquidity and capital, and what fintech committees and other committees might look like.
“These partnerships need to be subjected to further scrutiny and monitoring in both directions,” she said.
What is the impact on Open Banking?
Asked by PYMNTS about the impact of Open Banking, Imboden noted that large financial institutions may avoid sharing data with fintech partners who are deemed risky for downstream activities. Early Warning does not allow fintechs or neobanks to access bank data directly through APIs or through resellers. The net effect could be that funds will no longer be able to move.
“There needs to be some education on the consumer side,” Imboden said, adding that most consumers don't read the terms and conditions.
In her words, “The end consumer has no way of knowing if this is truly an FDIC insured account.”
To close this gap, digital-first brands need to communicate more clearly and transparently as fintechs establish themselves as the “face” of banking services.
Looking to the future, she said: “As the tea leaves fall, I think we will have a better operating framework. [these partnerships] …Banks need playbooks.”
Read more: Banking, Banking-as-a-Service, Banks, Digital Banking, Featured News, Fintech, Ingo Payments, Lydia Inboden, News, Partnerships, PYMNTS News, pymnts tv, Regulation, Video, WhatsNextInPaymentsSeries, What's Next In Payments: Banking-as-a-Service 2024
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