Demystifying Banking as a Service (BaaS)

Banking as a Service (BaaS) describes a relationship between a financial institution (FI) and a fintech or business wherein the FI provides tailored banking products through the fintech or business to their customers/members. All-in-one operating systems that include payment hubs or BaaS-specific platforms offer API connections that enable banking products to flow through to the fintech or business environment. In essence, BaaS enables fintechs and businesses to offer select banking services to their customers/members via a partnership with their FI.

Embedded banking addresses a finance solution within an application or architecture. When a platform partners with a BaaS provider, embedded banking occurs because the platform adds financial services as part of its user experience. Think of the concept of in-app purchases, where everything happens within a single application. 

Payments provide a common example of a BaaS relationship. Solutions like ApplePay, CashApp, PayPal, and Venmo have an FI partner who supports their back-end needs.

But BaaS solutions run the gamut of FI offerings, and may include financing products, account offerings, and more. Consider Stripe, which touts a payments solution, business financing, business cards, and accounts. 

Regulatory compliance is a risk and consideration for banks and credit unions who are utilizing BaaS models.

In July 2024, the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) signaled that they are placing greater scrutiny on BaaS relationships, having issued the Request for Information on Bank-Fintech Arrangements Involving Banking Products and Services Distributed to Consumers and Businesses. In September, the FDIC issued a notice of proposed rulemaking that would strengthen recordkeeping for bank deposits received from third party, non-bank companies accepting those deposits on behalf of consumers and businesses.

This increased regulatory review served as a response to growing market concerns: In May 2024, BaaS provider Synapse shut down abruptly, causing a massive ripple effect. As reported by BAI: 

In May 2024, a key third-party provider, Synapse, suffered a significant breakdown, sending shockwaves throughout the BaaS ecosystem. Sponsor banks (insured depository institutions or IDIs), fintechs and their customers were all caught in the fallout. End customers had deposits frozen and no immediate resolution in sight.

The incident exposed just how vulnerable banks and fintechs can be when relying heavily on third-party platforms for core operations like transaction records and account reconciliation.

Developing BaaS relationships will require FIs not only to have strong compliance programs but to also up risk management efforts. This includes being detailed in Know Your Customer (KYC), Know Your Customer’s Customer (KYCC), and overall third-party engagement, particularly as relates to transaction records and account details. 
 

BaaS scenarios offer significant opportunities for FIs, and those that want to offer the solutions can do so safely by selecting the right technology infrastructure partner. They should seek out a partner that doesn’t require them to introduce a separate BaaS platform, but rather, provides an all-in-one operating system as an embedded banking core.

By offering BaaS solutions directly from the FI and eliminating reliance on third parties, risk profiles fall more under individual FI control. For instance, they can onboard partners quickly and customize their experience to both meet their needs and align with reporting requirements. This allows them to maintain control and visibility while ensuring compliance. 

 

Also, FIs want to confirm the provider partner offers solutions to achieve regulatory compliance and transparency with accurate accounting and reporting tools. In addition, they should look for a real-time, 24/7 scalable platform that ensures up-to-the-minute accuracy and control when monitoring or analyzing transactions. For example, 24/7 virtual ledgers allow for immediate and transparent record-keeping. 

A cloud-native operating system that comes with a payment hub that is readily connected with the Federal Reserve, The Clearing House, and SWIFT, supports FIs in offloading all payment processing from the core. If a fintech’s or business’ customer/members want to launch a new payment rail, it can be simple and fast. Through a configurable workflow engine that provides control over its payment processes, FIs have the ability to innovate according to the needs of customers/members.

For more information on BaaS overall, reach out to the BaaS Association. For compliance insights, visit the OCC, FDIC, Federal Reserve, and National Credit Union Administration (NCUA) respectively. To learn how other FIs are bringing BaaS in-house with Finzly, speak with one of our BaaS experts.