Over the last several years, a series of startups have emerged to cut through the complexity of launching financial services by offering technology that sits on top of partner banks’ infrastructure and enables developers to spin up bank accounts, payments and card capabilities through APIs.
These banking-as-a-service (BaaS) startups promise to offer fintech capabilities to other companies without them having to strike deals with partner banks, integrate with the banking core, or hire the technical or compliance personnel necessary to test or launch a new financial product.
As a result, it’s never been faster or easier to launch a fintech app or add a banking component to an existing vertical SaaS business. To get a better understanding of the problem BaaS providers are trying to solve, we spoke with several founders in this space, including Unit CEO Itai Damti, Bond CEO Roy Ng, and Synctera CEO Peter Hazlehurst, among others.
Cutting through the complexity of financial services
In the early days of the fintech market, startups were largely on their own when building or launching a new financial services app. Bringing a new financial product to market typically meant finding a bank partner and signing a long-term contract, creating and implementing compliance policies with that bank, and then finally building out the tech needed to support whatever financial app or service you were looking to offer to end users.
For startups, that meant large upfront investments of time and money just to lay the groundwork for launching a new product long before establishing product-market fit. It also meant a lot of duplicative work not just by startups to build up the necessary infrastructure needed to launch a financial product, but also between banks as they signed up and offered fintech partners access to their banking systems.
“The amount of work and pain that is involved in launching even something simple, even just checking accounts — you need to navigate the partner ecosystem of 30 to 40 banks that don’t always understand your business, then you need to write 15 to 20 compliance policies and operationalize them,” said Unit founder and CEO Itai Damti.
Now a lot of that complexity can be outsourced to BaaS companies that already have the bank relationships, APIs for embedding financial services into their apps and the ability to run compliance programs on behalf of their customers. And venture capitalists have lined up to fund them, including rounds announced by companies like Rize ($11.4 million), Synctera ($33 million) and Unit ($51 million) over just the last three months.
But who benefits from working with a BaaS provider?
There are two big buckets of customers for banking-as-a-service products. The first group is composed of consumer-facing fintech startups who are looking to build their apps quickly and get to market as fast as possible. The second big group includes vertical or horizontal software-as-a-service (SaaS) platforms looking to add new financial services to their existing products.
Finally, there are banks themselves, who aren’t really direct customers of the BaaS providers but can leverage their technology and sales teams as a fast and easy way to access markets they couldn’t tap into directly.
Helping other fintechs get to market faster
For fintech founders, having a BaaS partner enables them to cut through a lot of headaches involved with signing up a partner bank. Depending on the complexity of what they wish to build, fintech startups who sign up as BaaS customers may decide to take on certain aspects of the tech or payments stack themselves, but the BaaS players are trying to make it as simple as possible to get up and running through a single API or set of APIs.
“For most fintechs, speed to market is the most valuable attribute, and knowledge of the marketplace of the tech is relatively poor,” said Synctera founder Peter Hazlehurst.
For fintech companies just getting started, hooking into their API or set of APIs can be a low-cost way to build, test and deploy with little hassle. That means faster time to market for fintechs and the ability to reach product-market fit earlier.
Enabling vertical SaaS players to add financial services
A growing number of software-as-a-service (SaaS) and platform companies have begun to offer financial services to their existing products in an effort to provide more value to, deepen relationships with and ultimately become stickier with their end customers. One good example of this in action is how Toast went from selling restaurant management software to deriving the bulk of its revenues from fintech services.
For these customers, the sales pitch is all about enabling them to focus on what they do best — which is to build software for their primary target market — without having to spin up entire new banking, compliance or payments teams to launch these new products or services to their end users. Due to the regulatory and compliance complexity required for these types of platforms to even just add a banking account or debit card, finding a tech partner to offload those headaches could help platforms bring new financial services to market a lot faster.
“One of the big things we focus on is making sure that you don’t need to be a fintech expert developer to actually understand our guides and our docs. We try to make it so that it is easily understandable by any developer,” said Bond founder and CEO Roy Ng.
Ng gave the example of Squire, a vertical software company (and Bond customer) focused on providing scheduling and point-of-sale solutions to barbershops. By working with Bond, the platform launched an instant payout option for barbershops to give workers their net pay plus tips on a Squire debit card immediately rather than paying them through a standard two-week payroll process.
“Unless you’re super deep in financial services already, the time and effort required to figure it out yourself is not worth it and you will never get a great deal,” Hazlehurst said. “Either you build it yourself and take six months doing due diligence on all these different providers and pick one and then negotiate and all that or you can come to us and we’ll have done all that work for you and give you a single set of APIs. And you can get started tomorrow.”
Connecting banks with more fintech partners
Of course, there would be no “banking as a service” without the banks. Getting all the required approvals and licenses to launch a new financial institution is a burdensome affair, which is why we’ve seen so few fintechs apply for, let alone receive approval for, a de novo bank charter.
To fill this gap, a number of small community banks have stepped up as partners to aspiring fintech startups. To date, the relationship between forward-thinking community banks and fintech startups has been largely symbiotic: Working with a so-called “partner bank” grants fintechs the ability to accept deposits, process payments and transfer funds without having licenses of their own.
Meanwhile, by partnering with a fast-growing consumer or B2B fintech app, a community bank can drastically increase deposits from an audience of users it would have never been able to reach on its own. However, due to the huge amount of venture funding pouring into the fintech market, there has been unprecedented demand among community banks for partnership opportunities.
Over the last decade, a few dozen community banks have established themselves as leaders in serving the startup market. For the most part, however, most small banks are not well positioned to offer banking capabilities to fintech startups or other tech partners. Many do not have the software or business development teams needed to support startups at the earliest stages of launching a new financial product. And even among the better-known partner banks that have successfully scaled up fintech programs in the past, most are not capable of meeting the exploding demand for their services.
“Right now, there’s so much inbound demand, they’re basically cherry-picking [fintech partners] because they can’t onboard more,” said Synctera’s Hazlehurst. “In our model, we want them to say yes to everybody.”
BaaS startups say they can help banks increase deposits by facilitating fintech partnerships with startups and other businesses looking to add new financial services capabilities. They promise to simplify the process of getting up and running not just for customers who wish to roll out banking services, but also for the banks where funds will be held and transfers initiated.
To banks, the BaaS pitch is simple: You take the deposits and we’ll handle the technology, compliance and integration headaches. In many cases, these BaaS companies facilitate onboarding by providing the tech layer, and some even act as matchmakers based on a customer’s needs and the risk tolerance of the bank or banks they’re working with.
“Different banks have different tolerances from a risk level, from a credit perspective and how they want to do KYC. We’re mapping the different types of risk appetite of the bank with the specific program of our customers,” said Bond’s Ng.
BaaS = AWS for banking?
It’s still early days for the BaaS market, but the lower cost and faster time to market enabled by abstracting out some of the technical and compliance-oriented aspects of banking could spur additional creativity in the market.
One person I spoke with likened the shift to the migration to cloud computing, which drastically lowered the cost and complexity of launching new products and services based on shared infrastructure. That shift will have a nonlinear effect on the market and unlock new types of fintech projects and create new kinds of companies, according to Unit founder Itai Damti.
“People have literally launched banks with us with just two people,” he said. “That means there’s a new generation of neobanks that are now growing up that will look very different from how the old neobanks look.”
Just as AWS introduced whole new categories of apps and services, you can expect BaaS to change not just the way financial services apps are built and embedded into new platforms, but also the way in which consumers and businesses alike interact with their finances.