Facing the new normal: How BaaS players can meet rising industry standards and still maintain strong relationships

2023 was a deeply challenging year for the banking sector, with the failure of three regional banks casting long shadows that are still felt today. The first half of 2024 has been just as challenging for the fledgling Banking-as-a-Service (BaaS) sector, which was only beginning its journey toward maturity. 

The May 2024 collapse of the BaaS fintech Synapse impacted nearly 10 million consumers in different ways including frozen funds for many end customers. This incident also sparked a debate over whether such failures are inherent to the BaaS model or preventable. Amid all the finger-pointing between banks and fintechs, their partnerships are now facing more scrutiny than ever before.

So, how can participants rethink their strategies to manage risk and compliance effectively while maintaining healthy relationships in the BaaS ecosystem?

The dos and don’ts in the new BaaS landscape

Sheetal Parikh, General Counsel and Chief Compliance Officer at Treasury Prime, believes that banks, in particular, have to maintain a clear understanding of their customers at all times and assume full responsibility for compliance. 

“Regulators care about protecting consumers and businesses, and banks have a responsibility to make sure they’re being careful – it’s a generally risk-averse culture for good reason,” Parikh said. 

Fintechs are not off the hook for their obligations, either. They can ask probing questions to evaluate a sponsor bank’s true capacity to support its fintech partners, ensuring both sides are in sync on their key priorities.

Renata Caine, SVP and General Manager of BaaS at Green Dot, asserts that compliance and risk management are now paramount in bank-fintech partnerships. She believes that the failure of Synapse and other similar failures are driving both banks and fintechs to prioritize these areas, especially as regulators ramp up their oversight of providers.

“While it could be months before we see any proposed rulemaking (if any), these actions on the part of regulators should create a fairly clear blueprint of how they are thinking about oversight and control at a minimum,” added Parikh.

BaaS 2.0: Tangible steps forward

Caine notes that earlier, partners were often less concerned about the depth of experience, banking expertise, and regulatory oversight, which allowed startups to grow quickly. Today, with many startups no longer around, partners prioritize assurance, stability in compliance, and regulatory support.

“While prospects in previous years seemed comfortable working with a mix of fintechs to piece together the solution they wanted for their customers, even if it involved farming out the formal banking relationship to one or multiple third-party chartered institutions, both businesses and their customers alike now want full transparency into who is managing and securing their funds,” she highlighted.

Providers have to better understand and address regulatory requirements in their negotiations and contracts. Although this shift may result in higher time and costs for compliance and risk management, addressing these factors is now a critical component of business strategies, according to Caine.

The challenge then lies in managing these additional costs while maintaining operational efficiency. “We’ll need to push ourselves to be more operationally efficient, explore automation and emerging technologies, and drive down costs in other areas,” said Caine on how to achieve that balance.

Despite the setbacks caused by recent BaaS failures, Caine sees a silver lining. She believes these events will bring greater clarity to the roles of all parties involved in BaaS partnerships that were earlier blurred.

Reflecting on how recent incidents are reshaping BaaS provider Green Dot’s approach, she noted, “We are investing significantly more time and resources — across our platforms, processes, and talent — into these priorities. It has become a central topic in every discussion we have, both internally and with our partners and prospects.”

Green Dot’s strategies to support its clients’ growth

Capitalizing on its bank charter, Green Dot says it offers partners a full spectrum for launching embedded finance programs, eliminating the need for third-party vendors or external integrations.

In recent years, Green Dot has directed investments toward upgrading its platform, to simplify and enhance its services. The bank’s primary focus has been on operational optimization — re-analyzing how it operates a platform that supports cross-channel collaboration, smooth customer and partner experiences, and scalable growth.

Last year, Green Dot completed an extensive, multi-year processor conversion. The bank overhauled its technology stack and transitioned to a cloud-native platform to enable more configurable production. Having completed these technological upgrades, the bank has now shifted its focus from being primarily inward-facing on internal – platform and model – optimization to outward-facing on growth and business development. The bank has secured new partnerships in this area, including collaborations with PLS, Dayforce, Stockpile, and Credibly.

How to cultivate relationships in the BaaS ecosystem

Moving forward, banks, fintechs, and providers will likely have to consider a few key factors to advance in their BaaS journey.

1. Is now a good time for FIs to become partner banks?

Amid the ongoing noise surrounding the BaaS market, evolving regulations, and the shifting dynamics of bank-fintech partnerships, is it the right time for an FI to step into the role of a partner bank, especially given that compliance management typically falls on them?

Parikh believes it’s a matter of perspective.

“If the Synapse situation taught us anything, it’s that not all banks are created equal,” she said.

The decision for a bank to venture into new product lines, like BaaS or embedded banking, hinges entirely on its readiness for such an undertaking. Key questions have to be addressed beforehand: Has the bank conducted a thorough risk assessment? Has it proactively engaged with regulators? Has it secured Board approval and informed them of the potential risks? Staffing is another important factor — does the bank have the right personnel in place to tackle the risks identified? These are the kinds of questions that need to be answered to determine if entering this market is a sound long-term investment for a partner bank, Parikh explained.

2. How businesses can identify the right BaaS provider

BaaS can take different forms depending on the business. For example, a retailer or e-commerce brand might want to offer their customers a branded DDA account to integrate full-featured financial services into their brand. Meanwhile, other businesses integrate specific components into their offering to solve certain challenges and build loyalty: for instance, employers offering flexible payroll solutions for their employees or a bill pay company integrating technology to offer cash bill payment options. Some may prefer a fully managed, end-to-end solution, while others might opt for a more hands-on approach by working with multiple providers. 

“The key is understanding you and your customers’ needs and goals and then seeking provider(s) that can support and grow with you,” said Caine. “The value of a flexible and configurable BaaS offering lies in enabling businesses to piece together and evolve the financial services they offer as their customer needs evolve. This flexibility and configurability are very important value propositions for clients navigating a market that’s always evolving.”

3. How providers can get BaaS right:

To carve out a position for themselves in a nascent market, Caine suggests that BaaS providers can: 

• Act swiftly to introduce new products tailored to their target users. 
• Make continuous investments in UX, as customers now expect interfaces on par with the best digital platforms. 
• Allocate resources to refine back-end operational processes for a smoother customer experience.

Successful partnerships in the BaaS space hinge on clear expectations, well-defined roles, a shared vision, and a long-term strategy that can lead to mutual growth.