BaaS: Exploring the Growth of Backend as a Service
The Dynamic Landscape of Banking-as-a-Service
The BaaS market is experiencing significant and accelerated growth. Consequently, the choices available to companies aiming to rapidly launch new financial services through these bank-in-a-box APIs are continually expanding.
Previously, we analyzed the optimal customer profiles and potential partners for banking-as-a-service startups. Today, we will explore the diverse types of BaaS offerings and evaluate their relative strengths.
Variations in BaaS Models
Several BaaS providers operate by establishing partnerships with established banking institutions. This allows them to provide API access to a range of banking services.
Others focus on software solutions, functioning as marketplaces that connect community banks with fintech companies.
Notably, one startup has taken a unique approach by acquiring a bank outright. This enables them to directly offer banking APIs to their clientele.
Strategic Considerations for Fintechs
For businesses intending to develop a new fintech application or integrate banking functionalities – such as debit cards or other financial services – into their current operations, understanding the positioning of each competitor is crucial.
Knowing how each provider interacts with both customers and banking partners is a key factor in making informed decisions.
- Understanding the different BaaS models allows for targeted selection.
- Careful evaluation of competitor strategies ensures optimal partnership choices.
- A clear grasp of customer and bank partner interactions streamlines integration.
Successfully navigating the BaaS landscape requires a comprehensive understanding of these varied approaches.
Turnkey Banking as a Service
A prevalent BaaS model delivers a comprehensive suite of tools necessary for companies to introduce financial services, accessible through Application Programming Interfaces (APIs). Providers in this space encompass companies like Synapse, Unit, and Bond, among others.
These BaaS companies generally generate revenue through platform fees charged to their clients, and/or by participating in revenue sharing from interchange or other fees stemming from the client’s final product or service.
For emerging fintechs or vertical SaaS businesses aiming to integrate financial services without establishing a dedicated fintech development team, utilizing their APIs offers a cost-effective method for building, testing, and deployment with minimal complexity.
Roy Ng, CEO of Bond, emphasized, “A key aspect of our approach is ensuring that our documentation and guides are readily comprehensible even for developers without specialized fintech expertise. We strive for universal developer accessibility.”
Core Infrastructure and Partnerships
This type of BaaS company establishes partnerships with community banks – often a select few – and constructs the technological infrastructure required for clients to launch services like deposit accounts, debit cards, or credit card payment systems.
The BaaS provider has already completed integration with these banking partners and established pre-defined agreements regarding permissible account types. Furthermore, they offer compliance and risk assessments on behalf of clients utilizing their APIs.
Itai Damti, CEO of Unit, explained his company’s approach: “We consolidate all these elements into a single entity. We maintain established bank relationships, and our compliance team functions as an extension of the banks, enforcing all relevant regulations. Clients are relieved of the burden of policy creation, operational implementation, and even forming opinions on money laundering detection – we manage all of that.”
- Key Benefit: Reduced development costs and time to market.
- Compliance: BaaS providers handle much of the regulatory burden.
- Scalability: Easily scale financial services as your business grows.
Essentially, these providers abstract away the complexities of banking infrastructure, allowing businesses to focus on their core competencies and customer experience.
Facilitating Collaboration Between Banks and Fintech Companies
Certain Banking-as-a-Service (BaaS) companies aim to eliminate the need for direct connections between their clients and traditional banking institutions. However, firms like Treasury Prime and Synctera adopt a contrasting strategy within the market.
Their objective is to establish a marketplace dynamic where they function not only as technology suppliers but also as intermediaries, connecting banks with emerging startups.
The Importance of Strategic Matching
“The core offering we provide is a sophisticated matching system,” explains Chris Dean, CEO of Treasury Prime. “Each bank possesses unique characteristics… For instance, some banks are open to engaging with cryptocurrency-related businesses, while others are not. Similarly, some will serve the cannabis industry, and others will avoid it.
These distinctions are often straightforward. However, more nuanced factors also come into play. Some banks prioritize revenue streams, while others focus on deposit acquisition. Fintech companies, in turn, have varying requirements.”
Furthermore, banks exhibit differing levels of willingness to manage fintech programs. While some institutions partnering with Treasury Prime are comfortable supporting up to 100 fintech integrations annually, others limit themselves to just two or three per quarter, as Dean notes.
Expanding Fintech Partnership Opportunities
Regardless of these variations, both Synctera and Treasury Prime are dedicated to increasing the number of banks capable of launching and sustaining new fintech initiatives. This is particularly crucial for banks that have not previously collaborated with technology startups.
These companies also believe they can accelerate the onboarding process for new fintechs, even for banks with established partnership programs.
Optimizing Revenue and Minimizing Costs
Peter Hazlehurst, CEO of Synctera, highlights that his company’s position between banks and fintechs allows for optimization of bank revenue while keeping fintech costs low. Their revenue model centers on a revenue-sharing arrangement with the bank, rather than directly billing the startups utilizing their technology.
“Our approach differs in that we provide community banks with 50% of the revenue generated from all fintech spending,” Hazlehurst states. “We’ve developed a platform – essentially a ‘fintech-in-a-box’ – which we offer to banks at cost. The banks then resell our services to the fintechs.”
Acquiring a Bank for BaaS Implementation
Several companies are establishing their BaaS (Banking-as-a-Service) solutions through partnerships with existing banks across the United States. However, Jiko has adopted a unique strategy: the acquisition of Mid-Central National Bank, located in Wadena, Minnesota, finalized last year.
This acquisition was undertaken with the intention of fundamentally rethinking the construction of banking institutions. Following the development of a robust and scalable money storage platform, secured by T-bills, and the launch of a direct-to-consumer challenger bank for testing purposes, Jiko aims to extend its technological and banking infrastructure to other businesses.
Stephane Lintner, founder and CEO of Jiko, explained that full integration results in a streamlined experience. “It’s a single API, mirroring the AWS model. Companies can access an API for secure money storage, enabling account creation and seamless fund transfers.”
The company’s approach to pricing distinguishes it from competitors. Instead of implementing platform fees or revenue-sharing arrangements tied to transaction volumes or overall usage, Jiko intends to provide a straightforward per-user, monthly subscription model for fintech companies utilizing its platform.
Lintner emphasized a desire to emulate a SaaS (Software-as-a-Service) structure. “We aim to avoid replicating the inefficiencies inherent in traditional banking systems,” he stated.
Consequently, Jiko does not derive income from deposit interest. “Customers acquired through fintech partners utilizing Jiko’s platform will directly benefit from the yield generated by the T-bills,” Lintner clarified.
Furthermore, the company operates independently of interchange revenue. “We intentionally avoid building a business model reliant on interchange fees,” Lintner noted. “Our concern is that such dependence could misdirect our focus. Therefore, we return interchange revenue to our partners, recognizing their need for profitability.”
Considerations Before Committing to a BaaS Provider
The selection of an appropriate BaaS (Banking-as-a-Service) provider is contingent upon several key factors. A crucial aspect to evaluate is the financial acumen of the development team and the extent to which they will depend on the BaaS partner for the establishment and oversight of compliance protocols.
The relative importance of rapid deployment compared to a direct rapport with the sponsoring bank also warrants careful consideration. Furthermore, assessing which economic structures and financial offerings align most effectively with the intended business or application is paramount.
Understanding BaaS Positioning
A universally applicable solution does not exist within the BaaS landscape. However, gaining a clearer perspective on how BaaS providers mediate interactions between financial institutions and fintech companies can significantly aid prospective clients in identifying the optimal model for their specific needs.
This understanding allows for a more informed decision-making process, ensuring the chosen provider effectively supports the long-term goals of the fintech venture.