The BaaS market is evolving rapidly and so are the options for companies who wish to quickly spin up new financial services by leveraging these bank-in-a-box APIs.
We recently took a look at who the ideal customers and partners are for banking-as-a-service startups … And today we’re going to dig deeper into the different flavors of BaaS offerings and how they stack up.
Some of the BaaS players in the market have partnered with bank partners to offer API access to their services, others offer software and are running a marketplace model to match up community banks and fintechs, and at least one startup has bought a bank to build its own banking API customers can access.
If you’re looking to spin up a new fintech app or want to add banking, debit cards or other financial services to your existing business, knowing how each of these competitors is positioned to work with customers and bank partners is key.
Turnkey banking as a service
The simplest — and most common — BaaS offering is one that brings together everything a company might need to roll out financial services and made it available via API. Companies providing these types of services include Synapse, Unit and Bond, among others.
Typically, these BaaS providers make their money by charging a platform fee to customers and/or share in revenues from interchange or other fees generated by the customer’s end product or service.
For fintech companies just getting started or vertical SaaS players looking to launch financial services without building out a whole new fintech team, hooking into their API or set of APIs can be a low-cost way to build, test and deploy with little hassle.
“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 is easily understandable by any developer,” said Bond CEO Roy Ng.
In this orientation, the BaaS startup partners with a community bank (or a small group of community banks) and builds out the tech stack necessary for its customers to launch a deposit, debit or credit card payment service.
The BaaS provider will already have integrated with these bank partners and predetermined agreements on the types of accounts that can be launched and will also provide compliance and risk overview on behalf of customers who sign up to use its APIs.
In describing his company’s operations, Unit CEO Itai Damti said, “We bundle all these things into one company. We have the bank relationships built-in, we have a compliance team that acts as an extension of the banks and enforces all of the things I mentioned. You don’t have to write policies, you don’t have to operationalize them. You don’t have to develop opinions on what makes money laundering, we take care of all of that.”
Playing matchmaker between banks and fintechs
Some BaaS providers try to make it unnecessary for their customers to have direct relationships with banking partners, but companies like Treasury Prime and Synctera have a different take on the market. They hope to create a marketplace model where they act as technology providers and also matchmakers between banks and startups.
“The real product here is the matchmaking algorithm,” says Treasury Prime CEO Chris Dean. “Every bank is different … Like some banks will do crypto, some won’t. Some will do cannabis, some won’t. And those are easy matches. But with some, it’s more subtle. Some banks really don’t care about fees, while other banks really care about deposits. And depending on the fintech, they’ll have different needs.”
In addition, different banks have different appetites for running fintech programs. While some banks that work with Treasury Prime are happy to do 100 fintech partnerships a year, others will only do two or three a quarter, according to Dean.
Regardless, Synctera and Treasury Prime hope to increase the number of banks that can spin up and support new fintech programs, especially those that have never partnered with a tech startup in the past. Even among well-established partner banks, these companies believe they can help speed up the process of onboarding new fintechs.
Synctera CEO Peter Hazlehurst says because his company sits in the middle between banks and fintechs, it helps to optimize the maximum revenue for the bank while providing minimal costs for the fintech. Its business model is based on a revenue split with the bank rather than directly charging the startups using its technology.
“Where our model is different … is we’re cutting the community bank into 50% of the upside of every part of the spending by the fintech,” Hazlehurst said. “What we have built is a platform that is sort of a fintech-in-a-box and we effectively give it to the banks at cost. Then the banks are actually reselling us to the fintechs.”
Buying a bank to get into BaaS
While all of the above players have based their offerings on partnerships they’ve struck with various banks around the U.S., Jiko has gone a step further: Last year the startup acquired Wadena, Minnesota-based Mid-Central National Bank in an effort to re-imagine how banks are built from the ground up.
After building a “scalable money storage platform” backed by T-bills and launching a consumer-facing challenger bank as a test bed, Jiko is seeking to make its technology and banking capabilities available to other companies looking to build out banking services.
“Since we’re fully integrated, it’s one API; it’s going to be the AWS model. You want an API for money storage, so you can open accounts, push money in and out. We don’t have to go and ask another bank for permission to do it. We have ACH, wires and debit,” said Jiko founder and CEO Stephane Lintner.
That’s not so different from other options in the market, but what is different is Jiko’s pricing model. Rather than charge a platform fee or a revenue share based on transaction fees or overall usage, Jiko plans to offer simple per-user, per-month pricing to fintechs building on its platform.
“We really want to think of it like SaaS and not live off the things that would make us revert to the inefficiencies of the old world,” Lintner said.
As a result, Jiko does not make money off the interest of deposits. “If you’re a customer onboarded by some fintech that begins running on Jiko, it’s still you, the owner of the T-bills, that gets the yield,” Lintner said.
It also isn’t dependent on interchange revenue. “I don’t want to build a business depending on that,” Lintner said, “because it’s our fear that it will make us focus on the wrong things. So we were passing the interchange back to our partners, they deserve it, they have to make money too.”
What to think about before signing up
Determining which type of BaaS provider to work with will depend on a number of factors. For instance: How financially sophisticated is the team building the product, and how much will they be relying on the BaaS partner to build and manage compliance programs? How important is speed to market versus having a direct relationship with your partner bank? What economic models and financial services best suit the business or app you’re building?
There’s no one-size-fits-all solution, but having a better understanding of how BaaS providers position themselves between banks and fintechs can help potential customers determine which model is best for them.
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