BaaS: Act III

If the evolution of BaaS were a three-act play, it would be at the beginning of act three, during which tension and challenges peak and resolution unfold. BaaS’s act one was a heady time filled with inflated expectations and aggressive competition. In act two, BaaS faced the classic turning point, during which its faults and challenges manifested. Fault lines have been generated by weak due diligence and ongoing risk management, which are paramount to a robust, sustainable BaaS model involving middleware providers. According to S&P Global Market Intelligence, in 2023, “banks that provide banking as a service (BaaS) to fintech partners accounted for 13.5% of severe enforcement actions issued by federal bank regulators, including prompt corrective action directives, cease and desist orders, consent orders and formal agreements.” In addition, competition has continued to heat up as the number of banks providing BaaS rises (115 banks in Q4 2022 compared to 136 Q4 2023; FedFis). At the same time, revenues have been disappointing for many participants, including Goldman Sachs, which is overhauling its transaction banking business, which includes BaaS.

Act three opened with the failure of Synapse, a BaaS middleware provider, and Evolve Bank being hit by a Federal Reserve enforcement action as well as a data breach (Evolve Bank’s fall has been particularly steep given it peaked with a partnership with Stripe).

A new equilibrium is appearing in the BaaS landscape as exemplified by three protagonists described below: Live Oak Bank, Pocketbook with Grasshopper Bank and Treasury Prime, and Stripe with Fifth Third's Newline. It is supported by a direct bank-to-fintech collaboration, rigorous due diligence, and robust ongoing risk management.