It’s not easy to be a banking-as-a-service provider in the United States these days. In the past few weeks, we have had stories from Goldman Sachs’ Fintech unit and their issues with the regulator or the BaaS provider Solid that has been faking revenue. And this week? Another BaaS provider is in turmoil, and this time it’s none other than Synapse. One of the oldest providers in the US, founded in 2014.
What is happening? Reports have surfaced that the company is laying off 40% of its staff. But the reason for this is even more interesting: one of their biggest clients, the popular business banking provider Mercury, has decided not to renew their contract and will work directly with their partner bank, Evolve Bank and Trust.
How does BaaS work in the US? In case you are not familiar with banking-as-a-service in the US, let me get you up to speed real quick: Unregulated companies that aim to launch a banking product (i.e., a fintech or a non-financial brand) need to find a technology and a licensed partner. There are roughly three options:
a) You go out searching for a BaaS provider (i.e. Synapse) and a partner bank separately. Common advice back in the day was to start looking for a bank partner first, as this tended to take much longer than finding the BaaS partner.
b) You work with a BaaS provider that has a very close relationship with one or more banks, making the process a little bit easier as you get the full package. Unit is probably a good example for this kind of BaaS provider, having partnered purely with Blue Ridge Bank in the first few years. They have more banking partners now, but the model remains the same. Please note that many BaaS providers, including Synapse, have started to work closer with some of their partner banks. For the sake of this discussion, I would still leave them as separate approaches.
c) You work with a licensed bank that can also cover the tech part. From my (German) point of view, Cross River Bank is one of the first and most popular banks in the US offering this service.
What does this mean? As you can see, when Mercury launched, they decided to partner with Synapse and Evolve Bank & Trust, so choosing approach A. Back in 2017, when Mercury was founded, this was the common approach, as providers like Unit had not been around yet and not many banks offered BaaS either. But a much bigger and more successful Mercury has decided now that they don’t need Synapse anymore and can work with the very same banking partner directly. This brings me to the question of whether (at least in the US) banks are better positioned to offer BaaS than standalone players. Before you contemplate if the standalone players could also get regulated, let me highlight that the US does not have a concept like e-money licenses in Europe, and therefore, becoming a regulated institution means becoming a bank, which is very unlikely, if not impossible, for such players.
At the moment, it feels like US banks with a BaaS product have good momentum, and if more banks launch such products (there are a lot of banks in the US; many might be incapable, but maybe a few are enough), the pressure on standalone providers could increase. Since Mercury is a pure fintech player, I don’t want to say that non-financial brands like retail companies could make a similar move; however, if banks build and design their product in a way that non-financial brands need it, then this could also impact how embedded finance products are being built in the US.
