Where Is Banking-As-A-Service Headed In 2024?

Where Is Banking-As-A-Service Headed In 2024?

AS PUBLISHED IN FORBES by Kate Drew, Contributor

Where Is Banking-As-A-Service Headed In 2024?

When looking toward the future of the fintech industry in 2024, one of the most salient questions is what developments we may see in Banking-as-a-Service, or BaaS.

BaaS refers to an (arguably) novel model by which a licensed institution provides access to the financial system to allow a nonbank to offer financial products. For quite a while, it was considered the holy grail of bank-fintech engagement. In fact, some of the most well-known names in fintech are backed by BaaS sponsor banks — the neobank unicorn Chime, for example, works with The Bancorp Bank and Stride Bank. However, this last year tested many matches that were once full of promise, bringing to light compliance issues and other operational struggles.

We saw some relationships get into hot water. For instance, Fintech Business Weekly reported that Evolve Bank & Trust and BaaS platform provider Synapse were in a dispute over responsibility for a “deficit” of over $13 million in for the benefit of accounts holding customer funds at Evolve. Meanwhile, others like Apple AAPL +1.1% and Goldman Sachs simply called it quits over, let’s say, irreconcilable differences.

The reasons for these troubles are varied — they stem in part from overexcitement in the last few years that got knocked back in 2023 as fintech funding plummeted and the macroeconomic environment grew uncertain, but they’re also likely the result of a fundamental mismatch between how traditional banks and fintechs think and operate. Traditional institutions are very risk averse; even the most progressive ones generally think about one thing more than anything else, staying compliant. If you were to ask any fintech what they think about most, they’re likely to tell you it’s the customer experience. Now, imagine being in a relationship in which you and your partner have such different ideas about what matters to your future. That is the central problem BaaS faces.

As a result, bank executives are increasingly struggling with how to capitalize on what’s long been touted as a top opportunity. According to CCG Catalyst’s The Banking Battleground 2023: Pulling Back and Pushing Ahead, out of 122 C-level bank executives surveyed, those who said working with fintechs is an integral part of their business strategy slipped from 43% to 39% from the firm’s prior year’s survey, and those who said they work with fintech providers on a one-off basis dropped by 14 percentage points. Moreover, those who are interested in leveraging fintech but aren’t sure where to start grew from 3% to 21%, seemingly taking the bulk of that decline.

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