The aftermath of
As a banker and ex-regulator, I'm ready to talk about
To recap, BaaS went wrong with early models that gave fintechs quick access to services like ACH, RPT, Visa and Mastercard, etc. Middleware acted as an accelerated path for launching fintech services, but they sacrificed sustainability for speed.
The industry was left with a BaaS model driven by grossly undercapitalized and unprofitable middleware providers that lacked depth in areas like compliance and oversight. Programs became completely dependent on middleware and third-party providers to match fintechs with banks. Rapid market entry led to compliance shortcuts, generating negative press and regulatory scrutiny.
The model advanced by middleware providers built a BaaS house of cards that allowed too many providers to skirt regulatory lines. Much of the frustration of daunting onboarding processes between banks and fintechs was warranted, but the shortcuts taken were destined for failure.
Without uninhibited access to the operational or technological switch, bank partners struggled to demonstrate control over fintech solutions, which strained relationships with fintech partners and left a mess to clean up. What is needed now is a restoration of trust and confidence in bank-fintech partnerships.
After all, the failure of Synapse doesn't change the growing demand for embedded finance. There are a host of banks that built a model centered on the role of the bank as the charter and technology gateway. Everyone, including the regulators, learned through this challenge that these nuances matter deeply.
Banks have been returning some funds to fintech customers affected by the Synapse collapse, but a multimillion-dollar discrepancy between how much Synapse says customers are owed and how much the banks say they have remains.
Banks taking back their rightful position in the center of the BaaS model won't bring the VCs back in droves. But it's the model most capable of withstanding scale and scrutiny. Enter BaaS 2.0 that bank leaders like me have long been referencing.
When banks lead the charge on BaaS to eliminate the middleware and allow direct and secure access between fintechs and the bank partner, a stronger model emerges that allows for the operational, legal and technological control more capable of withstanding regulatory scrutiny.
Direct partnerships with banks provide a stable foundation for innovation. Fintechs can build confidently on real infrastructure. While BaaS 2.0 may slow the pace, the trade-off is worth it. This approach doesn't stifle innovation but allows for sustainable, long-term progress. Fintechs can focus on creating customer value rather than navigating bank relationship disruptions.
It should come as no surprise that the Synapse implosion ushered in a far-reaching regulatory response — enter the FDIC "Synapse Rule" proposal. While well-intentioned, the broad scope of these regulations' risks burdens even responsible bank-fintech partnerships. A more nuanced approach is needed — one that recognizes the difference between high-risk arrangements and those already adhering to sound banking principles.
As the industry moves forward, regulators must carefully consider how to target truly problematic practices without stifling innovation. The entire financial services industry should advocate for a regulatory framework that fosters innovation and encourages responsible partnerships while maintaining necessary security and oversight. This is a needle that can be threaded.
The era of reckless growth demanded by the venture capital community (at the expense of regulatory compliance) is gone. Bank-fintech partnerships can be responsibly streamlined, but the bank needs to lead the charge. The benefits are ample. With control over the ledger and switch, banks have enhanced regulatory oversight and operational control. This increased control addresses regulatory concerns that compliance and risk management were being sacrificed in the 1.0 model.
BaaS 2.0 represents a maturation of the fintech revolution in a way that levels the playing field for innovative banks, without stifling anyone who plays by the rules. By restoring banks to their central role, the industry can responsibly develop a financial ecosystem that balances innovation with stability and compliance. This is not a step backward, but rather the establishment of a sustainable future for financial services in a way that benefits everyone in the value chain.
