Not Every BaaS is Created Equal

What is BaaS?

Banking-as-a-Service (BaaS) is revolutionizing the way financial institutions, neobanks and businesses operate. BaaS providers enable neobanks and businesses to seamlessly integrate financial services into their platforms, leveraging the banks’ operational setup and regulatory permissions. BaaS has grown to cover a wide range of financial services and products including deposit accounts, digital wallets, international transfers, credit and debit cards, and even everyday credit products such as Buy-Now-Pay-Later (BNPL). For financial institutions, this represents a significant shift, allowing them to reach customers in new and innovative ways through partnerships with businesses and fintechs.

BaaS Gone Wrong: A Banking-as-a-Service Crisis 

Recent events in the U.S. have brought BaaS into the spotlight, but unfortunately, not for the best reasons. The BaaS business model is under intense scrutiny. There have been severe consequences for those involved, with tens of thousands of customers of the BaaS-enabler Synapse and its bank partners having lost access to hundreds of millions of dollars in deposits. Synapse itself has gone into administration, while regulators have ordered some of its partner banks to suspend or scale back operations.

In this article, we’ll explore what went wrong and what these events reveal about the diverse structural ways in which BaaS operates.

The Good, the Bad, and the Ugly

Firstly, it must be noted that despite recent setbacks, BaaS is a huge success story. BaaS has fueled some of the most innovative financial ventures of the past decade. Revolut, Europe’s most valuable fintech, started in 2015 through a BaaS partnership that powered its first global multi-currency cards. Numerous other fintech success stories worldwide are similarly tied to BaaS, such as Chime, Alipay, Nubank, and Klarna. 

Naturally, not every BaaS venture is successful. In a competitive landscape, many companies launch with high hopes but fail to secure a foothold in the market, eventually having to withdraw. This is to be expected in a high-risk, high-reward industry, where not every player makes it to the top.

Yet, a clear distinction should be made between BaaS ventures that are set up properly but fail to meet expectations, and those where the BaaS model itself has some fundamental flaws—such as poor transaction and safeguarding controls, which are essential to ensuring the secure functioning of any financial service or product.

The Recent BaaS Crisis in the U.S.

Understanding the root cause of the recent collapse of a major BaaS partnership in the U.S. is important. Synapse’s failure reportedly left tens of thousands of end-customers without access to their funds for many months now. At the heart of the problem is the inability of both the BaaS partner bank and the technology enabler to accurately account for which funds belong to which end-customer. 

The problem appears to lie in a decentralized BaaS model with weak controls. In this partnership, the account ledgers were maintained by Synapse rather than the banks. This led to complex reconciliations between the BaaS partners, which ultimately failed. The lack of clear accountability worsened the situation, with both parties accusing each other of an inadequate response to multi-million-dollar discrepancies, reportedly going back as far as 2022, yet with neither party seeming to take definitive action until it was too late. 

Much of the debate around this crisis has focused on determining who was at fault—Synapse, the banks, and/or the regulators. The relevant authorities will call for those accountable to respond for their actions, and rightly so considering the impact the crisis has had on consumers of financial services—not to mention the reputational impact on BaaS as a whole. 

No doubt several lessons will be learned from this episode. But from our perspective, a fundamental root cause of the crisis lies in the structural approach employed by Synapse and its bank partners—key controls over the safeguarding of customer funds were decentralized and, as a result, unnecessarily complex and prone to failure.

Horses for Courses: Staq’s Approach to BaaS 

At Staq, we believe in focusing our efforts—and those of our partners—on our respective strengths. Our BaaS operating model is built on a clear and specialized distribution of responsibilities between Staq, our banking partners, and the businesses/fintechs we serve. 

At Staq, we focus on delivering a robust and comprehensive BaaS platform, faster. Our banking partners leverage their licenses, expertise, and our technology to deliver financial services through BaaS. And here is the key difference: our bank partners retain full ownership of key risk management and regulatory compliance controls. 

Account ledgers, for example, are managed by the bank, even if they rely on Staq’s BaaS platform. The bank’s teams maintain, reconcile, and audit the ledgers themselves, ensuring that control is always in the hands of those who know it best. This approach also eliminates the need for redundant and complex reconciliations between BaaS partners.

The same applies to critical areas such as KYC (Know Your Customer), AML (Anti-Money Laundering), and fraud prevention—the bank is always in charge. After all, risk and compliance management is a bank’s bread and butter, their privilege for owning a license/charter.

Leveraging the Best of Both Worlds

In summary, Staq’s BaaS model combines the strengths of all parties. Banks, as experts in risk and regulatory management, are empowered by Staq’s cutting-edge BaaS technology to perform their tasks more efficiently. Only then can we and our bank partners maintain the highest level of diligence necessary to safeguard the trust placed upon us by businesses, fintechs and their end-customers.