BaaS
I’ve written about commoditization of financial infrastructure. Still, a Fintech still has had to piece together a bank, processor, networks, and/or fulfillment houses to offer their services.
Banking as a Service providers are changing this. They bring together the required vendor set to offer a banking product or feature, then offer a unified platform for Fintechs to build on. BaaS providers make it easier and more cost efficient to launch a financial product. In return, anyone creating a financial product gives up margin and a direct relationship with their sponsor bank.
A direct relationship with a sponsor bank is key to accomplishing a program’s goal by enabling a program to define their compliance and exception protocols. This is why I find Treasury Prime to interesting. They’ve created a marketplace allowing FinTechs to find sponsor banks then integrate into them through a normalized API that works with any bank participating in the network. As a Fintech, you still get the benefits of lower startup costs and the ability to build thinner client apps while still maintaining a relationship with your sponsor bank.
With this approach, Treasury Prime is democratizing the Fintech stack in both directions (i.e.; Fintech having access to banks and vice versa). Further there are derivative effects that come from creating a more perfect market:
- Lower startup costs as banks will need to bid against one another and Treasury Prime looks to facilitate volume;
- Enabling startups to build to real risks according to the letter of the law as opposed to perceived risks where banks act ultra-conservatively so as not to even become close to being misconstrued as closely approaching a regulation;
- More options for customers leading to better user experiences, customer support, and pricing.
There are others taking this approach too. Companies like Unit Finance, Bond, and SynapseFi all offer BaaS services. In a world where multiple parties (e.g., networks, banks, processors, fintechs, and BaaS providers) are fighting for their cut of interchange, it will be interesting to watch these companies differentiate when there is but so much room to maneuver on price.
