Banking
as a Service: Wild West Bust?
The
Banking as a Service (BaaS) landscape is facing some turbulence, with whispers
of trouble brewing after a period of rapid growth. While it's not a full-blown
crisis, there are certainly challenges and uncertainties that warrant
attention. Here's a breakdown of the current state of affairs:
Reasons
for Worry:
- Overaggressive growth and shaky
partnerships: The hype surrounding BaaS led to some partnerships
forged without thorough due diligence. Some fin-techs partnering with
banks had questionable business models or struggled with regulatory
compliance. This exposed banks to potential reputational and
financial risks. In 2009-10 I managed default for Wachovia Bank. If you recall they got fined $160 million dollars for laundering money for Mexican Cartels. We found money in walls, cars buried under dirt filled pools, the real wild west until the Feds took over. Bad guys want to hide their stash, the best way is to grind it through a dumb fintech app that doesn't check anything. Due diligence seems to have been overlooked in this new frontier.
- Regulatory scrutiny: As BaaS
evolves, regulators are taking a closer look, concerned about
potential systemic risks and consumer protection issues. This
increased scrutiny could slow down growth and impose stricter compliance
burdens.
- Profitability squeeze: Many
BaaS players, particularly on the fintech side, are struggling
to turn a profit. The reliance on transaction fees and limited
control over interest rates makes it difficult to achieve sustainable
revenue streams. Even big banks are getting hit on the back side of the head with fines for over charging customers for non sufficient funds and repeating daily usury fees. These apps fail to check every state law, as well as federal regulation before they implement big charges.
- Competition heating up: With
established banks and tech giants entering the BaaS fray, the
competition is getting fiercer. This puts pressure on smaller players
to differentiate themselves and find a clear niche. It also encourages advertising that over promises. They use gameplay tactics, prizes, puzzles all sorts of kooky gimmicks to attract. Coinbase uses influencers and pays referral fees. Crowdfunding, promises to win a supped up car, content that is not true are common.
- Most are vulnerable to hacking and imply that the customer is safe. My son did not even know he had Zelle and someone stole from his Bank of America account which BofA did not make him whole.
However,
it's not all doom and gloom:
- Strong underlying potential: The
core value proposition of BaaS – offering seamless financial services
embedded within non-financial platforms – remains compelling. It has
the potential to disrupt traditional banking models and improve financial
inclusion.
- Consolidation and adaptation: The
current challenges might lead to consolidation and restructuring within
the BaaS ecosystem. This could result in stronger, more
sustainable players emerging.
- Regulatory clarity: Increased
regulatory scrutiny, while challenging in the short term, could
provide much-needed clarity and ensure responsible growth in the long run.
So,
where does this leave us?
The
BaaS industry is at a crossroads. While some companies might falter, the
overall trajectory remains positive. The key will be for players to adapt,
address concerns, and focus on offering truly valuable and compliant financial
services.
Keep an eye out for these key developments:
- Regulatory pronouncements and
their impact on the industry. Our government and those in EU are actively investigating and probing into every practice. Not a day goes by without a call.
- Consolidation and partnerships
among key players.
- Innovative BaaS offerings that
provide real value to both businesses and consumers.
Banking as a service has made accessing
financial products and services more accessible for everyone. However, for
organizations offering this convenience, there are also increased third-party
risks, including cybersecurity,
compliance, business continuity concerns, and the potential for reputational
damage
BAAS Wild West
Trouble in Paradise: A Rundown of 2023's BaaS Woes A Few Highlights this past year:
While
Banking as a Service (BaaS) has been touted as the future of finance, 2023
painted a rather turbulent picture for the industry. Here's a closer look at
some of the prominent issues that arose:
1.
Moonstone's Tangled Trajectory:
- From FTX to Farmington: Bank Prov's
BaaS partner, Moonstone Bank, initially sought to cater to the
crypto and cannabis industries with FTX backing. However, it
quickly backtracked, dropping the "Moonstone" name and
returning to its original moniker, Farmington Bank. This
flip-flop raised concerns about stability and commitment.
2.
BankProv's Crypto Stumble:
- Mining Mishap: The bank
suffered significant losses from lending against crypto mining
rigs, highlighting the volatility and unpredictability of the crypto
market. This also exposed potential weaknesses in BankProv's internal
controls and risk management practices. Last year my dry cleaner's office had a huge mine spinning because the power was stealing from a neighbor commercial. Scammy people abound...
3.
TAB's Predatory Partnership:
- Puppy Loan Blues: The BaaS
platform's partnership with EasyPay, a BNPL company accused of
predatory lending practices, particularly targeting puppy
loans, led to a downgraded CRA rating. This episode drew
attention to the ethical considerations surrounding BaaS partnerships and
the potential for reputational damage.
4.
OppFi's Lending Limbo:
- True Lender Tussle: The
California Department of Financial Protection and Innovation (DFPI) locked
horns with OppFi, a fintech lender partnered with BaaS bank
FinWise, over who bears the true responsibility for OppFi's allegedly
unfair loans. This legal battle highlighted the regulatory
ambiguities surrounding BaaS partnerships and lending models.
5. AML
Woes Across the Pond:
- European Crackdown: BaaS
platforms Solaris and Railsr faced anti-money laundering (AML) issues in
Europe. Railsr's Lithuanian entity, PayrNet, even fell
victim to regulatory action and was forced into bankruptcy. This
raised concerns about the adequacy of AML compliance measures within the
BaaS ecosystem.
6.
Fintech Biz Weekly's Bombshell Report:
- BaaS Market Unveiled: The
inaugural BaaS market report by Fintech Biz Weekly shed light on the
industry's complexities and challenges, providing valuable insights
but also potentially stoking further anxieties about the sector's future.
7.
SVB's Fallout:
- Ripple Effects: While not
directly related to BaaS, the implosion of Silicon Valley Bank (SVB)
sent shockwaves throughout the banking ecosystem, including BaaS
players. This heightened regulatory scrutiny across the
industry, with a particular focus on banks' risk management practices
and exposure to volatile assets.
These
are just some of the many BaaS-related troubles that surfaced in 2023. While
the industry undoubtedly faces challenges, it's important to remember that
growing pains are often part of the evolution process. The key forward will be
for BaaS players to prioritize transparency, compliance, and responsible
partnerships to weather the storm and build a more resilient and sustainable
future for this innovative financial model.
Post-Goldman
& Apple's Savings Account Launch:
1.
Regulatory Crackdown:
- Cross River: Faced fines and
a consent order for fair lending compliance issues, highlighting the
lack of due diligence within BaaS platforms.
- Synapse & Evolve: Their
clients, like SoLo Funds and Money Ave, faced trouble with
regulators for unlicensed lending, suggesting lax oversight within
the BaaS ecosystem.
2.
Consolidation & Controversy:
- Bond Acquisition: FIS
acquired Bond, indicating industry consolidation amidst changing
market dynamics.
- Maza's Misleading Practices: a16z, Unit, and
Blue Ridge-backed Maza faced criticism for targeting undocumented
immigrants with misleading claims, raising concerns about ethical
practices within BaaS.
- Stripe & Celtic's
Embarrassment: The unauthorized launch of the "no KYC"
crypto card Laso without their approval raised questions about their
control over their partnerships and compliance procedures.
3.
BaaS Dependence Backfires:
- Lineage's Fall: Lineage's
reliance on BaaS deposits led to financial instability and
ultimately, a hostile takeover by its shareholders, highlighting
the potential risks of overdependence on external funding sources.
Overall,
these events suggest a growing landscape of challenges for BaaS providers,
including:
- Increased regulatory scrutiny: Regulators
are tightening their grip on BaaS platforms, demanding stricter
compliance and due diligence practices.
- Reputational risks: Misleading
practices and compliance failures can damage the reputation of BaaS
providers and their partners.
- Financial instability: Overdependence
on external funding sources can expose BaaS platforms to financial risks
and potential hostile takeovers.
Additionally,
the deterioration of the Goldman-Apple relationship underscores the
complexities and uncertainties surrounding tech giants' entry into the
financial services space.
2023 OCC hired a con artist as its first-ever Chief Fintech Officer. How did he pass background?
The BaaS platform Solid faked its revenue number to
raise a Series B and is being sued by its investors. Liars.
Synapse and Evolve are arguing over who's
responsible for some $13 million in missing customer funds.???
Metropolitan Commercial Bank got a consent order
for partnering with Movocash, which fraudsters used to steal millions in
COVID-era relief funds
Blue Ridge, operating under a BaaS-related
consent order from 2022, announced it would seek to raise fresh capital as it
reduces its exposure to fintech
Mercury filed suit against one-time partner
Synapse, in an effort to recoup $30 million Mercury claims it is owed &
describing Synapse as in "financial freefall."
In the Wild West of olde' times it was the hardware store that sold shovels not the digger who made money.
