While some banks are leaving or cutting back on banking as a service, another group of institutions has been busy working on in-house technology platforms to offer the service to nonbanks.
These platforms have a technology-friendly approach that appeals to nonbanks while giving the bank a direct connection and oversight into their partner. The platforms are in contrast to the third-party middleware that a number of community banks used to enter the market and add partners quickly — the result of which has included numerous partner banks receiving enforcement actions. One of the most prolonged and painful has been the bankruptcy of Synapse Financial Technologies, where millions of customer dollars remain missing. The bank platforms may be the next phase of evolution for BaaS and embedded banking, creating a playbook that tries to balance compliance with innovation and a desire to stay competitive and relevant.
One of the latest banks to employ this approach is Watford City, North Dakota-based First International Bank and Trust, the $5.4 billion bank unit of Watford City Bancshares. First International leveraged its specialty payments division, the payroll processing firm Kotapay, to create a banking as a service platform called Kavinu. The platform is cloud-native and uses straightforward application programming interfaces, or APIs, to create a single, direct connection for nonbanks to the institution.
“What we wanted to do was to put a developer-friendly layer on top of [our payroll technology stack] to attract other companies to build products and services effectively on top of us,” says Trent Sorbe, chief payments officer.
The fact that it’s a bank-owned platform gives First International lots of oversight in these programs from a compliance and transaction monitoring perspective, which should assuage some of regulators’ concerns about BaaS.
“You have to have the switch, or you better be able to get to the switch, if things go horribly wrong,” Sorbe says. “You hope you never have to use it, but you have to have the ability to not let a program spin out of control. You could, if you had to, bring it down.”
First International’s Kavinu platform joins the ranks of banks like Fifth Third Bancorp, which incorporated its 2023 acquisition of embedded payments platform Rize Money into a distinct business line, aptly called Newline by Fifth Third. Cincinnati-based Fifth Third, which has $214.3 billion in assets, already had decades of experience in the embedded payments space through its merchant acquisition and processing business, which it sold 51% of in 2009. Buying Rize Money allowed the bank to own more of the technology infrastructure and compress the layers of software between the bank and its clients, says Thomas Bianco, the general manager of Newline.
“What we saw was an opportunity to take our experience in the [card] sponsorship space, add a modern set of technologies platform — APIs, developer toolkit, all of those things that somebody who’s implementing and integrating our core banking capabilities will need on their side — and modernize the platform in a way that leverages the depth and breadth that we already had as an embedded payments business,” Bianco says.
Fifth Third rebranded the unit to Newline, indicating it’s “literally a new line of business” at the bank, he says. Today, Newline approaches opportunities the way commercial lenders underwrite loans: They look at a firm’s risk management, the technology need and the economic value from the prospect. They also look for agreement on the governance and compliance structure the product needs and oversee clients’ products as if they were the bank’s products. Newline works with companies such as Stripe, Trustly, Brex, Blackbaud, AngelList, Nuvei and Payroc, according to its website.
One bank that’s long used the platform approach is $8.4 billion Cross River Bank, a unit of Fort Lee, New Jersey-based CRB Group, which built much of its own technology, including its core, to facilitate embedded banking for its clients and customers. The bank built its fintech platform gradually, starting with marketplace lending and ACH payments before adding card issuing, money storage and even capital markets, says Hillel Olivestone, head of strategy and corporate development. The result was a platform that offered clients a “one-stop shop” to add new products and services for their end customers. Cross River works with companies like Visa, Mastercard, DailyPay, Best Egg, Stripe, Plaid and Bill, according to its website.
“The fact that it is our own system, from end to end, means we have complete control — as we should, and as we need to, for these systems and relationships,” Olivestone says. “We believe strongly that that is the ideal way to handle these relationships and handle the oversight to protect the end consumer and end-user as best [as] possible.”
But even this approach doesn’t immunize a bank from regulatory feedback. Cross River received a 2023 consent order from the Federal Deposit Insurance Corp. regarding fair lending compliance. Olivestone declined to comment on the enforcement action. The bank didn’t admit nor deny the FDIC’s allegations.
The direct nature of the platforms offers several advantages for the banks. One area is in the revenue split between the partner and the institution, First International’s Sorbe says. He says other BaaS approaches relied on having a lot of transactions to generate program profits from money movement or debit interchange. If the bank and fintech company used a third-party middleware platform to facilitate the connection, that middleware firm got a cut of the profits, pressuring bank revenue even more.
By contrast, the direct model shares revenue between fewer parties, generating better financial outcomes. Olivestone says Cross River employs a similar approach: Clients can work with the bank to offer one product or service, but customers that use multiple products can package them into one attractively priced contract or use addendums to add services.
Sorbe also thinks that cutting out the middleman means that First International can be choosier when selecting nonbank partners to work with. He says potential partners include the payroll software firms Kotapay already works with, or the companies it runs payroll for, to create business-to-consumer disbursement products that go beyond paychecks. The bank is already familiar with these firms and their business models, which should help with risk management and customer risk assessments.
The bank-owned platform approach also addresses a hot topic in the partnership space: ledger reconciliation. The April 2024 bankruptcy of Synapse Financial Technologies, a third-party middleware provider for BaaS, revealed inconsistencies in the ledger across several partner banks. Customer funds have been frozen for months. In the wake of the bankruptcy filing, the Federal Deposit Insurance Corp. proposed a rule in September requiring banks to reconcile the ledgers of their third-party programs daily, even if they don’t control the ledger.
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