Banks involved in complex fintech partnerships known as banking as a service, or BaaS, have had a rough couple of years, but there might be brighter days ahead.
The number of institutions offering BaaS grew rapidly several years ago as technology made it increasingly easy to enter the space. But almost as quickly, regulators increased scrutiny of these institutions, and some received enforcement actions. Additionally, fintechs and the banks that partner with them are grappling with the fallout and lost trust stemming from the Synapse Technologies’ bankruptcy.
Two major players watching this tumult are Reinbeck, Iowa-based Lincoln Savings Bank and Murray, Utah-based FinWise Bank. Both institutions have been active in BaaS for many years, making FinWise Bancorp Chairman and CEO Kent Landvatter and Lincoln Bancorp CEO Sean Willett, practically veterans in the novel business line. Landvatter and Willett join Reinventing Banking to reflect on the evolution and challenges within the banking as a service space, as well as its potential future.
“You can’t dabble in the space; you can’t put your toe in the water. You’re either in or out,” Landvatter says. “Having those crucial discussions with your board on what you think the direction of the bank should be and where you should be putting your resources — to me — is primary before entering into the space.”
Finwise and Lincoln Savings specialize in two different areas of BaaS. FinWise added a lending-focused BaaS line in 2016 and now partners with companies such as private student lenders Stride Funding and Earnest, as well as consumer lender PowerPay. On the other side, Lincoln Savings Bank began deposit partnerships with nonbanks starting in 2014 and now works with companies such as Acorns and MoneyLion, both personal finance platforms. Both CEOs say they’ve had to grapple with the complexity that comes with expanding their product set through partners and the compliance challenges that come with more customers.
The outlook for BaaS banks like FinWise and Lincoln Savings could depend on the bent of regulators and lawmakers in Washington and how they’ll define responsible innovation, they say. At the same time, they attribute their success in the space — when other institutions have received enforcement actions or decided to exit — to their focus on compliance and risk management, as well as building good working relationships with regulators. Willet sees this as a competitive advantage for institutions like Lincoln Savings.
“A lot of us bemoan the regulators and the regulatory environment,” Willett says. “I look at it as … an opportunity, of deepening the moat, for banks that are serious about the space, because it does keep folks on the sidelines.”
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