After Spending Years Criticizing The Approach, Unit Now Says It Was Really "Direct" All Along
Synctera Lays Off 15% Amid SaaS Pivot, Another Evolve Client Hit With FDIC Cease & Desist
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Working with banks is hard. Especially the banks most likely to partner with early-stage fintech companies. Their technology tends to be legacy, from core providers like FIS or Jack Henry, and banking culture often focuses on risk management — not innovation.
This was the market opportunity identified by banking-as-a-service platforms like Unit: by abstracting away the most difficult pieces of partnering with a bank, they could, the argument went, dramatically improve time- and cost-to-market.
For Unit, realizing this vision meant finding a bank partner that was comfortable with the company taking more control.
In a 2021 interview, Unit cofounder and CEO Itai Damati acknowledged the difficulty in finding a bank willing to work with the company, saying he spoke to 50 banks before finding one willing to work with him, given the operating model “puts a decent amount of responsibility on Unit as the point of compliance.”
Another 2021 interview with TechCrunch, when the company announced its Series B, is revealing in how Unit and Damati thought about their bank partners, describing them as “critical vendors,” when, legally speaking, the exact opposite is the case:
“We are acting as a company that connects banks to the tech ecosystem and banks are critical vendors and partners to us, but we see them as a built-in element within Unit, because we believe that the most excellent experience in this ecosystem can only come from software companies.”
At the time it launched in 2020, Unit defined its offering in comparison to other fintech/bank partnership models.
In a November 2020 blog post that has since been scrubbed from its site, the company laid out three approaches: working directly with a bank, like The Bancorp, working with a bank and technology middleware, like Galileo, or working with a platform that does the “heavy lifting” of “managing a bank relationship, investing in tech and investing in compliance,” like Unit:
In fact, Unit spent years characterizing working “directly” with banks as slow, expensive, requiring extensive engineering resources, requiring 10 to as many as 50 dedicated staffers, including a chief compliance officer, and being vulnerable to “slow downs” and changes in a bank partner’s business model.
By contrast, Unit claimed that its platform — which it described at the time as “indirect” — could eliminate “90-95% of the enormous complexity and costs” from “working directly with a bank.”
Unit marketed to prospective fintechs that (emphasis added) “[b]uilding on Unit means that you tap into our set of banking relationships, but without the need to work directly with them.”
At the time, Unit put itself in the same category as now-troubled BaaS platform Synapse as fulfilling the role of “program manager,” thereby absorbing the day-to-day complexity and purportedly enabling its fintech clients (emphasis added) “to operate a fully compliant product, but without dedicated compliance hires and with only a fraction of the compliance requirements that banks typically make.”
Unit described itself as coming with a “compliance team built-in” that “own[ed] KYC, AML, fraud, and other compliance responsibilities for you so you don’t need to.”
Unit also described itself as “owning” the bank relationship, enabling its customer-facing fintech clients to “spend less time interacting with partner banks.”
Why The Pivot To Claiming To Be “Direct”?
By fall of 2022, the behind-the-scenes stress in banking-as-a-service spilled into public view as Blue Ridge — Unit’s bank partner — was hit with a wide-ranging consent order stemming from its BaaS programs.
Unit presumably had some inclination of regulators’ changing sentiment towards bank/fintech partnerships, in general, and middleware platforms like Unit that take on program management responsibilities, specifically.
Matters only intensified after Blue Ridge’s first consent order: numerous other BaaS-related consent orders — including a second one for Blue Ridge and another Unit partner, Choice Bank — followed, bank regulators released joint guidance on third-party risk management, the Fed and OCC launched “novel activities” programs to more closely examine “complex, technology-driven” partnerships, and Acting Comptroller Hsu begin referring to risks in the “supply chain” of bank/fintech partnerships.
Increasingly, the writing was on the wall that bank/fintech partnerships that were “intermediated” by middleware players like Unit had targets on their backs.
It quickly became conventional wisdom that “direct” partnerships, in which banks sourced, did their own due diligence, and oversaw fintech programs themselves were more likely to withstand regulatory scrutiny.
For BaaS platforms, including Unit, the shift has called into question their reason for existing.
Unit spent years painting the “direct” model as flawed, slow, and expensive, and its approach as faster and cheaper — including for its bank partners, as Unit promised to pick up the compliance lift of overseeing their fintech programs.
Some in the space, like Treasury Prime, have acknowledged this and drew a line in the sand by explicitly refocusing on selling software to banks, taking the short-term pain of refactoring its business and operating model, including layoffs of staff no longer needed in the new approach.
Unit has taken a different strategy by trying to re-write history.
Around mid-2022, based on reviews of archived versions of its website, Unit began softening its language around “owning” compliance, rephrasing to say the company “streamlines” compliance.
And by the beginning of 2024, Unit began describing its model as “direct” — and claiming that had always been the case:
When news broke that one-time Unit partner Piermont Bank was ending its partnership with the platform in favor of “direct” relationships, a Unit go-to-market leader went further, claiming that Unit has “always” enabled direct relationships and wouldn’t be changing anything material about its product strategy, saying in part (emphasis added):
“The recent news about Unit and some of our bank partners making decisions to part ways are correct! It’s also why we have multiple Unit bank partners and can easily migrate our clients from one to another…
Unit has always enabled and enforced a direct bank relationship with every single client. Every. Single. One. We sign triparty agreements and they have direct access to one another…
We will not be changing anything material about our product strategy, but rather keeping our heads down and continuing to grind working on our product and making it simple for our clients to embedded banking and lending into their platforms.”
Being able to “easily migrate [their] clients” implies that customer-facing fintechs are clients of Unit, rather than of their bank partners, as would be the case in a truly “direct” model.
And in a blog post released late Saturday, Unit CEO Itai Damati doubled down on the misleading claim that “Unit has always facilitated direct relationships between banks and the companies they work with.”
To be fair to Unit, describing a bank/fintech relationship as either “direct” or not is an oversimplification — there are numerous facets to these relationships and the role third-party vendors like Unit may play.
There are at least three areas of interaction to consider, including legal relationships/contracting, technology, and operating model (eg, who is doing business development, sales, onboarding and first-line oversight of fintech partners?)
Unit’s attempt to re-write history and describe itself as always having been direct seems to hinge on their tri-party contracting model, in which customer-facing fintechs have direct agreements with their bank partner(s) and with Unit, and that fintechs were able — though not necessarily encouraged — to have direct lines of communication with their bank partner(s).
It’s not quite clear where this all leaves Unit today.
Despite using the word “direct” at every conceivable opportunity to describe itself, the company has been anything but transparent around what, if anything, has changed or will change. (Unit’s emergency blog post released late Saturday evening, published several days after Fintech Business Weekly sent the company extensive context and questions, attempts to answer some of the concerns raised by this piece.)
It continues to describe its platform as bringing bank partnerships to its potential fintech clients, enabling them to “spend less time interacting with partner banks” and continues to market itself as “streamlining” compliance.
Despite the headwinds, offering compliance capabilities to customer-facing fintech clients both makes them stickier and has been an important source of differentiation and revenue for Unit.
And VC-backed Unit’s goal presumably is to continue growing quickly by onboarding more fintech clients — if its bank partners must themselves carry out compliance and oversight of customer-facing fintechs, that is likely to become a serious constraint on how quickly Unit and its fintech clients are able to grow.
Unit’s Comms Strategy Is A Self-Inflicted Wound
Perhaps the most confounding aspect of the situation Unit has gotten itself into is that it is a communications morass of its own making.
It would have been straightforward enough to acknowledge the market and regulatory climate had shifted since the company was founded in 2019 — that it had heard feedback from partner banks, their regulators, and fintech clients, and that it was making the difficult and painful but necessary changes to respond to this reality.
Instead, the company and its executives appear to be attempting to hoodwink the market into believing the company is and has always enabled “direct” relationships between fintechs and banks — undermining their credibility at a time when they need it most.
Why pursue this strategy? Unit is surely juggling a lot of stakeholders whose interests may or may not be aligned: current and prospective bank partners, current and prospective fintech clients, bank regulators, its VC investors, and its employees.
The message that Unit is and always was “direct” is certainly an easier one to deliver, if inaccurate, than the complicated reality the company and its partners must now navigate.
Unit has lost three bank partners in rapid succession and needs to calm the nerves of the ones it has left and any prospective partners in its pipeline.
Its current fintech clients were promised — and are presumably paying for — Unit to “own” the compliance burden; renegotiating those relationships will be no easy task.
Its investors don’t want to see an adverse impact to the financials of the company, which was valued at $1.2 billion when it announced its $100 million Series C nearly two years ago, back in May 2022.
And Unit’s employees, especially the ones carrying out those compliance functions, have no doubt nervously watched as competitors in the space, including Synapse and Treasury Prime, conducted mass layoffs as the business model continues to come under increasing pressure.
In statement sent via email late Saturday, Unit CEO Itai Damati said in part:
“In the past we haven’t been as precise as we could have been about describing ourselves. We have taken steps to correct that in our public-facing materials. We have started using more consistent definitions that we describe here. We appreciate the opportunity to clarify the work we do with banks in support of our mission: expanding access to high-quality financial services.”
Have a tip about Unit? Reach me on a confidential basis via secure messaging app Signal at +1-316-512-1571.
Evolve Bank & Trust Client PrizePool Hit With Cease & Desist For Misleading Deposit Insurance Claims
PrizePool, a banking startup that uses prize-linked savings mechanisms to encourage responsible financial behavior, received a notice from the FDIC demanding that it cease make potentially false or misleading claims about deposit insurance coverage.
PrizePool partners with Evolve Bank & Trust to hold insured customer deposits — and PrizePool isn’t the first Evolve fintech client to get in trouble for making deceptive deposit insurance claims.
The FDIC’s letter states numerous instances on PrizePool’s website and other media that misrepresented its deposit insurance status, including:
PrizePool indicates on its website that the returns (of 4.5% - 6.5% or more) promised on its “Stacked” savings account are FDIC-insured and are “risk-free.”
PrizePool states on its website that its customers’ deposits are “FDIC-insured up to $500k.”
On the company’s Instagram account, PrizePool has stated “Accounts are FDIC-insured up to $500K.”
PrizePool suggests on its website that its customers’ deposits are protected as against all forms of loss up to $500,000 by saying “100% Secure. 100% FDIC-Insured.”
PrizePool advertises its “Stacked” sweepstakes and savings product, for which customers pay $10 per month, is “FDIC-insured by Evolve Bank & Trust.”
On the company’s Instagram account, PrizePool has advertised the “Stacked” sweepstakes prizes as “FDIC-insured.”
PrizePool features customer “testimonials” on its website that state that PrizePool is a “member of the FDIC,” and that PrizePool itself is “FDIC-insured.”
Other testimonials on the PrizePool website indicate that sweepstakes and investment earnings are insured by the FDIC as against all forms of loss.
PrizePool’s Instagram and TikTok accounts feature similar testimonials, in which putative customers encourage users to invest in PrizePool on the ground that it is a completely risk- free investment owing to its FDIC-insured status.
The FDIC’s cease and desist demands the immediate removal of any and all statements that may misleadingly suggest that PrizePool itself is FDIC-insured, that deposit insurance protects against anything other than the failure of an insured depository institution, or that FDIC insurance provides coverage in any manner or extent other than that which is described in the FDI Act.
That fintechs are still making this kind of unforced and easily avoidable error — in 2024, after numerous other companies have been cited for similar violations — is truly astounding to me.
That PrizePool’s underlying bank partner, Evolve Bank & Trust, appears to continue to be unable to exercise basic oversight of its third-party programs, at a time when bank regulators are putting such bank/fintech partnerships under a microscope, is truly astonishing.
Synctera Lays Off About 15% Of Staff Amid “New Focus” On SaaS Solutions For Banks & Fintechs
Multiple sources have confirmed that banking-as-a-service platform Synctera, which announced it had raised an additional $18.6 million earlier this month, has laid off 17 people, or about 15% of its staff, based on the total number of employees listed on LinkedIn.
The layoffs come amid the wider middleware and partner bank turmoil, which has seen Treasury Prime conduct significant layoffs and pivot to focus on selling software to banks and troubled platform Synapse cut at least 40% of its workforce as it struggles to find a buyer.
Synctera cofounder and CEO Peter Hazlehurst communicated the decision to employees, characterizing the one-time layoffs as a necessary part of a “plan to restructure the company,” which includes a “new focus” on selling software-as-a-service solutions for fintechs and banks.
The $18.6 million round announced earlier this month was actually closed in November, according to sources with knowledge of the matter. The additional funding and reduced burn post-layoffs should help considerably lengthen the company’s runway.
Asked about the layoffs, a company spokesperson told Fintech Business Weekly, “Synctera has conducted a restructuring of the company that resulted in a reduction in staff and we are dedicated to assisting those who are impacted. We are committed to our current line of business along with the addition of SaaS offerings for banks and companies.”
Other Good Reads
Credit Decisioning’s OS Moment (Fintech Takes)
Regulators Focus on Digital Banking’s BSA/AML Compliance Issues (FinXTech)
Debate Over. Fintech Has Disrupted Banking. (Fintech Brainfood)
The 80/20 of how to work with multiple bank sponsors (Fintech Compliance Chronicles)
Listen: Interview with Alloy CEO Tommy Nicholas (Fintech Business Weekly)
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