Banking-as-a-Service: Wrapped
Top Stories in BaaS Middleware, Partner Banking & Fintech in 2023
A Note From Jason…
Happy New Year!
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Looking back at my predictions for this year, I expected a certain amount of tumult in the banking-as-a-service space — for middleware technology platforms, partner banks, and consumer-facing fintechs alike.
As I reflected on 2023 and think about what 2024 may hold for BaaS and the wider industry, I took a moment to look back on Fintech Business Weekly’s top BaaS-related stories this year:
January saw “Moonstone Bank,” now known again as Farmington State Bank, discontinue its “innovation-focused” business model, which concentrated on serving crypto and cannabis businesses. Provident Bancorp, owner of BankProv, revealed losses in its business lending against crypto mining rigs and material weaknesses in its controls and conflicts of interest in its digital asset lending program.
In February, Transportation Alliance Bank, known as TAB, had its Community Reinvestment Act (CRA) rating downgraded because of “discriminatory or other illegal credit practices,” owing to its partnership with BNPL provider EasyPay. EasyPay offered 160% APR financing, including in Iowa, which the state’s attorney general argued violated Iowa’s usury cap, as Iowa opted out of a provision of the DIDMCA which allows for out-of-state state-chartered banks to enjoy preemption rights.
The California financial regulator, the DFPI, also asked a court to block OppFi from lending in the state, in a case that is still ongoing.
Issues with European BaaS providers also came to light, with Solaris and Railsr (formerly Railsbank) running into issues with AML compliance.
February also saw the publication of Fintech Business Weekly’s inaugural banking-as-a-service market analysis, demonstrating that BaaS business models are no quick fix for community banks, given the resources and costs necessary to execute the business model in a sustainable, compliant manner.
March rocked the fintech, banking, and wider startup world, with the abrupt collapse of Silicon Valley Bank. While not specifically BaaS-related, SVB, and other “regional” bank failures have and continue to drive financial regulators to better understand and mitigate risks in the financial system, including possible risks (and benefits) of BaaS business models.
In May, despite what we now know were fraying ties between Goldman Sachs and Apple, the companies’ savings feature launched — and garnered $1 billion of deposits in just four days, demonstrating the attractiveness of partnerships with non-bank companies that have massive reach for deposit gathering and distribution of bank-offered financial products.
Cross River, a major player in BaaS, particularly in lending partnerships, reached a consent order with the FDIC in May related to its fair lending compliance.
May also saw multiple jurisdictions cite Synapse and Evolve client SoLo Funds, an unlicensed payday lender, for deceiving borrowers and charging illegally high interest rates disguised as “donations” and “tips.” Colorado introduced a bill that would potentially block certain bank-fintech partnerships from originating high APR loans into the state.
June saw signs of stress in BaaS intensify, as middleware platform Bond was quietly acquired by FIS, as exclusively reported by Fintech Business Weekly. Bond had partnered with banks that included UMB, CBW, and Evolve.
Also in June, signs of stepped up scrutiny from the FDIC about misleading deposit insurance claims were highlighted, with Synapse and Evolve client Money Ave receiving a cease and desist order over its false and misleading claims.
The European PayrNet entity of UK-based Railsr, which partnered with Evolve in the US, had its license revoked and was forced into bankruptcy amid serious violations of Lithuanian anti-money laundering regulations.
In July, Maza, an a16z-funded startup built on top of BaaS platform Unit and bank partner Blue Ridge, was revealed to be targeting undocumented immigrants with misleading claims, including false and deceptive FDIC insurance claims.
Gaps in Stripe and Celtic’s controls were revealed by the embarrassing launch of so-called “No KYC” crypto card Laso.
And news also broke in July that Goldman Sachs was looking to offload its partnership with Apple, though, here at the end of 2023, that has yet to actually happen.
In August, the Federal Reserve announced its plan to add incremental supervision of so-called “novel activities,” which includes banks involved in crypto or blockchain, those with high concentrations in crypto or fintech, and those using “complex, technology-driven partnerships with non-banks to provide banking services,” widely interpreted as referring to banking-as-a-service.
Lineage’s heavy dependency on BaaS deposits, sourced via its relationships with Synapse and Synctera, also came to light in a deep-dive Fintech Business Weekly investigation in August.
The Smallest Bank in Tennessee Grew Fast With BaaS. Why It May Give The Entire Industry A Hangover.
In September, in light of the spring banking crisis and certain BaaS banks’ heavy reliance on fintech-sourced deposits, we considered whether or not the definition of “brokered deposits” is fit for purpose in the age of fintech. News also broke that the Fed had warned Goldman about compliance in its BaaS program.
Fintech Business Weekly also broke the story about the quiet disappearance of the OCC’s first-ever Chief Financial Technology Officer, Prashant Bhardwaj, and that a key education credential he claimed came from an unaccredited degree mill — leading to the discovery later in the year that nearly the entirety of Bhardwaj’s résumé was bogus, and calls from Congress for the OCC to explain the situation.
September also saw the explosive news that BaaS platform Solid allegedly faked its revenue numbers in order to raise its Series B, driving its lead investor, FTV, to sue the company and the founders personally in an attempt to recoup its $61 million investment.
In October, the OCC released its FY2024 supervision plan, including a continued focus on banking-as-a-service, and named long-time OCC vet Donna Murphy to helm the Office of Financial Technology.
More explosive BaaS news broke in October, with Evolve and Synapse pointing fingers at each other over some $13 million in missing customer funds — a situation that remains unresolved as the year ends.
Also in October, Solid filed a countersuit in its battle with FTV, and Synapse CEO Sankaet Pathak confirmed the company’s “reconciliation challenges” with bank partner Evolve.
October saw another BaaS-related consent order, with Metropolitan Commercial Bank facing a $30 million action from the Fed and NYDFS over AML and fraud issues with a fintech client program, Movocash.
In November, Blue Ridge, a partner of middleware platform Unit that is operating under a consent order from 2022, announced it was “exploring options” for a capital raise and continue to reduce its BaaS and fintech exposure.
November also saw explosive follow-up reporting on the OCC’s ex-fintech chief, including numerous easily disprovable claims in his résumé and multiple criminal charges. First Fed reached a consent order with the FDIC related to its partnership to power a “fintech focused on financial wellness and lifestyle protection for consumers nationwide.”
Finally, earlier this month, activist shareholders in Lineage plotted a boardroom coup to remove the entire board of directors and senior management, which was ultimately successful. Republicans in Congress sought answers from the OCC on its fake Chief Fintech Officer.
And, in what seems to be a quickly escalating battle, Mercury filed an arbitration claim and lawsuit against its former partner Synapse, seeking some $30 million it claims it is owed.
Synapse’s CEO Pathak has described Mercury’s claims as “knowingly meritless” and promised a countersuit against the company is forthcoming.
2023 has been nothing if not eventful — here’s hoping you enjoy celebrating the New Year tonight, have a day off tomorrow, and are ready for 2024!
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