Leaked Treasury Prime Docs Show Risks Of BaaS Business: Churn, Concentration, Slowing Growth
Unit Loses Another Bank Partner, Green Dot Previews Consent Order, ONE Quietly Racks Up State Licenses, Chime Fined $2.5 Million For Customer Service "Mistakes"
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Leaked Treasury Prime Docs Show Risks Of BaaS Business: Churn, Concentration, Slowing Growth
Last week, banking-as-a-service middleware platform Treasury Prime announced a strategy pivot to focus on what it describes as a “bank-direct product.”
Treasury Prime describes the new offering as something that “will empower banks to support the entire lifecycle of a direct relationship with a fintech customer, including the sales, onboarding, management, and support of that partnership.”
Prior to the announcement, sources told Fintech Business Weekly the strategy refinement was in response to what has become a clear regulatory preference for banks to have more direct oversight and control over their fintech programs.
Treasury Prime’s blog on the shift bears this out, saying:
“[B]anking regulators are carefully scrutinizing fintech partner banks, shutting down fintech partnerships, and issuing consent decrees. Reading between the lines – or sometimes the lines themselves – regulators want banking institutions, not intermediaries, to have direct oversight of their fintech partners.”
Treasury Prime’s shift to focus on selling to banks marks a departure from its historic strategy of focusing on fintechs and then working to match them with a partner bank in the company’s network.
Not mentioned in the announcement is that the realignment facilitated Treasury Prime cutting about 50% of its 90 or so employees, as first reported by me on LinkedIn and X and later confirmed by other outlets.
The strategy shift and layoffs are reflective of the continued challenging environment facing all of fintech, but especially casts doubt on the viability of middleware platforms as standalone businesses.
Internal Treasury Prime documents shared with and reviewed by Fintech Business Weekly offer additional context on Treasury Prime’s successes and the challenges it is facing.
The middleware business model is ultimately a scale game in which a handful of key fintech clients often drive a disproportionate share of platform volume and revenue.
According to internal documents, Treasury Prime ended 2023 with 54 fintechs active on its platform and 24 booked but not yet live clients. In the four months through December 2023, Treasury Prime averaged two new fintech client bookings per month but churned on average one client per month.
The company ended 2023 with $17.4 million in annual recurring revenue (ARR), where ARR includes live-contracted ARR, booked-contracted ARR, and annualized run-rate usage revenue based on the most recent month.
The $17.4 million ARR achieved in December 2023 represented about 55% growth over the December prior, at which time Treasury Prime’s ARR was $11.2 million, though it’s worth noting a growing portion of that ARR is from booked-contracted revenue, as opposed to live clients. Fifty-five percent ARR growth is certainly nothing to sneeze at, but with the high-growth expectations in venture, the churn and concentration risk, and Treasury Primes’s burn rate, the company certainly has an uphill battle.
On average for the four months through December 2023, the company had cost of goods sold of about $555,000 and overhead of just over $2 million, driving a monthly net burn of a bit over $1.5 million. Given the sharp reduction in staffing last week, Treasury Prime’s burn rate should come down considerably.
Taking a look at the programs driving deposit volume illustrates that, despite BaaS platforms like Treasury Prime typically supporting dozens of programs, it’s often a handful of clients that account for the lion’s share of the business — posing a concentration risk, should one of those programs defect and go direct to a bank partner, as we saw when Mercury left Synapse.
Treasury Prime clients’ customers hold an aggregate of about $1.5 billion in deposits, as of the end of last year. But just shy of 60% of total deposits are from a single client, AngelList.
The combined share of AngelList and the second largest Treasury Prime client, Meow, comprise over 80% of aggregate deposits.
That’s not the only concentration problem Treasury Prime faces.
While not as stark as the deposits, just three banks — Piermont, Grasshopper, and Bangor — appear to account for a majority of Treasury Prime’s fintech clients.
This could pose a risk if the company were to lose one of these bank partners and need to migrate an impacted client to a new bank — though larger programs, including AngelList and Meow, are active on multiple banks, helping to mitigate this risk.
No matter how good Treasury Prime’s platform and sales and marketing efforts have been to date, it is still dependent on its bank partners to accept potential new fintech clients — something Treasury Prime does not have much control over. And most of these bank relationships are not growing.
The number of Treasury Prime clients on Piermont appears to have peaked in early 2023 and then steadily declined. Only Grasshopper and, more recently, Bangor Savings Bank have meaningfully seen an increase in the number of Treasury Prime clients they serve.
The banking-as-a-service space broadly — banks, middleware platforms, and the fintechs that use them — are undoubtedly going through a period of severe turmoil, as the market adapts to the dual shocks of sharply reduced VC funding for fintech and the ongoing regulatory onslaught.
The fintech/bank partnership model still isn’t going anywhere, but this is the latest data point suggesting that BaaS middleware may not be a viable stand-alone business, vs. having these capabilities integrated into a bank directly, like Column and Lead, or as part of a wider technology/core banking offering.
Representatives for Treasury Prime declined to respond to an extensive list of questions or to comment for this story.
Unit Loses Another Bank Partner
In other banking-as-a-service platform news, Unit, which works with fintechs like Cleo, Ampla, Roofstock, Relay, and numerous others, has lost another bank partner, sources with direct knowledge of the matter tell Fintech Business Weekly.
Piermont Bank will be exiting its relationship with Unit, though all fintech clients the two share will have the option to remain on Piermont.
The news is the latest setback for Unit, which has seen one of its primary partner banks, Blue Ridge Bank, move to exit banking-as-a-service altogether after receiving two enforcement actions in less than 18 months related to its activities in the space.
Unit also is parting ways with Choice Bank, though Unit never had significant volume with Choice, according to the company.
Choice entered into a consent order with the FDIC in late December, stemming from compliance and third-party risk management failures in its fintech and banking-as-a-service programs.
Green Dot Reveals Pending Regulatory Action In Quarterly Earnings
A brief disclosure in Green Dot’s recent quarterly earnings filings reveals it will be one of the next BaaS-focused banks to receive a consent order.
While not always thought of as a major bank partner for fintechs, Green Dot does work with some big names, including Apple, Walmart, Amazon, Uber, and Wealthfront, among others.
The brief disclosure reveals Green Dot has received a proposed consent order from the Federal Reserve Board and has set aside a provision of $20 million to cover the expected penalties, though it notes that it is possible, though unlikely, that losses could reach as much as $50 million (spacing adjusted and emphasis added):
Green Dot has received a proposed consent order from the Federal Reserve Board relating principally to various aspects of compliance risk management, including consumer compliance and compliance with anti-money laundering regulations.
The matters addressed in the proposed consent order relate to activities and practices that commenced prior to the company’s Chief Executive Officer transition in 2020. Included in the consent order are proposals for civil money penalties related to these issues.
While Green Dot is still in discussions with the Federal Reserve Board regarding these proposals, it has accrued as part of its GAAP financial results an estimated liability of $20 million related to the proposed consent order during the quarter ended December 31, 2023. Green Dot believes the estimate of the aggregate range of reasonably possible losses (meaning the likelihood of losses is more than remote but less than likely) is up to $50 million as of December 31, 2023.
The statement is quite brief, though we will know more once a final order eventually becomes public.
There are two things worth noting here.
One, that Green Dot goes out of its way to say the order relates to “activities and practices that commenced prior” to the current CEO’s tenure, which began in 2020. It’s not entirely clear how that reconciles with the fact that Green Dot accounts were used to siphon at least $286 million in pandemic-related relief funds through some 15,000 bogus accounts.
The second thing worth noting is that proposed orders are typically considered to be confidentially supervisory information — implying that the Fed signed off on Green Dot disclosing to investors and, by extension, the public, in its earnings statements.
Given it is quite clear by now that all three federal bank regulators are trying to make a point about bank/fintech partnerships, the Fed allowing (or encouraging) release of the information makes sense — it is likely to strengthen the industry’s perception that bank regulators have stepped up supervision of any bank engaged in BaaS-like activities.
Chime Enters Into Consent Order With Cal DFPI Over Customer Service “Mistakes”
Late last week, neobank Chime entered into a brief consent order with the California Department of Financial Protection and Innovation, stemming from an investigation the DFPI took into Chime’s consumer complaint handling between January 2020 and September 2022.
During the investigation period, the DFPI received complaints from California consumers about their Chime accounts and how Chime handled customer service interactions. Ultimately, the DFPI found that “Chime’s complaint handling violated the CCFPL with regard to, among other things, occasional mistakes that occurred in Chime’s responsiveness to those complaints.”
The DFPI found that, while there were a relatively small number of mistakes in complaint handling during the investigation period, “the mistakes were important to the affected consumers.”
Chime cooperated with the DFPI’s investigation and agreed to the consent order without admitting or denying the allegations.
The order requires Chime to pay a $2.5 million penalty, to enhance its customer service, including by making it available 24/7, and to enhance its compliance policies, procedures, and standards to ensure compliance with the order.
ONE, Walmart & Ribbit’s Neobank, Is Quietly Racking Up State Licenses
Things at ONE, the brand name used by Walmart and Ribbit Capital’s joint venture that acquired the neobank by the same name as well as earned wage access company Even Responsible Finance, have been relatively quiet.
But, behind the scenes, ONE has begun the laborious process to obtain state and local licenses that could be leveraged to originate its own credit products or to broker and service loans on behalf of other lenders, depending on the state and license.
Over the course of 2023, ONE has secured various licenses across 25 states, according to the company’s website and NMLS.
Types of licenses ONE has acquired include state lending licenses, but also collections licenses, credit services business licenses, and loan broker/loan solicitation licenses:
That ONE has begun amassing these licenses is a fairly clear indicator the company is gearing up to make a push in the consumer credit space.
The combination of license types, state lending, but also collections- and broker-related licenses, suggests that, in some states, ONE may lend under its own state-issued licenses, while in others, it may leverage a bank partner to originate loans — presumably, its current bank partner, Coastal Community.
Other Good Reads
Blue Ridge turned down M&A offer and is sticking with a recapitalization deal (S&P Global)
Bilt Rewards and the Future of Loyalty (Fintech Brainfood)
Checking the Math Behind the CFPB’s Comparison of Credit Card Interest Rates Between Large and Small Issuers (Consumer Bankers Association)
Artificial Intelligence: A Real-World Approach (FinXTech)
Listen: The Fintech OG Series: Max Levchin and Jackie Reses (This Week In Fintech)
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