Not all BaaS partnerships are created equal

Not all fintech and bank partnerships — especially banking-as-a-service ones — are created equal. This was made clear by the recent Synapse failure and bankruptcy, which has left many of the fintech's customers unable to access their savings. .As an advocate for educating consumers about healthy financial behaviors and the importance of saving, I'm struck by the fallout. And as a fintech founder and former bank leader, I think it's unfortunate to see another company fail. However, the fact that this failure has the potential to tarnish partner banking and BaaS business models in the eyes of the public — as well as regulators — means it needs to be addressed..The crisis could cause a pendulum swing, causing regulators to overcorrect on a failure that should not have happened. Companies that are doing things the right way and genuinely focused on improving financial services and access to banking products should not be penalized. We cannot allow a few bad actors to cause panic. Many fintech and banking partnerships contribute to innovation, leading to greater financial inclusivity, which is possible to accomplish compliantly and sustainably. .Lessons learned (so far) .There is a vast difference between a BaaS "sponsor" bank and a fintech/bank partnership, and right now they are being lumped together. Fintech and bank partnerships have occurred since the beginning of bank technology. .Banks do not build most of their tech; instead, they buy it from fintech partners. A sponsor bank is a relatively new type of relationship. A sponsor bank offers to be the bank underneath the fintech companies, or the bank sponsoring the fintech's banking services. This model can work, but presents inherent risk, as the bank is the regulated entity while the fintech is in the driver's seat. This can create confusion about who to blame when controls break down. Regardless of the model, banking is not Amazon or Uber. .Banks and fintechs must have controls in place and uphold the highest of standards. Breaking things or pushing the limits of regulation is not a differentiator. Banks should always hold their partners responsible for maintaining the standard they are held to, as it's their charter at risk if adequate controls are not upheld. The fintech should be capable of providing the bank with documentation to regulators that risk management and compliance protocols are functioning as they should. For fintechs that onboard new accounts and accept deposits, this means that all standards that have been long established must be followed, including KYC, fraud and AML controls. .Partner banks should always have For the Benefit of (FBO) accounts in their control, rather than the fintech. Banks must also have visibility into each individual end-user account. Banks should avoid scenarios where funds from multiple fintechs or different bank programs are commingled in a shared FBO. At Plinqit, we never do this. Each of our bank partners has its own FBO, which eliminates any reconciliation issues. .Lastly, fintech teams must have banking experience on their leadership team. Having a CEO, CFO and CTO who do not have real-world banking experience will lead to risk. If the founding team lacks a banking background, ensure they have legal and compliance oversight from people who do understand the industry. .Teams with previous banking experience will understand the nuances of risk and regulatory compliance, and how their technology fits into an institution's risk management framework. This helps a bank strike the right balance between oversight of third-party risk while leveraging the growth opportunities a fintech can offer. It's partnerships like these that can provide a blueprint for how BaaS should function and be regulated. Industry best practices can be developed as well, which will help banks, fintechs and their customers reap the benefits of bank and fintech partnerships..Who's responsible for what? .Bank and fintech partnerships play a vital role in a thriving financial services ecosystem, but recent events have shown the challenges of managing fintech partnerships. .In an interview with PYMNTS, Jim McCarthy, CEO of Thredd, noted, "Too many people are focused on the 'as a service' part — but have 'minored' in the banking part, if at all … if you're going to play in that space, I'd argue that if you fail at the banking, the service piece doesn't matter." .He's right. Fintechs have to be cognizant of their obligations to their bank partners, especially from a compliance and risk management standpoint. Banks are well-versed in the areas of compliance and risk management, and leaning in to their expertise makes a stronger partnership. Meanwhile, fintechs are rightly known for their product innovation, strong marketing, sleek onboarding workflows, and as a result, the ability to generate deposits quickly. .With competition for deposits still fierce among financial institutions of all sizes, fintech and BaaS partnerships have been on the rise. According to S&P Global, in 2023 banks offering BaaS outpaced peers on quarterly deposit growth by 2.2 percent while the rest of the U.S. banks below $10 billion in assets saw deposits decline by 0.8 percent..There's still a future for the space, and there needs to be. We do not need to let this pendulum swing so far that we forget many companies have been operating in this space for decades. .However, to navigate fintech partnerships amid increased regulatory scrutiny following the recent events, banks should consider how they evaluate potential partners and continue their oversight of the relationship moving forward. There should be transparency throughout to ensure all parties are aligned as regulatory expectations become clearer and best practices for managing these programs are established. .By addressing the challenges of bank-fintech partnerships and BaaS, we can create a brighter financial future. However, broadly discouraging partnerships between banks and fintechs as the issues with Synapse and its partners shake out is not the answer either. Without strong bank and fintech partnerships, the future of financial services looks much dimmer..Kathleen Craig, a former community banker from Michigan, is founder and CEO of Plinqit, a fintech focused on customer attraction, retention and financial wellness via its savings platform.