What do recent bank deals say about future of BaaS?

Two recent bank deals perhaps point the way forward with respect to banks and technology. The Equity Bancshares deal to purchase Lincoln Bancorp may be a reality check on the viability of the banking- as-a-service business model for banks, while the Chime deal to buy Stride Bank is another example of the value of the bank charter to aggressive fintechs. .On Sept. 3, Equity Bancshares, Inc., of Wichita, Kan., announced it is purchasing Lincoln Bancorp., which owns Lincoln Savings Bank in Reinbeck, Iowa. Only three years ago, the $1.7 billion Lincoln Savings Bank was the posterboy for banking-as-a-service, an early entrant into the space through its LSBX division. Equity is paying LSB shareholders a bonus of as much as $750,000 if they can wind down the LSBX operations before Dec. 21. Equity is clearly interested in Lincoln’s branch network, which covers good portions of Des Moines and Waterloo. But the non-traditional part of Lincoln, which was regularly in the news a few years ago, got no mention in the merger press release. The bonus for the LSBX wind down was buried in the small type of Form 8-K filed with the SEC. This is quite a turn of events for a bank that was a leader in the BaaS business model.In spring of 2023, Erik Skovgard, president of Lincoln Savings Bank at the time, shared the LSBX story at a Bank Holding Company Association seminar. LSBX partnered with fintechs, often facilitating the savings accounts fintechs offered to their customers. LSBX customers included CashApp, a partnership that sparked a massive increase in the number of LSB customers to more than three million from 18,000. LSBX also worked with Square and mobile banking platform MoneyLion.LSBX generated revenue with zero-interest-rate deposits, shared interchange fees, and fees it charged fintech partners and core processors. Skovgard stressed the importance of regulatory compliance in the BaaS space, but said that even while it serviced customers in all 50 states, it was working to preserve its community bank feel.Skovgard, however, suddenly resigned from the bank, just six weeks after addressing the BHCA. Skovgard, who had worked for the bank since 1994, had been CEO and president since 2014. At the end of 2023, the bank hired Sean Willett as CEO. He had been chief administration officer for the $6.1 billion Five Star Bank, which is based in Rochester, N.Y. While Willett was an experienced relationship banker, he also had experience working with emerging fintechs.But as of the merger announcement, it looks like all that tech froth is going away. Brad Elliott, Equity’s chairman and CEO, stressed the deal’s potential for expanding Equity’s traditional banking business. “This partnership marks an important step in our long-term strategy for Iowa,” said Elliott. Equity Bancshares is an active acquirer, having completed 27 deals since its founding in 2002.Meanwhile, the Chime/Stride Bank deal shows strength of fintech business model.Chime, a San Francisco-based fintech offering low-cost banking and payment products, announced on Sept. 8 it is purchasing Stride Bank in a $590 million cash deal. Stride, which is based in Enid, Okla., has been a partner with Chime for seven years. The acquisition means that Stride will become a Chime subsidiary and will change its name to Chime Bank.Chime already claims to have 10 million customers and Stride’s national bank charter will only help it offer banking products and services more seamlessly. In its press release, Chime said “owning the bank will eliminate partner-bank fees, reduce funding cost, and improve unit economics. The combined entity will be able to serve consumers across all 50 states and expand the addressable market.”Chris Britt, CEO and co-founder of Chime, said: “By combining Chime’s leading brand and deep member relationships with Stride’s national charter and team, we will accelerate toward our vision to be the largest provider of primary bank accounts in America.”The press release stated: “The acquisition of Stride Bank provides Chime with a faster and more proven path to full-stack ownership versus pursuing a de novo bank charter.”Stride has assets of $5.4 billion, which will make Chime Bank about $7 billion. Chime said it intends to keep the bank under $10 billion in assets for the time being. Chime said the deal is expected to close in the first half of 2027.