How to Ride Out the Waves of Banking-as-a-Service, Now and in the Future

In the world of finance and technology, the last year has been nothing short of a rollercoaster ride for Banking-as-a-Service (BaaS) businesses. From mergers to layoffs, the industry has witnessed its fair share of ups and downs. However, amidst the turbulence, large organizations are enthusiastically embracing the BaaS concept to gain competitive advantages and deliver enhanced customer value.

BaaS comes in various forms, with each offering unique opportunities and challenges. One variant involves providing bank-like services to other players within the industry. Another grants access to charters and banking services while excluding underwriting. Fintech companies that offer individual banking components without the need for a charter represent the third type.

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Michael Abbott, global banking lead at Accenture, believes that BaaS holds the potential for phenomenal growth for traditional banks. "There are proven approaches like private label and co-branding. You provide banking, consumer loans, and credit card portfolios to households, small businesses, and increasingly, corporations," he notes.

The market for BaaS is expansive and poised to witness a 15% annual growth rate, potentially reaching a staggering $66 billion by 2030. Venture financing continues to attract companies eager to tap into this burgeoning sector. Notable investments include Treasury Prime's $40 million in Series C funding, Synctera's $15 million to introduce embedded solutions in Canada, Omnio's $9.8 million infusion, and Griffin's $13.5 million raise in June.

However, the path to success in BaaS is far from smooth. Recent events have demonstrated that challenges abound. Figure Technologies, which includes Figure Pay, had to make the painful decision to lay off 20% of its staff in July. Similarly, Synapse trimmed its workforce by 18% in June.

According to Peter Hazlehurst, CEO of Synctera, the last six to 12 months saw a sobering "recognition or rationalization of those investments." BaaS startups received significant injections of venture capital in 2020 and 2021, with approximately two dozen companies entering the field during that period. However, the survival rate appears to be only around 50%.

So, how did these startups secure initial traction? Hazlehurst explains, "They used venture dollars to make irresistible deals with customers to get usage." A year ago, losing potential deals because they refused to offer services for free was a reality many faced. The market's pricing dynamics were still in flux, making profitability a challenging goal.