Sankaet Pathak, CEO of Synapse, joined Jason Mikula this week on Fintech Business Weekly a podcast that features leaders in fintech, and banking. They were joined by Shaul David, Head of Banking at Railsr and they covered a wide range of topics relating to banking as a service and regulation, including:
- How banking as a service can help bank/fintech partnerships to scale
- Why do some banking as a service platforms want to be regulated
- How to ensure customer funds are protected when a fintech (or bank, or e-money institution) fails
- Predictions for the future of banking as a service
- And more
The conversation kicked off with Sankaet answering the question, how does regulation work with customer relationships? He explained that there are BaaS point solutions and there are comprehensive solutions that handle many more services like KYC, AML, sanctions monitoring, some Reg E, and others that get baked into the BaaS platform. The accelerant for BaaS providers was the centralization of a lot of governance and control practices, which made the whole fintech layer far more scalable because there were portions of the infrastructure that were centralized. Deceptive practices, customer support, and financial fraud are still decentralized with the fintech company owning all of those areas. So some things are centralized, and some still are not. Now the industry has an absolute scale problem which is how do we scale and support this next layer of regulatory oversight?
The next question focused on how the bank in partnership with a BaaS provider ensures that regulations are upheld by the fintech and beyond. Sankaet began explaining that the regulatory framework in the US needs to evolve based on the products and services that are starting to get distributed more and more through fintech companies. The group discussed the roles and relationships between a bank and a BaaS provider calling out a more scalable model for the bank to work with the BaaS provider. Synapse is regulated with a broker-dealer license and lending licenses state by state which makes Synapse a service provider to our bank partners on the DDA products while the banks are service providers for us around card sponsorship and payment processing for cash management accounts and our credit accounts. This arrangement is more scalable because Synapse can leverage multiple banks and have direct regulatory exposure.
Jason pointed out that we’ve already seen a number of neobanks fail, so what are the kinds of steps and due diligence that BaaS providers or the underlying Banks do to safeguard customers? Synapse looks at the cash flow statements of fintechs on a regular basis, giving bank partners and subsidiaries insight to them as well. They reach out when they see problems, working closely with the company to find solutions, or send emails to customers or even checks. If all of those solutions fail, Synapse also has a portal for customers so they can access their money and withdraw it.
Responding to the final question about what Sankaet and Shaul are keeping their eye on, Sankaet had two things that he was excited about:
- Global finance provides a unified experience around financial services especially surrounding stored value that works for people in different countries.
- Multi-bank enablement makes it possible for fintechs to go live with multiple banks at the same time. As fintech companies grow and evolve, they will need additional banks because not every bank is good at everything and load balancing and redundancy are valuable.
His prediction was that more BaaS providers will seek out regulation and get their own licenses.