Editor’s Note — This article is sponsored by Byline Bank. As with all sponsored content in Fintech Takes, this article was written, edited, and published by me, Alex Johnson. I hope you enjoy it!
Five years ago, fintech founders treated the search for bank partners the same way that they treated the search for every other piece of infrastructure that they needed to get their product to market. They prioritized speed, cost, and the developer experience. Anything that a bank did (or didn’t do) that impinged on any of those three variables was seen as a reason not to pick that particular bank.
Then the banking-as-a-service (BaaS) market melted down; numerous consent orders and other regulatory actions against BaaS banks, and, of course, the spectacular failure of Synapse, a BaaS middleware platform.
These failures left an indelible impression on a generation of fintech founders. That impression can be summarized into a single, very simple lesson: picking the wrong bank partner is an existential risk.
Even the most optimistic, early-stage founders have come to recognize that if they cut corners on this decision, they’re taking on a massive tail risk.
This shift has had a profound effect on the BaaS market.
The same developer-friendly attributes that propelled BaaS middleware platforms and their bank partners to prominence are now seen, at best, as tie-breakers in bank partnership decisions that are made, first and foremost, on the grounds of safety, compliance, and risk management.
At worst, these characteristics — a willingness to rubber-stamp any decision the fintech company wants to make, the flexibility to work around regulatory rules or internal policies, a focus on speed above all else — are seen as outright negatives.
Put simply, we are now in the midst of a flight to quality in BaaS.
And this prompts an important question: How exactly should fintech companies define “quality” in their search for bank partners?
The Floor vs. The Ceiling
Through enforcement actions, guidance, and new rulemaking (such as the FDIC’s recordkeeping rule), regulators have clarified what “good” looks like in BaaS.
To be clear, none of these clarifications should have been necessary. We knew all of it before. The floor (the minimum you need to clear to stay out of trouble) has always been obvious.
But the ceiling? That’s where things get interesting.
There is a big difference between “good” and “great” in BaaS, between a bank partner that simply avoids consent orders and a bank partner that can act, for years, or even decades, as a force multiplier for your business.
Finding “great” in BaaS isn’t just about checking all the boxes. It’s about finding the best fit. And that’s not always obvious.
As frustrating as it is, fit isn’t completely objective. There’s some subjective judgment required as well.
While tempting, it’s a mistake for banks or fintech companies to make partnership decisions based on a rigid set of quantifiable guidelines — asset size, VC dollars raised, years of experience in the industry.
This approach, while efficient, leads to too many missed opportunities. Years of experience can mean a decade and a half of doing it wrong. A lack of experience can mask a founder who has done more homework than anyone else in the room.
The better filter isn’t a longer list of rules; it’s a sharper instinct for spotting the right approach.
The Right Approach
So, what exactly does the right approach in BaaS look like?
1. Transparency is the first tell.
Mature fintech companies understand the importance of transparency with their prospective bank partners. They’ve been through audits; they know the process. Others still hide the ball when questions get uncomfortable. A bank worth working with will demand the same transparency from itself — open books, clear documentation, and no hiding behind process when a direct answer is needed.
2. Subject matter expertise is next.
Not just knowing the product, but knowing the rules, regulations, and risks around it. On the fintech side, that means understanding regulatory obligations well enough to have a substantive risk conversation on day one.
Joe Wolsfeld, Head of Payments and Fintech Banking at Byline Bank, likes to borrow a line from Chris Stapleton: “we can jump in the water and see what floats” is a fine motto for certain things in life, but not for a fintech partner. “Speed to market remains relevant, but it can’t come at the risk of compliance and safety. These things are not mutually exclusive of each other. When all stakeholders are aligned from the start, it enables a seamless process.”
On the bank side, it’s about being able to explain (in plain language) why they do things the way they do and how they’ll adapt to the specifics of a program.
3. The willingness to push back with curiosity.
The best banks don’t reflexively say yes, and they don’t reflexively say no. They say, “Tell me more”. That’s not just a negotiation tactic; it’s a sign that the bank is looking for a way to make the right answer possible, even in a gray area, without compromising on safety, compliance, or risk management.
Once you know what these subjective markers are, the next question is where and how to apply them. That’s where discipline becomes the real differentiator.
4. The discipline to specialize.
One of the clearest patterns in BaaS bank blunders is the temptation to chase shiny objects.
Lending. Commercial deposits. International remittances. Real-time payments. Each comes with its own risk profile, its own learning curve, and its own edge cases. Small institutions that try to be the “BaaS bank for everyone” usually end up taking risks they barely understand.
Specialization is the antidote. BaaS banks that have the discipline to stay in the product areas they know the best create more flexibility when it comes to other dimensions of the partnership, which brings me to my next point.
5. Flexibility on the Who vs. the What.
Think of partner selection in terms of “who” and “what.”
When the “what” is familiar — a product the bank has already derisked — it can take more chances on the “who.” This opens the door to working with founders who may, on the surface, appear riskier (less experienced, smaller professional network, less fundraising ability, etc.) but who might, over the long run, deliver better results.
A great example from David Prochnow, Managing Director, Head of Fintech Solutions and Partner Strategy at Byline Bank is this:
“I don’t think we’ve ever sponsored a consumer-facing open-loop General Purpose Reloadable (GPR) card with a startup. It’s common — there are plenty out there — but the risk is high. By contrast, if a startup comes with an accounts payable commercial credit product disbursing funds for the State Farms of the world, where clients never touch the funds, and the management team is strong, we can get comfortable. But a brand-new startup trying to launch a consumer-facing open-loop GPR card? That’s a tough one. There’s just so much more risk attached.”
However, even the best judgment on who and what can be undermined if the relationship itself is indirect. That’s why the next factor is becoming critical
6. Insistence on direct relationships.
In the wake of Synapse’s failure, the market (and regulators, in particular) have really soured on BaaS middleware platforms that do anything beyond technical integrations. If, for example, a bank needs a middleware platform to help them acquire fintech partners, that’s a signal they can’t win those partnerships on their own.
The lowest risk models in BaaS are built on direct relationships between banks and fintech companies. Direct relationships make it possible to have the honest, iterative conversations that define sustainable, equitable partnerships.
The Regulatory Pendulum
It’s possible that regulators’ posture towards BaaS will loosen over the next few years. If that happens, some banks may sprint back to lowest-common-denominator risk management. That’s the supply-side risk in this market, and it’s real.
The guardrail is on the demand side. The best fintech companies have learned, often painfully, that regulatory enforcement actions or operational disruptions can halt product launches, block approvals, or disrupt transaction processing for months. Those scars make them cautious, even in regulatory environments where they could, technically, cut corners.
This is why, even in a looser environment, the banks that stay disciplined will be the ones that the best fintech companies seek out. And the banks that earn the business of the best fintech companies will build the most sustainably profitable BaaS businesses.
The flight to quality in BaaS isn’t going to reverse itself anytime soon. Banks and fintech companies that want to succeed need to learn to navigate it.
