BaaS Is Dead, Viva BPPaaS & CPaaS
Happy Wednesday, Fintech Listeners!
I hope your week is going well.
In the midst of some truly alarming bits of news (like this and this), it’s worth pointing out that NASA just successfully sent humans to orbit the moon (and take some kickass photos!), setting the stage for a moon landing in 2028, and laying the groundwork for future missions to Mars.
This is so incredibly cool. What a time to be alive, and what a great reminder of what humans can accomplish when we set our sights on seemingly impossible goals.
We can solve hard problems. And we will continue to do so. To quote Ryan Gosling, the future is something to be figured out, not feared.
— Alex
P.S. — We are nearly at capacity for our upcoming NYC event. If you’re a bank exec with an eye on AI, consider joining us!
3 BIG IDEAS FROM THE PODCAST
This week on the Fintech Takes podcast, I got to sit down again with Jason Henrichs, CEO of Alloy Labs and co-host of the Breaking Banks podcast, this time for a conversation about the future of bank-fintech partnerships.
It’s easy to reduce this topic down to one acronym — BaaS — and we have certainly been guilty, here at Fintech Takes, of focusing a lot on BaaS over the last couple of years (BaaS Island!!!).
However, as Mr. Henrichs reminds us in this episode, BaaS is just one part of a much larger and more diverse universe of bank-fintech partnership models.
In our conversation, we talked about several of those models (Jason introduced a few new acronyms for us to use to describe them more accurately), the impact of the availability of bank charters on partner banks, and why the future of banking depends on breaking customers’ addiction to seemingly free products.
And at the end of today’s episode, I was delighted to be joined by AJ Clark and Tom Johnson, two startup advisors and members of the Fintech Takes Network, for a quick conversation about what's happening on the ground inside banks and fintech startups and why deeper, slower conversations are often the prerequisite for real partnership. They also provide a preview of the upcoming Fintech Frontier Summit, a small, curated gathering in Montana that AJ and Tom are helping to organize in late May/early June.
Tune in for the full conversation here
And read below for my three big ideas...
#1: Why Partnering to Get a Charter is FrustratingCopy anchor linkCopied
Jason coined two new acronyms as more precise alternatives to BaaS in the course of our conversation, and I think they're useful.
BPPaaS: Bank Product Partnership as a Service: A fintech company builds a product. A bank partners with them to distribute it to its customers. The fintech company sits behind the scenes. The bank controls the relationship with the end customers.
CPaaS: Charter Partnership as a Service: A fintech company wants access to a bank’s regulated infrastructure (charter, access to payments infrastructure, etc.) in order to deliver its products to end customers. The bank sits behind the scenes, and the fintech company controls the relationship with the end customers.
These two frameworks aren’t variations on the same thing. They have different regulatory footprints, failure modes, and economic structures. And the distinction is meaningful at the moment because regulators have spent years lumping everything under "BaaS" or "partnership banking" or “embedded finance,” which has made it harder to diagnose what's broken in the model to rectify it.
The frustration inside CPaaS arrangements is specific and real. Jason lived it at Perk Street (circa 2010): a regulator would flag something in a supervisory exam, the bank would tell the fintech company something needed to change, but because the exam findings were considered confidential, the fintech company couldn't hear the specifics, couldn't push back, and couldn't even fully understand what they were being asked to fix. They were accountable for a problem they weren’t allowed to see.
That dynamic helps explain why so many fintech and crypto companies are now exploring bank charters.
#2: More 90-Year-Olds Than 19-Year-OldsCopy anchor linkCopied
When Jason and the Alloy Labs member banks did a deep dive on their customer demographics, asking what they needed from fintech partnerships, they didn't find teenagers. They found the other end of the age spectrum.
One community bank (with billions of dollars in assets) had more 90-year-olds than 19-year-olds in its customer base.
The number one driver of customer attrition for this bank was death.
The insight that followed was about the sandwich generation: people in their 40s and 50s who are simultaneously raising children and managing the finances of aging parents. This group concentrates wealth, small business relationships, and deposits across multiple silos inside a bank. And they are dealing with an urgent, underserved problem.
That's what led Alloy Labs to partner with Carefull. Carefull monitors older adults' accounts for the financial fingerprints of cognitive decline, and their ambitions are bigger than catching duplicate subscriptions.
Jason shared a couple of anecdotes from his own life to illustrate the customer need. His father had three simultaneous Time magazine subscriptions because he kept filling out the postcard, and the cancellations weren't processed in time. In another instance, scammers had set up a recurring charge on his father’s credit card that required a physical letter to the FTC to stop.
These are the kinds of things Carefull, which is now doing BPPaaS with banks like Synovus, is trying to identify and stop. Their goal is to help adult children identify and eliminate risks before they compound.
Banks like to tell stories about the importance of trust. Carefull is what trust looks like when you turn it into a product.
The distribution opportunity runs through community and regional banks that have the older customer relationships and lots of built-up brand equity, but haven't built anything with it yet …
#3: How Do We Balance Out Conflicting Incentives?Copy anchor linkCopied
Jason closed our conversation with an interesting take he hadn't fully worked out yet. He shared it anyway, and I'm glad he did.
The setup: banks focus so much on maximizing net interest margin, and they spend so much time trying to optimize the revenue-generating side of the equation (lending) that the deposits and payments sides of the business often become secondary.
Fintech companies land on the other end of the continuum. Driven by the incentives of venture capital investors, they optimize for growth curves, engagement, and whatever metric unlocks the next round. They tend to obsess over the experience of using deposits and payments products, but don’t think much about revenue generation or profitability.
Jason’s instinct is that we need something in the middle. Something that can balance out the bank incentive to maximize revenue with the fintech incentive to maximize engagement.
Both are needed, but in balance.
How do we achieve that balance?
Well, Jason has some ideas (and so do I), but we did not share them in this podcast.
If you’d like to hear them, consider applying to attend the Fintech Frontier Summit (if you do apply, let me know and I’ll put in a good word for you!)
WHAT I'M LISTENING TO
#1: Closing Credits: Margin Call (Bank Nerd Corner) 🎧 Copy anchor linkCopied
This is a great idea for a recurring podcast, especially because Kiah is joined in the endeavour by the wonderful Catherine Leffert.
Margin Call is a great choice for the first one. I find it to be oddly timeless, despite the specific time and conditions in which it was made.
“And please, speak as you might to a young child. Or a golden retriever. It wasn't brains that brought me here; I assure you that.”
#2: An AI state of the union: We’ve passed the inflection point, dark factories are coming, and automation timelines (Lenny’s Podcast) 🎧Copy anchor linkCopied
I always enjoy Lenny’s Podcast (even though I’m not a product leader), but this one was especially good. Simon Willison is THE guy to go to on all questions relating to AI coding.
Fascinating stuff.
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
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