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Banking as a Service (BaaS)

The middleware layer that turns banks into APIs—how any company can offer banking without becoming a bank

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Embedded Finance

Banks as APIs: The Abstraction Layer

Banking as a Service (BaaS) is the middleware that broke open finance. Before BaaS, if you wanted to offer banking in your app, you needed to either become a bank (multi-year regulatory nightmare) or negotiate directly with banks (18+ months of legal contracts). BaaS platforms solved this by creating an abstraction layer: banks become API endpoints.

The promise: integrate banking in weeks, not years. Call an API to create accounts, issue cards, move money. The reality: it works—until it doesn't. BaaS is the plumbing behind every neobank, embedded finance app, and fintech you use. But recent failures (Synapse bankruptcy, regulatory crackdowns) expose the fragility of this model.

The Problem BaaS Solves

Traditional banking was a walled garden. BaaS turned it into infrastructure.

Before BaaS (Pre-2015)

• Get bank charter: 3+ years, $50M+ capital

• Or partner directly with banks: 18-month negotiations

• Build entire banking stack from scratch

• Navigate compliance solo (regulators per state)

• Result: Only big companies could do it

After BaaS (2015+)

• Integrate API: 3-6 months, $100K setup

• BaaS handles bank partnerships behind scenes

• Pre-built banking primitives (accounts, cards, transfers)

• Compliance-as-a-service (KYC/AML automated)

• Result: Any startup can offer banking

🔑The Core Insight

BaaS doesn't replace banks—it commoditizes them. Banks provide the charter and balance sheet. BaaS platforms provide the technology and developer experience. Applications provide the brand and customers. It's a three-layer cake where the middle layer (BaaS) captured most of the value... until regulators noticed.

The BaaS Value Chain

Every BaaS transaction flows through three layers. Each adds value and takes a cut:

🏛️

Layer 1: Partner Bank

Holds the charter, FDIC insurance, regulatory relationship. Takes 10-20% of revenue. Example: Sutton Bank powers Chime.

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⚙️

Layer 2: BaaS Platform

Provides APIs, developer tools, compliance orchestration. Takes 20-40% of revenue. Example: Stripe Treasury, Unit.co.

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📱

Layer 3: Application

Customer-facing brand. Owns user relationship. Takes 40-70% of revenue. Example: Shopify, Mercury, Brex.

The dynamic: Applications capture most value (they own customers). BaaS platforms compete for applications (commoditizing). Partner banks are becoming dumb pipes (regulators trying to fix this).

The Economics: Who Really Wins?

BaaS promised to democratize banking. But the revenue split reveals who actually profits:

40-70%

Revenue Share

Applications Win

• Own customer relationship

• Control brand & pricing

• Can switch BaaS providers

Example: Shopify earns $500M+ annually from Balance

20-40%

Revenue Share

BaaS Platforms Compete

• Fierce price competition

• High customer acquisition cost

• Thin margins (15-25%)

Risk: Commoditization race to bottom

10-20%

Revenue Share

Banks Lose Power

• Smallest revenue share

• Highest regulatory risk

• Becoming "dumb pipes"

Result: Many banks exiting BaaS

The irony: BaaS was supposed to "democratize banking." Instead, it created a new oligopoly where 3-4 platforms control access to banking infrastructure. Power shifted from banks to tech companies—just different gatekeepers.