Direct. 

Indirect. 

Truly direct. 

In the context of Banking-as-a-Service (BaaS) partnership models, what do these three have in common?

Answer: None of them describes a partnership model that inherently addresses bank examiners’ concerns about the safety and soundness of BaaS partnerships. 

In August 2022, I wrote about how regulatory scrutiny on the weaknesses of the bank-fintech relationship was casting a shadow on the BaaS space. Since then, a handful of events have underscored the significance of the issues I raised. To highlight a few:

• Regulatory actions have targeted banks for insufficient compliance and risk management practices related to their partner banking activities, as seen with Blue Ridge Bank, Lineage Bank, and First Fed Bank. 
• Several banks and platforms have reevaluated their BaaS strategies or exited the space entirely — Metropolitan Commercial Bank (MCB) withdrew from the space, Piermont Bank discontinued its partnership with Unit, and Treasury Prime pivoted to a “bank-direct” model. 
• Operational breakdowns plagued Synapse and Evolve Bank & Trust’s relationship, Choice Financial Group (Choice) entered into a consent order, and CBW Bank (CBW) is for sale. 

With each new consent order or negative news report, the supervisory directive seemed straightforward: Banks must ensure these partnerships do not adversely impact the banks’ ability to manage risk and fulfill compliance obligations.

However, a new narrative is emerging in panel discussions, industry thinkpieces, and my LinkedIn feed. A narrative built around the concepts of “indirect”, “direct”, and even “truly direct” partnerships. The narrative is that regulators are cracking down on “indirect” BaaS partnerships and demanding “direct” relationships between banks and fintechs. Presumably, regulators are also giving top marks for “truly direct” partnerships? 

This perspective misses the point and creates a dangerous misdirection in the market.