You probably heard that last week, Stripe announced Stripe Treasury, an API driven banking service on top of Stripe's core payments services. Stripe has always been at the forefront of new technology, and while they aren't the first fintech to introduce banking as a service, their entrance to the scene is sure to set off a wave of adoption. So what is Banking-as-a-Service? And why do we think it isn't just the future, but a beautiful way to recycle an aging industry.
Banking-as-a-Service (BaaS for short) is the offering of financial products, that otherwise would be obtained through a bank, via a technology company or startup. First things first, BaaS companies are not banks, they are not fiduciaries and don't have a banking charter so they legally are not able to hold deposits. But what has happened is an interesting trend in which the banking industry has innovated without having to actually innovate. How you ask?
Let's take Stripe Treasury as an example. Through their API you can apply for a create a checking account where your Stripe payments can be deposited for quick and easy access to use that cash flow. Now while Stripe makes it easy to create the account and has built a slick UI for you to view it and manage your money, that is not a "Stripe" bank account. Stripe is operating as what is called a "Bank Agent", essentially they have a partnership (in this case with Goldman Sachs) to create deposit accounts on their behalf and enable users to deposit cash into it. Long story short, it is a Goldman Sachs business checking account with some Stripe lipstick on it.
Now what is awesome about that arrangement is it an amazing innovation for two companies to bring you, the consumer, an amazing product. Stripe gets access to new features that will drive user adoption, customer retention, and keep you within their ecosystem. Goldman Sachs, one of the old monarchs of Wall St, get's a much needed tech makeover without having to completely re-invent themselves, plus it gives them access to a new batch of deposits. It's a win-win, let Stripe build tech and UI that makes getting financial products for your business easy. And Goldman Sachs gets to be a bank, it's what they do.
There are plenty of other startups tackling the world of Banking-as-a-Service for different use cases. Take everyone's favorite startup credit card, Brex, they offer their Cash product which is a business checking account that is in a unified UI with your Brex Credit Card for easy expense and cashflow management. There is Square's Cash App, which offers consumers access to a cash-like debit card that is backed by a checking account where you can even direct deposit your paycheck. There are even BaaS providers tackling climate change like Aspiration which offers a checking account and debit card that helps fight climate change. They offer automatic carbon offsetting of you purchases and that your deposits will never be lent out to fossil fuel projects. Step provides a credit building checking account and Visa card to teens that has a companion app for their parents to help them manage their spending. None of them a bank.
Despite an industry giant like Stripe entering the game, we are in the early innings of the BaaS innovation curve, from industry-specific BaaS products for VC/PE Funds, Real Estate, etc. It will be amazing to watch the next decade of BaaS fintech innovation.