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'Banking as a Service' for Fintechs Seeking Scale

Traditional logic says that when successful fintech companies reach a certain point, they need to partner with— or be acquired by— banks to gain scale.

But a German fintech company is hoping to change that by offering fintech companies a modular banking platform to build on. Last week solarisBank, formed by the fintech startup incubator FinLeap, announced it had been granted a banking license by regulators in Germany, enabling it to offer fintech companies things like account and transaction services, compliance and trust solutions, working capital financing and online loans. It is essentially banking as a service, to borrow the term tech companies use to refer to software that resides in the cloud and is delivered over the Internet.

Like most fintech companies, solarisBank is aiming to solve a problem within the existing banking system. Rather than come up with a new deposit product or a faster payments platform, its goal is to solve for the issues that fintech companies often have with in dealing with some banks: legacy systems, bureaucratic processes and a wariness over an industry looking to disrupt them.

"We're essentially saying to all manner of companies, 'We've done the hard work of getting a banking license so you don't have to,' " said Marko Wenthin, managing director at solarisBank. "If you partner with solarisBank it's really simple to enable a financial solution, so come build on our platform and realize your vision."

Some banks worry that too much collaboration with fintech would erode their relationships with people and that they would become relegated to the plumbing of the system. Others, like The Bancorp in Wilmington, Del., and WebBank in Salt Lake City, have found a niche in essentially renting their charter to companies and being a conduit for them to transact. SolarisBank's plan is to build on that concept – rather than just providing financing or processing, it aims to offer advice, facilitate collaboration with other companies and offer various solutions. It is also building open application program interfaces to make it easy for banks to plug into its system.

"Our goal is to enable our partners' success by providing the financial solutions their businesses need," Wenthin said. "That could be — and will be — services like providing digital businesses with near-instant consumer lines of credit as payment options for their customers during checkout — in addition to enabling the disruptive fintechs of the future."

Observers say that U.S. banks already serving fintech companies could take note of what solarisBank is doing, but that the regulatory landscape would make it difficult to establish a new bank with a similar business plan.

"This project is very innovative, the way they are structuring banking services as a technology platform," said Gil Luria, a managing director at Wedbush Securities. "Interestingly, it comes from Europe, where the banking regulation is not as strict as what we have. It's harder to envision the Fed agreeing to something like this, at least at the current time."

One reason for this is that the regulatory framework in the U.S. does not adequately address banking models focused primarily on technology, said Ray Chandonnet, principal at Second Act Capital Partners.

"The regulatory framework is reactive; regulators review an existing business model and establish a framework around it, which may or may not become the regulatory standard," he said. "We are seeing that play out right now for example with marketplace lending, where regulators are struggling to establish consistent policy around bank participation because the industry is evolving and innovating so quickly."

But if the regulatory landscape evolved, the model of what solarisBank is doing could prove to have a significant effect on U.S. financial services.

"The concept of banking-as-a-platform is interesting because it turns upside down the current trend of how companies are trying to intersect fintech and banking," Chandonnet said. "Right now, the trend is for existing fintech companies to either try to partner with existing banks, or … approaching the OCC and FDIC looking for a new bank charter."

Another potential challenge solarisBank faces is that since it is targeting startups as customers, it may have high turnover as a portion of its customer base doesn't make it long term, said Robard Williams, a vice president at Moody's.

"Will they have 30-year customers?" Williams said.

But what solarisBank is offering can appeal to fintech companies whose only options now are to work with large, monolithic banks or smaller, but perhaps not tech-savvy ones, said Chris Skinner, a British blogger and author who focuses on financial technology and serves as chairman of the Financial Services Club networking group in the U.K.

"It offers bank functionality for those who do not want to work with banks," Skinner said.

Skinner said he is a "fan conceptually of what they are doing," and noted that a small number of other companies are doing similar projects. An example is the German fintech company WireCard, which also received a banking license and formed WireCard Bank, the underlying financial institution behind the popular European digital bank account Number 26.

Skinner says banks ought to pay close attention to what solarisBank and others are doing, especially if fintech companies are able to build substantial scale by pairing with them instead of traditional banks.

"Any bank that isn't watching what's going on is stupid," Skinner said. Whether solarisBank and similar players "are truly disruptive, we'll see, but they could point to a better way of managing money."

Ultimately, solarisBank sees itself as not exactly disrupting banking, but powering the way banking will work in the future.

"Part of that vision of the future is conceding that not every customer who walks into a retail branch will be a consumer of every financial service in the banking stack," Wenthin said. "Pure-play companies can better serve these customers when served by a pure-play banking layer, which is us."

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