- Key insights: More large fintechs are securing banking charters, and that is changing sponsor-banking strategies.
- What's at stake: The banking-as-a-service business model has for more than a decade counted fintechs as its bread and butter clients, but as they secure their own banks, it's forcing sponsor banks to narrow their focus.
- Expert quote: "Chime's proposed acquisition of Stride Bank is the latest sign that fintechs are rushing to take advantage of a more favorable regulatory backdrop to bring banking capabilities in house." —Sanjay Sakhrani, analyst, Keefe Bruyette & Woods.
Fintechs are taking advantage of the Trump administration's
Sponsor banks, which sell banking as a service to support nonbanks that sell financial services, rely on fintechs as their bread-and-butter clients. But as those same fintechs
Chime's
"For larger fintechs, the benefits can be meaningful," Sakhrani said. "Owning a bank means relying less on sponsor-bank partners and having more control over how products are built and delivered. It can also make it easier to launch new products, expand into lending, lower funding costs, and keep more of the economics."
That's impacting banks that have built their business around providing banking services to fintechs, including The Bancorp, which is one of Chime's sponsor banks. Shares of The Bancorp were sitting at $50.84 as of 1:35 p.m. in New York on Monday, a decrease of 21.7%, or $13.55, from market close on Sept. 8, when Chime said it was
Chime was one of The Bancorp's largest customers, accounting for approximately 8% of revenue in the second quarter, according to analysts at Piper Sandler. The Bancorp is also a BaaS provider for
And while Chime's departure from The Bancorp will be protracted (Chime and The Bancorp have a contract in place until mid-2028, and the contract requires a years' notice to exit, which will slow the wind-down of the partnership) it does highlight vulnerabilities in The Bancorp's business model, according to the investment bank. A vast majority of The Bancorp's deposits come from banking-as-a-service partnerships.
The Bancorp did not respond to requests for comment before publication time.
But that does not mean that sponsor-banking is facing an existential threat. Some banks are shifting their focus to more specialized verticals and away from the broader fintech ecosystem.
Read more:
IDscan's breach shines light on vendor risk in the age of AI Lessons from 9/11: How one NYC community bank rebounded Safety and soundness rule puts nonmaterial risk onus on banks Banks, credit cards fall out of favor for bill pay
Morristown, New Jersey-based Valley Bank is standing up its own banking-as-a-service business that focuses around embedded banking and caters to companies outside of fintech, Rodrigo Suarez, Valley Bank's senior vice president and head of partner banking, told American Banker.
"[The embedded banking business] is currently covering business accounts with money movement capabilities," Suarez said. "Those are accounts that would be opened with partners, which are typically software companies that they are serving and customers that are businesses."
That includes vertically integrated software-as-a-service companies or technology companies developing with automated workflows.
"We are focusing on companies that have a broader product proposition around addressing a specific business need using software or automation, where embedding an account makes the product experience better, but the account is not the product. The account is complementary to the product," Suarez said.
San Marcos, California-based Hatch Bank has also been adding to its banking-as-a-service business over the last 12 to 18 months and has been putting its focus on providing more specialized banking services rather than focusing broadly on fintech, Chief Revenue Officer Jeffrey Green told American Banker.
"The general profile [of our clients] is either venture or sponsor banks backed in private equity. They generally have a technology platform that they've built to work with and acquire service providers, whether that's being contractors, or dentists, orthodontists, and they work with those distribution models, ultimately providing you know a Hatch loan or a Hatch product through that technology platform," Green said.
Green views the rise in fintech-acquired banking charters as a sign of the continued evolution of the BaaS industry.
"The model has been in constant evolution — certainly for the better part of you know of the 2020s — and these acquisitions or de novo charters are just another chapter in that evolution. Ultimately, what these de novo charters have done is just increased competition in banking as a service," Green said.
"It is kind of a natural progression in a way. Take the model of banking as a service out of it and think about traditional banking, whether that's community banking, regional banking, there needs to be a right to win, and usually these banks are specialized in specific products," Green said. "What you're seeing is that specialized nature that has been prevalent in traditional banking for a long time start to appear in sponsorship banking."
