In the wake of recent bank failures and the follow-on probing to understand root causes, banks, regulators, and the entire fintech ecosystem are seeking better ways to diversify risk across the global financial system. Consumers of financial services are now more keenly interested in diversifying their holdings across multiple banks or financial institutions to isolate themselves from financial system shocks. In addition, they are looking for the best-of-breed service providers for individual financial services like ACH, wires, and the like. Modular banking by Synapse now makes this all possible like never before.
The fintech industry started in the early 2010s with so-called “single bank integrations,” where fintech services had to be customized to each bank with which they integrated. Being dependent on a single bank partner to provide all banking services meant none were best of breed for their end users, and FDIC Coverage was usually capped at $250K.
Banking as a Service (BaaS) made this integration easier, but it was still limited to being built on top of a single bank or financial institution, with fintech platforms providing open access to banking data via APIs. But this still didn’t mitigate the issues described above.
This paved the way for multi-banking, a paradigm that allows fintechs to source services from multiple bank partners, effectively diversifying risk for the fintech. However, individual banks still inherit significant risk under this design.
Despite the evolution from “single bank integration” to BaaS and multi-banking, none of these models provide a framework that effectively mitigates risk for all parties (including banks) while also increasing the efficiency and access to best-in-class services. The rise of modular banking is changing that narrative.
Enter modular banking
Modular banking is Synapse’s new approach in which Synapse enables fintech platforms to integrate with multiple bank partners, each of which specializes in and supports specific back-end banking services.
Unlike the prior banking integrations, where all bank partners provide all core banking services, modular banking lets bank partners choose only the services they want to provide that fit their strategy and risk appetite.
For instance, one bank partner may offer deposit and money movement services, while another may focus on international transfers exclusively. The benefits are extensive: fintech customers, through the Synapse Modular Banking platform, can access the best services and terms from any of the banking partners, and the partner banks generate new business and diversify their income sources with less regulatory risk and compliance burden. This model is only possible when a BaaS platform is licensed (for Synapse’s affiliate, as a registered broker-dealer), enabling the platform to be the account administrator of record for users.
What makes modular banking so valuable?
Modular banking eliminates the risk of a single point of failure or bottleneck, resulting in banks having better risk-adjusted rates of return. For fintechs, modular banking represents the quickest path to launch financial products via a fintech platform, and they can rely on the security of a direct licensed provider relationship for seamless onboarding and scaling.
Moreover, modular banking shifts a substantial amount of the regulatory and compliance burden to the licensed provider, offering clarity of roles and responsibilities for all parties involved. Banks are able to focus on delivering high-quality financial services, while the licensed fintech provider remains responsible for meeting a large amount of the regulatory requirements and identity verification services, thereby promoting more compliance rigor and fewer errors overall.
Conclusion
While the early single bank integrations and open banking greatly improved speed to market, they did not address the risk and compliance burden faced by individual banks. Multi-banking models provided some respite from this, but the risks were still high. Modular banking by Synapse represents the future of fintech banking and financial services by offering best-of-breed services, diversification of risks, as well as the potential for expanded deposit insurance coverage, all from a single BaaS platform integration.
