To use Banking as a Service (BaaS), a startup partners with a licensed bank through an API-based platform that provides the regulatory infrastructure and banking capabilities, allowing the startup to embed financial products””such as accounts, payments, or cards””directly into its own application without obtaining a banking license. The process typically involves selecting a BaaS provider, integrating their APIs into your product, handling compliance requirements through the provider’s framework, and launching financial features under the partner bank’s charter. Companies like Stripe Treasury, Unit, and Synapse (before its 2024 difficulties) have enabled startups ranging from expense management tools to gig economy platforms to offer branded bank accounts and debit cards without spending years and millions on bank charters. This approach has fundamentally changed how technology companies think about financial services.
Rather than viewing banking as something only banks can do, startups now treat it as infrastructure that can be layered into any product where money movement matters. A freelance management platform can pay contractors directly into platform-managed accounts. A vertical SaaS company serving restaurants can offer next-day settlement instead of waiting for traditional payment processing timelines. The barrier to entry has dropped from “impossible for most startups” to “a meaningful technical and compliance undertaking.” This article covers how to evaluate whether BaaS fits your business, select providers, navigate the integration process, handle the regulatory complexity, and avoid the pitfalls that have tripped up companies in this space.
Table of Contents
- What Exactly Is Banking as a Service and How Does It Work for Startups?
- Evaluating Whether BaaS Fits Your Business Model
- Choosing a BaaS Provider: Key Differences That Matter
- The Integration Process: What to Actually Expect
- Navigating Regulatory Requirements Without a Compliance Army
- The Risks: What Can Go Wrong and Has Gone Wrong
- Building the Customer Experience Layer
- The Future of BaaS and What It Means for New Entrants
- Conclusion
What Exactly Is Banking as a Service and How Does It Work for Startups?
banking as a Service is an arrangement where licensed banks provide their regulatory infrastructure and core banking capabilities to non-bank companies through APIs. The licensed bank””sometimes called the sponsor bank or partner bank””holds the actual banking charter, maintains relationships with payment networks like Visa and Mastercard, and takes on the ultimate regulatory responsibility. The baas provider sits in the middle, offering technology platforms that translate the bank’s capabilities into developer-friendly APIs. The startup, often called the program manager or fintech partner, builds the consumer-facing product. The technical architecture typically works in layers. The sponsor bank provides FDIC insurance, access to payment rails (ACH, wire, card networks), and regulatory compliance under their charter. The BaaS platform handles API development, developer documentation, and often provides compliance tooling like KYC/AML verification services.
Your startup integrates these APIs to create accounts, issue cards, move money, or whatever financial features your product requires. When a customer opens an account through your app, they’re technically opening an account at the sponsor bank, but the experience is entirely branded as yours. This differs from simply using payment processors like Stripe or PayPal in a crucial way: with BaaS, you can offer actual deposit accounts, issue debit cards under your brand, and hold customer funds. Payment processors move money; BaaS lets you hold money and offer banking products. However, this distinction also means significantly more regulatory responsibility. A payment processor handles a transaction and it’s done. When customers have accounts holding their funds, you’re in ongoing compliance territory””which brings both opportunity and risk.
Evaluating Whether BaaS Fits Your Business Model
Not every startup that could use BaaS should use BaaS. The embedded finance model makes the most sense when financial services are integral to your value proposition, not a nice-to-have feature. If you’re building a neobank competitor, obviously you need banking infrastructure. But the more interesting use cases are companies where banking capabilities solve a core problem for their specific customer base. Consider the difference between two approaches. A generic consumer app adding a debit card as a retention feature is fighting an uphill battle””consumers already have bank accounts and cards, and switching costs are real.
Compare that to a platform serving a specific underserved segment where existing banking options fail them. Historically, companies targeting gig workers, small business owners in specific industries, or populations underserved by traditional banks have found stronger product-market fit for embedded banking. The key question is whether your customers would genuinely benefit from financial services integrated into the context where they already operate, rather than managing separate banking relationships. However, if your core business doesn’t involve regular money movement or financial management, adding BaaS creates complexity without corresponding value. The integration isn’t trivial, ongoing compliance costs money and attention, and you’re taking on responsibility for functions outside your expertise. Several startups have launched card programs only to shut them down after discovering that maintaining them distracted from their core product. Before pursuing BaaS, honestly assess whether embedded finance solves a real problem for your customers or just sounds impressive to investors.
Choosing a BaaS Provider: Key Differences That Matter
The BaaS market includes several categories of providers, each with different tradeoffs. Full-stack platforms like Unit, Treasury Prime, and Bond (among others) aim to provide comprehensive solutions covering accounts, cards, and payments. More specialized providers focus on specific capabilities””some excel at card issuing, others at ACH processing, others at account management. The distinctions matter because switching providers later is extremely difficult once customers have accounts and cards in the wild. Sponsor bank relationships represent perhaps the most critical evaluation criterion. Some BaaS platforms work with a single sponsor bank; others have relationships with multiple banks. The sponsor bank’s risk appetite determines what products you can offer, what customer segments you can serve, and how much flexibility you have in program design.
Banks with conservative risk profiles may reject applications from startups targeting higher-risk industries or customer segments. The BaaS platform’s track record with their sponsor banks””and the banks’ regulatory standing””should be central to your evaluation. Pricing models vary considerably. Some providers charge per-account monthly fees, others take basis points on transaction volume, and most use some combination. For early-stage startups, per-account fees can be painful when you’re still finding product-market fit with small customer numbers. Volume-based pricing works better initially but can become expensive at scale. Negotiate understanding that you may need flexibility as you learn what works. Also scrutinize minimums and commitments carefully””several startups have found themselves locked into contracts that didn’t match their actual growth trajectory.
The Integration Process: What to Actually Expect
BaaS integration is not a weekend project. Even with well-documented APIs, expect the technical integration to take months, not weeks. The APIs themselves may be reasonably straightforward for experienced developers, but the complexity lies in the edge cases, error handling, and compliance requirements embedded throughout the process. A realistic integration timeline for a funded startup with competent engineers might look like this: one to two months for initial technical integration and sandbox testing, another one to two months for compliance documentation and sponsor bank approval, and additional time for production testing before launch. The sponsor bank will want to review your compliance program, your customer onboarding flow, your transaction monitoring approach, and various other operational details. This isn’t bureaucratic delay””the bank is ultimately responsible for regulatory compliance, so they’re appropriately careful about who they let use their charter.
The technical work involves more than just API calls. You’ll need to build customer onboarding flows that capture required information for KYC verification. You’ll need to handle all the states an account or transaction can be in, including frozen, suspended, and under review. You’ll need to integrate the provider’s webhooks to keep your system synchronized with the banking backend. And you’ll need to build customer support processes for banking-specific issues””a customer whose card doesn’t work is a different problem than a customer who can’t log in. Staff appropriately for operations, not just development.
Navigating Regulatory Requirements Without a Compliance Army
The regulatory complexity of BaaS is real but manageable for startups willing to take it seriously. You won’t need the compliance staff of a major bank, but you can’t ignore compliance entirely either. The sponsor bank’s charter covers the ultimate regulatory requirements, but you’re contractually and practically responsible for compliance at the customer-facing level. Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements form the baseline. Most BaaS providers include identity verification services that handle the mechanics, but you’re responsible for implementing them correctly. Every customer must be verified before accessing banking services. Sanctions screening must happen.
Suspicious activity must be monitored and reported. The BaaS platform typically provides tooling, but you need someone on your team who understands what the tools are checking and can make judgment calls on edge cases. Transaction monitoring is where many startups underestimate the work involved. You’re not just processing payments; you’re potentially detecting fraud, identifying unusual patterns, and complying with reporting requirements. The specifics depend on your product and customer base. A platform handling high-value business transactions has different monitoring needs than one processing small consumer purchases. Work with your BaaS provider and legal counsel to establish monitoring rules appropriate for your specific use case. This isn’t optional””failures in transaction monitoring have contributed to regulatory problems for both fintechs and their sponsor banks.
The Risks: What Can Go Wrong and Has Gone Wrong
The BaaS model has experienced significant growing pains, and startups should understand the risks before committing. The most dramatic recent example involved Synapse, a BaaS middleware provider that went through bankruptcy proceedings in 2024, leaving customer funds in complicated limbo between the fintech applications and the underlying banks. While the specific details are still being resolved as of recent reports, the situation illustrated a fundamental risk: the multi-party structure of BaaS creates dependencies that can become vulnerabilities. Sponsor bank regulatory issues can cascade to their fintech partners. When regulators have concerns about a bank’s oversight of its fintech partnerships, the bank often responds by tightening requirements or even ending relationships. Several banks have exited the BaaS space or significantly reduced their fintech programs following regulatory scrutiny. If your sponsor bank exits or your BaaS provider loses their bank relationships, migrating customer accounts to a new infrastructure is extremely difficult.
Concentration risk works both directions. The sponsor bank is dependent on you not causing regulatory problems for them. You’re dependent on the BaaS provider and sponsor bank continuing to operate and support your program. Due diligence on your partners’ financial stability and regulatory standing is essential. Ask about the sponsor bank’s regulatory history. Understand how the BaaS provider makes money and whether their business model is sustainable. The cheapest option may not be the most reliable option.
Building the Customer Experience Layer
The financial infrastructure is only half the product””the customer experience you build on top determines whether people actually use it. The best BaaS-powered products feel seamlessly integrated into the broader application, not like a banking product awkwardly grafted onto something else. This requires thoughtful design work specific to your customer context.
Consider how Mercury built a banking experience specifically for startups, with features like unlimited virtual cards, integrations with accounting software, and workflows designed for how startup finance teams actually operate. They weren’t just offering bank accounts; they were offering bank accounts designed for a specific use case. Similarly, neobanks targeting specific demographics have succeeded by understanding what frustrates those customers about traditional banking and addressing those specific pain points. The BaaS layer provides capabilities; your product design determines whether those capabilities translate into customer value.
The Future of BaaS and What It Means for New Entrants
The BaaS market is evolving rapidly, and what works today may not be the optimal approach in a year or two. Regulatory attention on bank-fintech partnerships has increased, which will likely mean higher compliance costs and potentially more limited product options. Some observers expect consolidation among BaaS providers as smaller players struggle with the economics of the business. Others anticipate more banks entering the space directly rather than through middleware providers.
For startups evaluating BaaS now, this uncertainty argues for careful partner selection with an eye toward stability, not just features and price. Build relationships with providers and sponsor banks that appear committed to the space long-term. Understand that the regulatory environment may tighten and factor compliance capacity into your planning. And recognize that embedded finance, while powerful, is a strategic commitment””not just a feature you can easily add or remove.
Conclusion
Banking as a Service offers startups a genuine opportunity to embed financial products into their applications without the prohibitive cost and time of becoming a licensed bank. The path involves selecting appropriate BaaS providers and sponsor banks, integrating their APIs into your product, building compliant customer onboarding and transaction monitoring processes, and accepting ongoing responsibility for the regulatory and operational aspects of offering financial services. Done well, embedded finance can create significant value for customers and competitive moats for the companies offering it.
The approach isn’t without risks. The multi-party structure creates dependencies, sponsor bank relationships can change, and regulatory requirements demand ongoing attention. Startups considering BaaS should evaluate honestly whether embedded finance solves a real problem for their customers, choose partners based on stability and regulatory standing rather than just pricing, and resource the compliance and operational functions appropriately. For the right business model, the benefits justify the complexity””but go in with clear eyes about what you’re taking on.