Banking as a Service (BaaS) is a model where licensed banks and fintech companies provide banking infrastructure””payments processing, lending products, deposit accounts, and compliance frameworks””to third-party businesses through APIs. Instead of obtaining a banking license and building financial infrastructure from scratch, a startup can plug into an existing bank’s systems and offer branded financial products to its customers within months rather than years. An e-commerce platform might embed checkout financing, a gig economy app could offer instant payouts to contractors, or a SaaS company might launch a corporate expense card””all without becoming a regulated bank themselves.
The market has grown rapidly, reaching an estimated USD 24.58 billion in 2025 and projected to hit USD 60.35 billion by 2030, expanding at a 19.68% compound annual growth rate according to Mordor Intelligence. That growth reflects real demand: 85% of senior executives at banks, fintechs, and consumer-facing brands are either using BaaS or plan to start soon, per Softjourn research. But the model carries genuine risks that the industry is still working through, as demonstrated by the 2024 Synapse collapse that affected 10 million end users and triggered widespread reconsideration of vendor management practices. This article explains how BaaS actually works, who the key players are, what regulatory pressures are reshaping the landscape, and what founders should weigh before integrating banking capabilities into their products.
Table of Contents
- How Does Banking as a Service Actually Work?
- The Economics of BaaS for Startups and Banks
- Where BaaS Adoption Is Concentrated
- What Regulatory Scrutiny Means for Your BaaS Strategy
- Lessons from the Synapse Collapse
- How PSD3 Could Reshape European BaaS
- Who BaaS Serves Best””and Worst
- Conclusion
How Does Banking as a Service Actually Work?
At its core, BaaS creates a three-party arrangement. A licensed bank (often called the “sponsor bank”) holds the charter, maintains regulatory compliance, and provides access to payment rails like ACH and card networks. A BaaS platform or middleware provider builds APIs that abstract away the complexity of these banking systems. And a brand””your startup, marketplace, or software company””integrates those APIs to offer financial products under its own name. The technical integration happens through standardized APIs that handle account creation, transaction processing, KYC verification, and ledger management. When a user opens an account through your app, the API call creates a real bank account at the sponsor bank, with your branding layered on top.
The funds are held at the bank, subject to FDIC insurance, but the customer relationship belongs to you. This is why the model is sometimes called “white-label banking”””the regulatory infrastructure is someone else’s, but the experience is yours. However, this abstraction creates dependencies that aren’t always obvious. If your BaaS provider experiences downtime, your customers can’t access their money. If the sponsor bank faces regulatory action, your product might be forced to pause onboarding or freeze certain features. The middleware provider sits between you and the actual bank, which means you’re trusting two counterparties rather than one.
The Economics of BaaS for Startups and Banks
For startups, BaaS dramatically reduces both the capital and time required to launch financial products. Obtaining a bank charter in the United States typically takes two to five years and requires millions in regulatory capital. BaaS lets you skip that entirely, paying instead through some combination of setup fees, monthly platform costs, and per-transaction charges. The economics work when your revenue per user from financial services””interchange fees, interest spreads, subscription premiums””exceeds these costs by a meaningful margin. Banks participate for different reasons.
Traditional financial institutions often lack the engineering talent and product velocity to compete directly with fintechs, but they have something fintechs can’t easily replicate: a charter, existing compliance infrastructure, and access to the Federal Reserve’s payment systems. By partnering with BaaS platforms, they can earn fee income from a much larger customer base without building consumer-facing products themselves. According to EY research, 84% of financial leaders now view BaaS as a new model for revenue growth, and 62% are prioritizing it as critical to their strategy. The catch is that sponsor banks take on regulatory risk for every partner they enable. When regulators find compliance gaps in a fintech’s operations, enforcement actions target the bank that enabled them. This dynamic is reshaping how banks evaluate BaaS partnerships””they’re increasingly selective, demanding more transparency and often requiring startups to meet compliance thresholds that weren’t expected just a few years ago.
Where BaaS Adoption Is Concentrated
North America currently leads the BaaS market with approximately 34% of global market share, according to Research Nester. This dominance stems from a combination of mature financial infrastructure, high fintech investment, and regulatory frameworks that””while becoming stricter””have historically allowed experimentation with new banking models. The U.S. in particular has a fragmented banking system with thousands of community banks, many of which have explored BaaS partnerships as a way to remain relevant. Asia Pacific is the fastest-growing region, projected to expand at a 20.41% CAGR from 2026 to 2034 per Straits Research.
Rising smartphone penetration, large underbanked populations, and government initiatives promoting digital payments create favorable conditions. Countries like India, Indonesia, and the Philippines have seen particularly strong growth in embedded finance offerings, though the regulatory environments vary significantly. For founders building global products, these regional differences matter. A BaaS provider with strong U.S. coverage may have no presence in Southeast Asia, requiring you to stitch together multiple partners or accept geographic limitations. Cross-border payments add another layer of complexity””different rails, different compliance requirements, different settlement times.
What Regulatory Scrutiny Means for Your BaaS Strategy
The regulatory environment for BaaS has tightened considerably. In 2024, 13% of severe enforcement actions targeted banks that were white-labeling services for fintechs, primarily citing anti-money laundering deficiencies and inadequate third-party risk management. Notable enforcement orders against Evolve, Sutton, and Piermont banks highlighted that regulators expect sponsor banks to have deep visibility into their fintech partners’ operations””not just contracts that shift liability. The Federal Reserve’s Novel Activities Supervision Program now provides specialized examination resources for BaaS arrangements, signaling that this business model receives heightened scrutiny rather than the light touch some earlier participants expected. Regulators are particularly focused on “Know-Your-Customer-Customer” protocols””meaning the bank needs to understand not just the fintech it’s partnering with, but the fintech’s end customers as well.
For startups, this has practical implications. Due diligence periods are longer. Compliance requirements are more detailed. Some BaaS providers have paused onboarding new partners entirely while they shore up their processes. If you’re evaluating BaaS providers, ask specifically about their regulatory examination history, how they’ve responded to recent industry enforcement trends, and what compliance obligations they’ll push down to you.
Lessons from the Synapse Collapse
The 2024 collapse of Synapse, a prominent BaaS middleware provider, offers a cautionary study for anyone building on this infrastructure. When Synapse failed, approximately 10 million end users were affected””people who thought they had bank accounts suddenly couldn’t access their funds. The incident exposed how the layered BaaS model can obscure where customer money actually sits and who bears responsibility when things go wrong. The fallout prompted sponsor banks across the industry to tighten vendor management protocols.
Many now require more detailed reconciliation reporting, direct audit rights over fintech partners, and contractual provisions that were previously rare. Some banks exited BaaS entirely, concluding that the reputational and regulatory risks outweighed the fee income. For founders, the lesson is that counterparty risk in BaaS isn’t theoretical. Before selecting a provider, understand the specific sponsor bank backing the accounts, research their regulatory standing, and build contingency plans. If your BaaS provider fails, how will your customers access their money? If the sponsor bank exits BaaS, how quickly can you migrate? These aren’t comfortable questions, but the Synapse situation proved they’re necessary ones.
How PSD3 Could Reshape European BaaS
In Europe, the upcoming Payment Services Directive 3 (PSD3) is expected to accelerate BaaS adoption by reducing the legal friction involved in cross-border financial services. Once transposed into national law””anticipated by 2026″”PSD3 should create more standardized requirements across EU member states, making it easier for BaaS platforms to serve multiple countries through a single integration.
For startups with European ambitions, PSD3 may lower the compliance burden of multi-country expansion. Currently, each market requires separate regulatory analysis and often separate banking partnerships. Greater harmonization could change this, though the devil will be in the implementation details that vary by country.
Who BaaS Serves Best””and Worst
BaaS works particularly well for companies that already have customer relationships and want to deepen them through financial services. A payroll software company adding early wage access, a property management platform enabling rent payments, or a vertical SaaS provider launching industry-specific credit products””these are cases where financial features enhance an existing value proposition rather than serving as the core product. BaaS works less well when financial services are the entire business.
If you’re building a neobank that competes directly with established players, the BaaS model means you’re renting infrastructure from companies that may view you as a competitor. Your margins depend on their pricing, your product roadmap depends on their API development, and your regulatory exposure depends on their compliance posture. Over 50% of the U.S. population now uses mobile banking, with 85% of 25-to-34-year-olds relying on digital banking according to SDK.finance””the competition for these users is intense, and operating on thin margins while paying BaaS fees is challenging.
Conclusion
Banking as a Service has genuinely lowered the barriers for startups to offer financial products, creating opportunities that didn’t exist a decade ago. The projected growth from roughly $25 billion in 2025 to $60 billion by 2030 reflects both real demand from businesses and real value delivered to end users who benefit from more convenient, more integrated financial experiences. But BaaS is infrastructure, not magic.
The regulatory environment is tightening, counterparty risks are real, and the economics only work if your use case genuinely benefits from embedded finance rather than forcing it. Founders considering BaaS should evaluate providers on their regulatory track record and sponsor bank relationships, not just API documentation and pricing. The companies that thrive with BaaS will be those that treat it as critical infrastructure deserving of serious due diligence””not a shortcut to skip.