Have you ever thought about how PayPal, Robinhood, Square and other financial technology companies (fintechs) facilitate payments, accounts, debit cards, and cash transfers without being banks?

Usually, it’s because they have partnered with Banking as a Service (BaaS) companies and their sponsor banks to embed banking products into the fintechs’ unique and innovative products and services. Working with a BaaS provider, fintechs and other non-bank-chartered businesses can bring services, such as deposit accounts, payment processing, lending, crypto, insurance, and more to the fintech’s customers by partnering and leveraging the infrastructure of existing chartered banks instead of chartering their own bank. The application or service developed by the fintech/business is connected via application programming interfaces (API) either directly with a bank or through a BaaS provider (middleware) already working with banks.

Banking as a services diagram

This allows them to bring new and innovative products and services to their customers much more quickly and with stronger support. The total market today for BaaS is estimated to be greater than $1 trillion, with a long growth runway.

BaaS provides an opportunity for sponsor banks like AMG to diversify their deposit bases and business lines, expand services, and broaden client bases at a reasonable level of investment, which AMG is pursuing. They do this by partnering with one or more middleware providers and fintechs. By using a middleware provider, the sponsor bank requires relatively little infrastructure and personnel to begin operating in this space. The bank’s focus is on backend processing and regulatory compliance.

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