What is banking as a service, and how does it work?

#What problem does banking as a service solve?

Becoming a bank takes years, a lot of capital and constant supervision. Many companies that want to offer a debit card, a savings pot or a small loan to their users do not want to become a bank. Banking as a service (BaaS) lets them rent the regulated part from a licensed bank instead. The bank provides the account, card or loan; the company designs the app, markets it and talks to customers. The connection usually runs through an API, a software interface that lets two systems exchange data (see our API glossary entry and how banking APIs work).

The Basel Committee anticipated this direction in 2018 with a "distributed bank" scenario in which financial services become increasingly modular and many new businesses provide specialised pieces⁠^[1]. BaaS is one practical version of that modular picture. It is also the engine behind a lot of embedded finance, where financial products appear inside non-financial apps.

#Who does what in a BaaS arrangement?

In July 2024 the three US federal bank regulators described bank-fintech arrangements in three groups: deposit-taking, payment activities such as cards, ACH transfers, wires and instant payments, and consumer or small-business lending, where the partner bank funds loans that the fintech company markets⁠^[2]. They also described intermediate platform providers, often called middleware, that sit between banks and fintech companies to connect them⁠^[2].

#Where is the customer's money actually held?

Often in a single pooled account at the partner bank, sometimes called a custodial or "for benefit of" (FBO) account, opened in the name of the fintech company or platform on behalf of all its users. The bank sees one large balance. The split between individual users lives in a separate ledger. For US deposit insurance to "pass through" to each user, the FDIC rules require the fiduciary relationship to be disclosed in the bank's account records and the interests of the actual owners to be ascertainable from records kept by the bank or, in good faith, by another party⁠^[4].

That is why record-keeping is the heart of BaaS. The regulators' Joint Statement warns that end users may not realise their access to funds can depend on the third party, and that deposit insurance does not protect against losses caused by the failure of that third party⁠^[3].

#What went wrong in the Synapse collapse?

Synapse was a middleware company connecting fintech apps to partner banks. According to the FDIC, Synapse filed for bankruptcy protection in late April 2024; in early May 2024 a partner bank froze deposits placed through Synapse-linked apps, end users could not access their money, and the bankruptcy trustee reported that the deposits held at the banks appeared insufficient to cover what the fintech companies owed their customers⁠^[5]. The problem was not a bank failing. It was that nobody could quickly prove who owned which dollar.

The FDIC proposal would require banks to keep records showing the balance attributable to each beneficial owner of a custodial account with transactional features and to reconcile against those records no less often than at the close of business each day⁠^[5]. In the US government's regulatory agenda the FDIC lists it as a long-term action with the final rule date "To Be Determined"⁠^[8], so treat it as a proposal, not a rule in force. Separately, on 15 September 2026 the OCC, Federal Reserve, FDIC and NCUA proposed new third-party risk management guidance. They say any final guidance would replace their 2023 guidance and its supplemental resources, which include the July 2024 Joint Statement; comments are due by 16 November 2026⁠^[9].

A gap like this can come from bugs, missing transactions or fraud. Daily reconciliation, the requirement in the FDIC proposal, exists so a gap is spotted in a day instead of discovered during a bankruptcy. Deposit insurance would not fill it, because no insured bank failed.

#Why do banks and fintechs choose this model?

For the fintech company, BaaS is a faster route to market than a licence. For the partner bank, it can bring in deposits and fees from customers it would not otherwise reach. Card rules can also differ by bank size: in the US, the debit interchange cap applies to issuers with $10 billion or more in assets, because issuers below that size are exempt under Regulation II⁠^[11]. You can read how interchange works in how card payments work.

#How can you tell if an app uses banking as a service?

Look at the bottom of the app's website and its account terms. Phrases such as "banking services provided by" or "card issued by" followed by a bank's name are the giveaway. Then check that bank on the regulator's register, and read our guide is a fintech app a bank? for a full checklist. If you want to compare with banks that hold their own licence, see what is a neobank.