The flurry of activity in BaaS is almost entirely restricted to community banks partnering with fintechs and other nonbanks to underpin their financial offerings. But the $121 million-asset North Bay is one of the few credit unions to participate as well, and one of the few to speak about it publicly.
"The vast majority don't do it and legally, it's challenging," said Greg Mesack, senior vice president of advocacy at
The biggest hurdle for credit unions to overcome is the field of membership requirement, which dictates which subsets of the population can be a member of the credit union, based on their location, employer, association membership or other factors.
Beyond that, as not-for-profit institutions, this kind of fintech partnership is not typically considered to be part of the credit union ethos. It is also an
"It brings a lot more risk, a lot more rapid growth," said Mesack. "If you don't have the expertise to manage that, you are putting yourself at risk."
But a few have made it work, and there are signs that others are eyeing the sector.
Financial institutions that entered the space before regulatory oversight intensified need to calculate whether the price of talent, risk planning and technology is worth the return.
Klaros Group keeps a proprietary database of depository fintech relationships and counts six credit unions on its list of 184 financial institutions. The BaaS Association, which is part of the
For North Bay, its BaaS activity — which spans electronic payments, debit cards, depository services and more — is about standing out.
"We're in a territory that is dominated by some much larger credit unions," said Chris Call, CEO of the Santa Rosa, California-based North Bay. "To find a niche, we had to develop an expertise."
The credit union learned how to manage
"We thought we could leverage this expertise in other ways," said Call. "We determined we could take the compliance oversight we were doing for cannabis and apply it to a fintech relationship."
Call is not deterred by recent turmoil in the BaaS space. A number of banks engaging in BaaS have received
With the credit union's history in cannabis banking, "We are sticklers about compliance," he said. "We expect our customers, the fintechs, to have a strong compliance model and tools in place to monitor their customers' activity. It's our responsibility to make sure compliance is happening."
North Bay "backed into" the BaaS model in January 2023 when it started sponsoring the activities of its cannabis subsidiary, Greenbax Marketplace, which provides accounts and payment processing for cannabis firms. North Bay now has a dozen clients, including ones that bank cannabis operators, process international payments and offer secured credit cards to people rebuilding their credit.
The credit union built some compliance and know-your-customer software in house; it also uses
Call is not aware of other credit unions in the BaaS space, based on his research.
Some relationships resemble BaaS on the surface, but operate in a different fashion.
When customers open accounts through Dora, "The account is at USAlliance, the statements are being generated by USAlliance, it's a USAlliance-issued card. It's a co-branded flow with Dora," he said. "Dora does not have account or card processing relationships and does not hold deposits. We want to take people who have limited banking experience and get them on a path to a full credit union relationship."
USAlliance has a designation to serve low-income consumers; the primary audience that Dora is targeting, the underbanked, align with USAlliance's target member base as well.
Synctera, which describes itself as a marketplace for banks and fintechs to form relationships and a system of record when these relationships form, chalks up hesitation among credit unions to the rules around membership.
"We have spoken with several credit unions over the years, and there is certainly interest," said Shep Smith, chief operating officer of Synctera, via email. "However, the limiting factor historically has been that credit unions typically have membership requirements, making it difficult for them to support programs outside of very small niches."
"Memberization" is a consideration for credit unions when forging fintech partnerships, said Carlin McCrory, an associate at Troutman Pepper.
"When it comes to deposits, whether the credit unions are federally or state chartered, they usually want the deposits to be covered under NCUA [National Credit Union Administration] share insurance," she said. "They have to go through the process of making people members, generally speaking, but there are limited caveats."
North Bay's membership requirements include those who live, work or worship in four northern California counties or are members of certain select employer groups or associations. To comply with these requirements, North Bay qualifies the fintech client for membership and creates a For Benefit Of account per client. The FBO account serves as a settlement account for all transactions occurring on the fintech platform and the fintech maintains its own platform as the books and records for its end-user accounts. The fintech's end users do not need to become members of North Bay individually.
Because North Bay has a low-income designation, like USAlliance, it can take a certain number of nonmember deposits that would be fully insured under the National Credit Union Share Insurance Fund. North Bay also has custodial relationships with third-party banks to hold excess deposits that it doesn't hold on its balance sheet, which are fully insured.
In short, "All deposits are fully insured," said Call.
Beyond the membership requirement, the fact remains that BaaS is outside of a credit union's cultural norm.
"Credit unions are traditionally conservative, close-knit organizations that provide standard banking services," said Call. Partaking in BaaS "requires some expertise and expenditure of a fair amount of money to invest in the compliance tools and staffing needed."
In North Bay's case, the inclination to push the envelope is supported by its board.
BaaS is not an area where one can dip a toe.
"The broader view on banking as a service is you have to go big or go home," said Brian Graham, a partner at Klaros Group. Otherwise, "you pick up all the regulatory compliance exposures and you don't have the resources to do it right."
Banking regulators
"The regulatory regime applicable to credit unions is less prescriptive in the area of third-party vendor management, including with respect to fintechs," said Graham. "You can argue about whether that's a good thing or bad thing."
In theory, there is very little distinction between what services banks and credit unions can provide to their fintech partners. Going with one or the other "will be about the effectiveness of them as a partner," said Graham. "The more they invest in it and the more they have the capabilities and technology to do it well, the better it's going to be for a fintech."
Clients have largely found North Bay through word of mouth. Call says there are advantages to fintechs in working with a credit union rather than a bank.
"The corporate structure is a lot flatter," he said. "If people want to contact me as CEO they could ring my phone directly. Our decision-making process is more streamlined."
