Interchange Enables Flexible BaaS Underwriting
Former Galileo executive on differentiation and scalability in the BaaS market
Taking interchange is really a credit decision disguised as pricing. When a BaaS provider receives interchange first, it gets paid automatically out of card spend before sending the fintech its share, which means less collections risk and more room to underwrite weaker, earlier, or messier customers. That matters because many BaaS clients are thinly funded startups, and the provider may also be eating fraud losses, dispute costs, and program management overhead out of that same stream.
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In the standard stack, interchange is split across the network, sponsor bank, program manager, BaaS layer, and fintech. Typical models leave the BaaS running on thin margins, so controlling the flow of funds is valuable because it lets the provider cover costs directly instead of invoicing later and hoping a startup pays.
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The trade off is customer mix. Fintechs that want gross pass through interchange, or direct bank negotiation on economics, often prefer a fee based infrastructure layer. But providers that keep the interchange can say yes to riskier programs because they have an immediate revenue source tied to spend, not a fixed SaaS bill.
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This also explains why program management matters so much. The party acting as program manager often receives interchange and absorbs losses. Newer platforms have tried to push more responsibility back to the fintech and bank, but the core issue is unchanged, whoever controls the economics can support a broader range of customers.
The market is moving toward a split model. Large fintechs will keep pushing for direct bank relationships and more of the interchange pool, while BaaS providers serving the long tail will keep using interchange first economics to fund onboarding, compliance, and risk for younger programs. That will separate infrastructure vendors for scaled operators from full stack partners built to finance customer risk at launch.