How do BaaS companies generate revenue and what are their monetization models?

There are three very consistent revenue models.

1. A monthly subscription fee. I wouldn't share any particular numbers, but if you want access to a deposit account, that'll cost the developer $10,000 a month. If the developer would like to offer a card program, it might be an additional $5,000 a month. The subscription fee is based upon the services that the developer would like to offer.

2. The second piece is a per monthly fee per user, or a per user fee per month. So if you have a million customers, then you might be getting charged 10 cents per customer per month for having access to the platform. And that's fairly consistent for BaaS platforms.

So you could be paying $15,000 for your subscription fee and then $100,000 a month for your user fees.

3. And then every time you do a transaction, whether it be an ACH, a wire or a check, there is some sort of fee associated with that. It could be as low as 2 cents could be as high as $5 or $30 for an international wire. But there's some sort of fee per transaction. 

That's how the BaaS platforms make their money.

There are ways for FinTech to make money. And while I don't know exactly what they charge like hypothetically, if this FinTech was charged 5 cents for an ACH transfer, they might charge 10 cents to the end-user and they're still making 5 cents per transaction. And they're still 10 times better than what Bank of America charges me for example. 

Regarding interchange, that’s where FinTech can make money. If I go back to that coffee shop, every time that coffee shop is making a card transaction to sell a coffee, Stripe is probably charging them 5 cents, or Square is charging them 2.5 cents.

So if it was a $10 coffee, to make the math simple for me, then they'd be getting charged 25 cents, 30 cents, something along those lines. So the coffee shop would receive $9.70 from that transaction that would go into their account, held at Synapse.

Synapse does not charge the coffee shop. They don't make money from that particular float. However, when that coffee shop is then wanting to grow to use their own branded card to buy the coffee beans, to pay the electricity bills, then that's when there's an interchange that BaaS platforms will participate in.

So when the coffee shops use their card to go and buy $1,000 worth of coffee beans, then that's $25 that is being charged. So the coffee bean person gets $975. And that $25 is split amongst whoever they're using to process the payment, is split amongst a bank that's using the processor, it's split amongst the Visa/MasterCard themselves, it split amongst the BaaS platforms. And then BaaS platforms share that with FinTech.

So the FinTech themselves might be getting 1-2% for every card swipe that happens. So when that coffee bean customer went and bought $1,000 worth of coffee beans, the Fintech is getting say 10 to $15 themselves. Now they can either keep that as revenue, or they can then pass that through to the customer as cash back for your purchase. You’ve just earned 1, 1.5%.

Ultimately it's the FinTechs that get the largest portion. So because it's their customer, it's their relationship. They've done the hard work, arguably, wherever FinTech has 100,000 customers.

Visa and MasterCard have hundreds of millions of cards. So their business models of let's just make small, incremental little payments and if they get 0.5%, 20 cents per transaction, that's hundreds of millions of transactions a second, not too bad for them.

The bank typically gets a sizeable portion of interchange, specifically banks that have less than $10 billion in assets as per the Durbin amendment, that was there to help the banks get revenues, but the way that these players have arranged it, I like to think that Synapse is one of the better ones in this mix is that we've simply negotiated with the bank to say: look, the FinTech is bringing new customers that you would never normally get. You can benefit from the deposits. You can lend them out. We don't ask for any of that lending revenue. So let the FinTech take this interchange revenue for themselves.

So ultimately as it is 2.5% charged at that checkout, that $25, I can say 1.5% roughly will go to the FinTech, leaving 1% for BaaS, the bank, Visa MasterCard, Stripe or Square. So you can imagine that FinTech is getting the majority of it.