Banking As A Service Explained With Cookies

Written by Rodolfo Passeri

Formally, BaaS is where a bank offers some of its core capabilities and its regulated infrastructure as a service to third parties for a fee. These capabilities could be compliance, KYC, identity, payments, accounts, risk management and much more. Since explaining BaaS may be challenging, I will borrow Dov Marmor's "The Fintech Cookie Factory" example.


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Let's say there's a pastry chef that has created the perfect cookie for her customers: vegans who love flavor-packed foods. Her cookie does not disappoint, crispy outside, fluffy inside, with vegan buttercream and hints of cinnamon. In fact, she sells out of them every night until one of her customers suggests selling her cookies wholesale. So she gets a meeting with a major grocery store chain that has a vegan customer base. With one taste, they place an order to stock every one of their 500 stores with an initial run of 1,000 cookies, and they tell her there is plenty more to come. Now she has a decision to make. How will she produce 500,000 cookies? She's a pastry chef, not a manufacturer.

Option No. 1: She can take her purchase order to a bank and get a loan. With the money from the loan, she can set up an entire cookie baking factory and hire a team of experts to run it. The cost will be $3 million, the interest on the loan will be 12% or $120,000 a year and the cost of a 10-person team to run it will be $500,000 a year. Let's say she goes down this path and the first order goes off without a hitch. In fact, the grocery chain sells out in three weeks and places another order. The second order sells out in another three weeks, and she calls to get the next purchase order, but the buyer's tone has changed. Then she hears these words: "I'm so sorry, but we've decided to bring baking in-house and start our own vegan line. My boss says we can't give you another order." The result? The chef's business declares bankruptcy after three months.


Option No. 2: She goes to a co-packer. A co-packer is a contract manufacturer for food products. They've invested in all the equipment and assembly lines, they've hired a team with expertise in manufacturing, food labeling, wholesale supply chain and distribution. Their cost to set it up was tens of millions as they went for the absolute top talent and machinery. But they divide that cost across hundreds of customers, producing different food products in each "run" using the same core infrastructure. They know what can be standardized without compromising quality and what processes need to be tweaked product-by-product to ensure they all taste different and amazing. Let’s say the chef uses option two. Her set-up costs are $5,000, she doesn't take out a loan and she builds her brand using those first two huge orders from the grocery chain. Okay, her cost per cookie will be higher at scale, but she can keep her focus on new recipes and new sales, instead of splitting her efforts between manufacturing and baking. When the grocery chain cancels on the third order, she can weather the storm by continuing to work on her restaurant, and six months later she gets a new order from a different grocery brand.

In the world of fintech, the product manager is the chef. The product manager understands their customers' needs, designs products that suit their customers' unique tastes and combines those various products to create an overall experience. But being a chef is not being a manufacturing expert, and the same benefits the chef gets from the co-packer, the product manager gets from a banking as a service platform.

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