Graduation Year

2025

Date of Submission

12-2024

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

George Batta

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© 2024 Jonathan Ke

Abstract

Over the past decade, financial technology (fintech) has emerged as an innovation reshaping the financial services landscape. One particular fintech that recently caught the attention of consumers and regulators is Banking-as-a-Service (BaaS). BaaS is often a partnership wherein a fintech company provides banking services, such as digital payments or lending, using the infrastructure and license of a sponsor bank. The bank manages regulatory compliance and core banking operations, while fintech focuses on developing and delivering innovative services to customers. On the one hand, BaaS partnerships allow banks to expand their customer base and service offerings without investing in extensive technological infrastructure. On the other hand, there have been rising concerns surrounding the risks assumed by the sponsor banks when they take on BaaS partnerships. The complication of new technology and a newly acquired customer base raise compliance risks. In this paper, I study how BaaS partnerships affect the performance of U.S. community banks, measured by deposit growth and cost efficiency, using a bank-level panel data set from 2014 to 2023. This paper first introduces the levels model, examining whether there is a sustained effect of BaaS partnership on deposits and cost efficiency. Next, the paper implements a differences model to examine whether BaaS implementation has any year-specific impacts or changes on the banks’ deposits and cost efficiency. Estimation of the levels and differences model indicates that there is not a statistically significant relationship between BaaS partnerships and the bank’s deposit growth and cost efficiency.

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