As covered in my last piece, defining BaaS is challenging. It means different things to different people depending on their involvement with the industry and their geographic location.
How Banking-as-a-Service Works In Europe
In Europe, the term is applied broadly to many different types of business, but within that there are two distinct groups: Companies with full banking licences and software providers that have varying levels of permissions, but which are generally regulated as Electronic Money Institutions (EMIs).
Between them, they offer a huge range of services covering the entire banking stack from card issuing, lending and payment wallets, to regulatory compliance. It should be noted, however, that only those with full banking licenses can hold customer deposits or lend off their own balance sheets.
Customer facing brands — which include representatives from industries including fintechs, retailers and mobility providers — will often use a number of these companies to build out a financial offering. That ranges from what appears to be a full-service banking product to financial products embedded within customer journeys like instalment payments.
Two key things to note here are: The complexity of this ecosystem means that it’s incredibly hard for end users to know who is responsible for their money, and companies looking to use BaaS providers are ever-more confused about who they need to do what.
As John Salter, CCO at Clearbank, an 8-year-old UK bank which specialises in providing financial services for other companies notes, “The confusion around the definition of BaaS can create false expectations for those wanting to provision the service, potentially leaving them under-serviced or not receiving the level or type of service they required and expected.”
Regulators Are Flexing Their Muscles
As a result of this situation, and the disastrous collapse of Wirecard, an early provider of BaaS services in Europe, regulators in the region have become more interested in the space.
Railsr, an early pioneer of the BaaS model in Europe came under several regulatory bodies’ scrutiny, for example. It was put under investigation over anti-money laundering (AML) offences by the Lithuanian authorities, and subsequently the UK regulator, the Financial Conduct Authority (FCA), put it under watch for fear of failure. Ultimately that fear was justified and Railsr went into administration before being acquired by a consortium of shareholders.
Another sign of increased regulatory interest was the recent action German regulator Bafin took regarding Solarisbank, a major provider of BaaS services to the fintech industry. Following an investigation into its business organization, the bank must now receive regulatory approval to onboard new customers. This course of action allows Solarisbank to continue operating, while Bafin gains a better understanding of BaaS.
The combined impact of examples like these and the wider state of the BaaS industry is that regulators will continue paying more attention to BaaS, and the end result will be more specific regulation for the segment. That’s not necessarily a bad thing, but adherence will require more resources to navigate.
That resource requirement will be too much for some providers to handle. In the meantime, while waiting for updated rules, companies are unlikely to make strategic decisions, hampering the industry’s ability to expand. That, coming at a time when the whole fintech industry is recalibrating how to ensure sustainability in an uncertain economic climate, will be unwelcome.
The result will be fewer players in the space, and less choice for companies wanting to build BaaS-powered services.
Established Banks Want In On BaaS
At the same time, this environment has contributed to the emergence of a new breed of BaaS providers — established banks looking to capitalise on the gaps opening up in the market.
For example, UK bank NatWest took a majority stake in BaaS provider Vodeno in October 2022 and the two will now work together to offer NatWest Boxed, which will “enable large corporate clients to embed financial products directly into their ecosystem by leveraging Vodeno’s BaaS technology and NatWest’s banking technology and its banking licenses.”
As Andy Ellis, CEO at Natwest Boxed points out, organisations like his have major advantages when it comes to navigating the challenges of the BaaS industry. Not only do they have significant experience in managing compliance, they also have access to the resources required to offer an end-to-end BaaS service which he suggests is “not an inexpensive endeavour”, but which is arguably more appealing to customers.
Ellis also said that the most valuable customers for BaaS providers, and that “arguably benefit the most from BaaS”, are companies with large customer bases which are hard to sell into for most smaller providers. An organisation like Natwest, however, already has relationships with those large companies making it easier for them to navigate the sales and onboarding process.
It would seem that established banks working with newer technology providers could be the perfect BaaS solution, as each can focus on their own strengths. That said, any relationship has its ups and downs and there are more examples of failed bank-fintech relationships than successful ones — so every partnership should be assessed on a case-by-case basis.
The European BaaS Landscape Is Shifting
The result of these two key trends — increasing regulation and banks moving into the market — will be consolidation in the BaaS industry. The winners will be those that can and will prioritise compliance, likely the largest non-bank providers and the full-banking license holders, and those which focus on service delivery.
The delivery point is important because providers focusing on growth and customer acquisition above all else, which was many before the funding market reset, are likely to make missteps — data from Aite-Novarica research commissioned by Clearbank shows that 40% of BaaS customers surveyed saw services go down and 33% lost customers.
At a time when customers are getting more discerning and the competitive landscape is shifting, providers can’t afford to let anyone down. If they do, customers will go elsewhere and spread word of their dissatisfaction at the same time.
The end result of these shifts for BaaS customers, and their own customers which are the end-users of the new financial products and services, should be increased clarity and reliability. In turn, that lays the ground for BaaS to build on its early promise to deliver a wider range of customer-centric financial offerings to the market.
As David Jarvis, Co-Founder and CEO of BaaS provider Griffin which holds a full banking license said, “Despite rumblings to the contrary, Banking as a Service (BaaS) is far from dead”.
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