Banking-as-a-Service breaks out, but not yet Open Banking payments

Both Banking-as-a-Service (BaaS) and Open Banking emerged some years ago with the potential to disrupt banking, payments, and fintechs by opening the banking and payments infrastructure to API connectivity and accessible licensing. BaaS providers were destined to disrupt banks by enabling fintechs and by supplying a variety of corporate segments with ‘embedded financial services’. Open Banking, meanwhile, was positioned to cannibalise traditional payment methods (e.g., cards) and restricted access to banking data. Then we fast-forward to today when we see widely disparate disruptive impacts from BaaS and Open Banking. BaaS is fully emerged and relevant today, scaling rapidly as fintechs leverage BaaS to tackle various segments of financial services. Open Banking payments, however, are still largely nascent. 

Figure 1: Banking-as-a-Service & Open Banking Primer

Each of BaaS and Open Banking was stimulated on the supply side by PSD2 and a mandated opening of financial services licensing, network access, and account access. BaaS, however, also had the corresponding demand-pull as fintechs proliferated and banks underserved fintech plumbing. Open Banking information access also demonstrated demand-pull as this access is an easy way to validate identities. There is little demand evident for Open Banking payments, however, as bank payments in Europe were already relatively well served by APMs and strong clearing networks. 

BaaS is reshaping how financial products and services are distributed, enabling a wave of non-financial service providers to embed payments and banking services into their core offerings. BaaS fintechs offer white-labelled plug-n-play licensed financial products that allow fintechs (e.g., neobanks) and corporates (e.g., telco, insurance, retailers) to embed these into their own customer journeys and offer these as branded products. 

As we illustrate in figure 2, BaaS fintechs are enabled by modern, cloud-based, micro-services-driven tech stacks with a roster of API accessible products along with the underlying licensing and back-end infrastructure. 

Figure 2: BaaS platform stack and comparison by business model

BaaS providers gained early traction by addressing the needs of fintechs (e.g., neobanks, lending fintechs, x-border PSPs, others). BaaS offers fintechs a rapid path to market with significant technical and business case advantages over building everything in-house or assembling legacy components and partnerships. Neobanks in particular benefit tremendously by leveraging BaaS partners, allowing them to focus on customer-facing products and customer acquisition. Fintechs are the early drivers of demand, but we also see big tech and large corporates (Amazon, Samsung, Ikea) now using BaaS services. These corporates aspire to integrate fintech products into their customer user journeys to increase customer stickiness, drive brand loyalty and also benefit from new fintech revenue streams. 

Leading BaaS providers offer a broad product suite that caters to a variety of fintech and corporate needs. Rather than assembling one partner/ platform for cards, one for digital banking, one for payments, and one for lending, fintechs can now obtain all these services via a single BaaS partner, via API. However, not all BaaS have the same product portfolio. Solarisbank or Railsbank are examples of BaaS providers with broad product coverage. Banking Circle and Modulr Finance are more focused on bank payments and virtual IBANs (though Banking Circle also enables merchant lending).

BaaS providers are receiving a massive injection of capital where we expect billions of funding from 2020 through the end of 2022. This capital will help to drive the global expansion of BaaS and broadening of the customer segments served with embedded financial services. 

Four years after the implementation of the regulations, the development of PSD2 and Open Banking as disruptive forces in the European payments industry is still a developing story. As we illustrate in figure 3, markets have evolved at different rates and current PIS turnover only accounts for ~1% of total European ecommerce turnover. 

Figure 3: Open Banking maturity by market & PIS ecommerce penetration

Open Banking PIS payments were effectively established by the regulators via PSD2 to fully open bank accounts as means of payment. The European market for digital payments, however, was already well-served by a long list of alternative payment methods accessing bank payment rails (iDeal, Blik, Twint, Swish, MobilePay, Trustly, Sofort) as well as rapidly growing BNPL schemes. These schemes have established brand and trust with consumers, along with acceptance by merchants, which in combination can take a decade to build. 

Open Banking payments are also somewhat awkward to enable and service. Outside the UK (the clear leader in enabling Open Banking payments), structural and technical headwinds hampered PIS adoption due to fragmentation of API standards, and inconsistent API availability (banks built to fulfil regulatory mandates, neglecting performance). Open Banking payments also lack the clear rules and servicing backbone that exists for cards, whereas servicing of Open Banking payment fraud or other exceptions continues to be somewhat ambiguous. 

Adoption of PIS payments remains low with early adoption in verticals such as gaming and crypto exchanges. Although use cases for PIS payments are still developing, the rails for accepting bank APIs for payments are now largely in place via specialized Open Banking fintechs such as Tink, Token, Truelayer, Yapily and others. These Open Banking fintechs offer a suite of integrated PIS products enabled by API and integration toolkits. The Open Banking sector is not suffering from lack of capital. Despite today’s small revenue pool, Open Banking providers have attracted billions of funding.

In contrast to PIS, account information services (AIS) have gained greater traction, powering a range of use cases illustrated in figure 4. While stymied by the same API quality and availability barriers, they have not faced the same challenges as PIS payments. 

As an enabler of new business models and being a B2B solution, new fintechs were quick to launch AIS powered businesses. AIS and PIS functionality is increasingly being combined to power new financial use cases (i.e., BNPL) and to improve legacy use cases (direct debit). 

Figure 4: Sample AIS use cases

Despite similar disruption expectations, Banking-as-a-Service is now realising its potential, while Open Banking payments are still awaiting a breakout. BaaS is a powerful force of acceleration in the broader evolution of fintech and leading BaaS providers are now driving hundreds of millions in revenue. Open Banking information access is scaling, but Open Banking payments are still looking for use cases capable of scaling. The acceleration of new embedded finance use cases (e.g., BNPL, B2B financing, crypto commerce) is reinforcing the convergence of BaaS and Open Banking, e.g., BNPL services being powered by BaaS are being further enriched through Open Banking data services to improve credit decisioning. With both BaaS and Open Banking, innovators have exceptional tools to drive innovation and disruption in the European market for financial services.

This article is part of ‘Who’s Who in 2022’s payments ecosystem? Full rundown of key topics and actors reshaping the industry as we speak’, a thorough analysis of the payments ecosystem by pinpointing the key trends that shaped the market over the last year, but also the most important names needed to be taken into account when it comes to relevant case studies in the field. The article is published in Who’s Who in Payments Report 2022. 

About Flagship Advisory Partners

Flagship Advisory Partners is a boutique consultancy and M&A advisory firm focused on payments. We provide strategy, delivery, and M&A support to financial institutions, PSPs, fintechs, technology providers, brands, and investors. We serve clients globally from offices in Europe and the US.