Sam Boboev, Founder at Fintech Wrap Up and Product Manager at TPF, discusses the critical issue of compliance in Embedded Finance and BaaS, differences between the US and EU BaaS models, and the factors influencing BaaS platform success.
Certainly. I'm Sam, a seasoned product professional currently serving as a Product Manager at TPF, a dynamic payment company committed to revolutionising conventional payment paradigms. With nearly a decade of immersion in the fintech and payments realm, I've built my expertise in crafting innovative product strategies tailored to diverse markets across the UK, EU, and Central Asia.
In addition to my role at TPF, I co-founded Botcommerce, a SaaS commerce platform designed specifically for banks and fintech enterprises, underscoring my commitment to driving innovation at the intersection of finance and technology.
Beyond my professional engagements, I am the founder and curator of Fintech Wrap Up, a highly regarded newsletter revered for its deep dives into the ever-evolving landscape of fintech, digital banking, and emerging technologies. Furthermore, I'm deeply passionate about paying it forward through pro-bono peer mentorship, where I offer guidance and insights to aspiring product managers seeking to navigate the dynamic fintech landscape
I'm driven by a passion for learning and taking risks, both in my professional and personal life. This motivates me to constantly seek new opportunities for growth and innovation, believing that embracing challenges leads to greater achievements and fulfillment.
In my observation of the Embedded Finance and Banking-as-a-Service (BaaS) landscape, one of the most critical topics currently is the ownership of compliance or risks. As the ecosystem expands and becomes more interconnected, the lines of responsibility for regulatory adherence are becoming increasingly blurred. Neither the technology providers nor the customers of Embedded Finance or BaaS, nor the traditional banks, are eager to assume sole ownership of compliance.
This hesitancy to take ownership stems from various factors, including the complex and ever-changing regulatory environment, the potential liabilities associated with non-compliance, and the desire to shift responsibility onto other parties in the ecosystem. However, this lack of clarity and accountability is eroding trust among all stakeholders and, ultimately, adversely impacting customers.
Without a clear understanding of who bears responsibility for compliance, there is a risk of regulatory breaches, which can result in severe consequences for all parties involved. Moreover, the absence of trust among ecosystem participants undermines the foundational principles of Embedded Finance and BaaS, which are built on the promise of seamless integration and mutual benefit.
Despite challenges in the last couple of years, the BaaS model in the US is gaining significant traction, primarily due to the increasing demand for seamless financial services integration into various digital platforms. At its core, BaaS allows non-banking businesses to offer banking services by leveraging the infrastructure and regulatory frameworks of traditional banks.
The key parties involved in BaaS are originators, which are banks that provide licenses required for regulatory compliance. Then we have enablers, which are usually fintech or software vendors—tech companies that create APIs and platforms for integrating financial services. Next, we have platform providers, which could be non-financial or financial companies that embed financial services into their existing offerings. Lastly, we have end users, which are consumers or businesses who benefit from the seamless integration of financial services within the platforms they already use.
If we compare the US and EU BaaS models, we will see that the US model is characterised by a strong presence of traditional banks as originators. In the US model, banks provide the regulatory framework and infrastructure, while fintechs handle the technology and customer-facing aspects.
However, in Europe, fintechs often take the lead, acting as both enablers and platform providers, potentially even bypassing traditional banks. The European model is more collaborative and driven by regulations like PSD2 (Payment Services Directive 2). PSD2 mandates that banks open their payment services and customer data to third parties through APIs, fostering a more open and competitive environment.
The decision to offer program management services is influenced by several key factors, including resource allocation, target market needs, competitive positioning, regulatory considerations, and partnership strategies.
Until recently, many BaaS platforms provided all-inclusive services, including program management, to help their customers accelerate their go-to-market strategies and create a seamless experience. This model was also appealing to originator banks, as it allowed them to delegate some risks to BaaS platforms and save on resources. Typically, this involved tri-party contracts between the bank, BaaS platform, and fintech, with the BaaS provider managing the program for the fintech.
However, regulators have raised concerns about how well banks understand their fintech partners and the ambiguous agreements regarding responsibility for risk and compliance. In some cases, regulators found that banks had completely gave up their oversight responsibilities regarding these providers and partners.
As a result, many BaaS platforms have shifted towards a "Direct" model. In this approach, BaaS platforms function primarily as middleware, facilitating communication between banks and non-bank providers and offering API integrations without taking on program management responsibilities.
I believe Banking-as-a-Service (BaaS) has immense potential to scale, primarily because it aligns with the growing demand for seamless and integrated financial services across various industries. The scalability of BaaS can be attributed to several factors.
The modular nature of BaaS platforms allows them to offer a wide range of financial services through APIs and cloud infrastructure, making it easier for non-banking companies to integrate these services into their own offerings. This flexibility means that businesses of all sizes, from startups to large enterprises, can leverage BaaS to enhance their customer experiences and streamline their operations.
On the other hand, the increasing digitisation of financial services further drives the need for scalable BaaS solutions. As more businesses and consumers adopt digital payments and banking solutions, BaaS platforms can rapidly expand to meet these needs.
The collaborative ecosystem between traditional banks, fintech companies, and other businesses fosters growth. By partnering with established financial institutions, BaaS providers can tap into existing infrastructure and regulatory frameworks, allowing for quicker and more efficient scaling.
As reported on May 9th, TabaPay, a payments processor, has withdrawn from its deal to purchase Synapse, a BaaS provider. Under the terms of the deal, TabaPay was set to pay USD 9.7 million to acquire Synapse’s assets. What are your thoughts on this development, and what problems does it surface and how it will influence the evolution of BaaS and the middleman model?
The situation with Synapse is quite complex, but I'll try to summarise it. Synapse was providing BaaS services as an intermediary between its banking partner Evolve Bank & Trust and fintech startups like Mercury. Currently, there are disputes among these parties, adding to the complications.
Synapse filed for Chapter 11 bankruptcy, and around the same time, TabaPay announced its intention to acquire Synapse’s assets. However, the deal has fallen through, and various parties have offered explanations for why it didn't go through, but I won't dive into those details here. Given these developments, it's possible that Synapse's case might be converted from Chapter 11 bankruptcy reorganisation to Chapter 7 liquidation, according to court documents.
The potential closure of Synapse, a key player in the fintech space, would create significant challenges. Many developers and startups rely on Synapse’s technology to power their financial services. An abrupt shutdown could disrupt these businesses, causing a ripple effect throughout the fintech industry. This scenario highlights the inherent risks in the fast-paced world of fintech, where rapid growth and innovation can sometimes overshadow sound financial planning and stability.
The BaaS landscape in the US is undoubtedly undergoing significant transformation, driven by regulatory pressures and operational challenges. While these developments present hurdles, they also offer opportunities for growth and improvement.
As the industry faces these challenges head-on, there’s a sense of resilience and adaptation. BaaS platforms are recalibrating their strategies to meet evolving regulatory standards and operational demands. The shift towards the "Direct" model, where banks have more control and oversight over fintech partnerships, is a testament to this adaptability.
Technological advancements are also playing a crucial role in shaping the future of BaaS. Platforms are investing in simplifying integration processes and migrating to cloud-based infrastructure, making it easier for banks to onboard new partners without disrupting their existing operations.
When assessing the potential of a BaaS platform for future partnerships, I prioritise several crucial criteria that reflect the evolving landscape of the industry.
Secondly, effective risk management practices are critical. I seek out platforms that have robust processes for identifying, assessing, and mitigating potential risks. This includes not only financial risks but also operational, legal, and reputational risks.
While technology has traditionally been a primary focus, I now also consider the maturity and adaptability of the platform's technology stack. I look for platforms that offer flexible APIs, scalable infrastructure, and innovative features that cater to diverse use cases and customer needs.
By carefully evaluating these criteria—regulatory compliance expertise, effective risk management, and the maturity of technology—I can confidently assess the potential of a BaaS platform for future success.
About Sam Boboev
Sam is a seasoned product leader at TPF, a leading payment company renowned for its innovative solutions. With almost a decade of experience in the payments and fintech sector, Sam has been instrumental in shaping product strategies for markets spanning the UK, EU, and Central Asia. Alongside his role at TPF, Sam is a co-founder of Botcommerce, a pioneering SaaS commerce platform tailored for banks and fintech firms. Beyond his professional endeavors, Sam is the founder and curator of Fintech Wrap Up, a widely acclaimed newsletter delving into fintech, payments, digital banking, and tech industries. He is also passionate about pro-bono peer mentorship, offering guidance and insights to aspiring product managers seeking to navigate the dynamic fintech landscape.
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