Is Banking-as-a-Service (BaaS) at an inflection point? Given the challenges and regulatory pressures emerging in BaaS, do you see this moment as a ‘reckoning’ for unsustainable models, or is it an evolution towards a more responsible and resilient BaaS 2.0? What would a more mature, sustainable BaaS model look like?
BaaS is evolving, but for the better. The challenge with BaaS today is all BaaS providers are not the same. Some are strictly IT specialists, others hold payment licences, and a few others offer services based on a full banking licence. The BaaS you get might look very different from one provider to another.
This can be very confusing for companies considering BaaS, and regulators don’t like the ambiguity. In reality, the licence of a BaaS provider dictates the services they are able to offer. What’s more, the compliance and risk management credentials of BaaS providers many times are not consistent.
Compliance processes such as Know Your Customer (KYC) and Anti-Money Laundering (AML) are integral in the delivery of banking products. As we enter BaaS 2.0, how a BaaS provider is licenced, and if they can provide the necessary regulatory and compliance support, is just as important as their technology solution. BaaS is moving into its more responsible era, but that is good for the sector, and ultimately, good for clients and consumers.
The assessable market predictions for BaaS are driven by consumer appetite. Ecommerce companies seeking a competitive edge are turning to BaaS to make their customer journey better, and consumers, particularly Millennials and Gen Z, are responding with their wallets, leading to increased conversion and repeat visits. Our recent research found that (52%) of 25-34-year-olds prefer using financial products and services from their favourite brands over traditional banks, whilst 50% will only stay loyal to brands offering embedded financial products and flexible solutions like BNPL and cashback.
Consumer behaviour toward financial services has shifted markedly in the past five years. Today, far more people trust the brands they use every day to access financial services. As BaaS adoption has increased, consumers expect Embedded Banking products offered in the customer journey when and where they need it, making the shopping experience faster and easier.
BaaS puts the customer at the centre, delivering what they want in the way they want it – just as no one wants a mortgage, they want to buy a house, no one thinks I want BNPL, they think I want to buy a pair of jeans.
We have seen some BaaS providers exposed for failure to abide by onboarding and AML regulation. This is the result of BaaS 1.0 being inherently flawed with too much focus on tech valuations over banking compliance. Following regulatory frameworks was less important…in fact, it was viewed as a blocker to the growth of the sector by some.
Regulators are now actively looking to understand the BaaS model better in order to identify the risks and determine how to manage them. Regulators will also want to define roles and responsibilities for the BaaS ecosystem which has multiple layers and different stakeholders. Additionally, regulators will need the support of the BaaS sector to help fill the gaps in digital knowledge.
I believe supervision will not just be about scale but will be about complexity as well – and one size will not fit all. This could mean the creation of a new regulatory model for BaaS. The more forward-thinking BaaS providers will find success by positively engaging the regulators.
The first step is to understand your customer. What are the friction points within your customer journey? What challenges do your customers face? How could Embedded Finance solve them? Understanding your customer will inform which Embedded Finance products make sense for your business and where in the customer journey to offer them.
Next, regulation and compliance are critical; depending on the banking product, the right licence is required to enable the solution. The BaaS provider must also make sure all business processing operations are fully compliant. Compliance can vary significantly from one BaaS product to another; while requirements are relatively light for simple payment processing, lending solutions like BNPL are much more demanding due to changing regulations and the accountability and decision requirements for lending money to customers.
Without the right level of regulatory and compliance support, BaaS adopters may find themselves under-serviced, and as a result, they may have to outsource compliance responsibilities to another BaaS provider or hire a dedicated team to handle compliance in-house.
Finally, Go-to-Market (GTM) is just as important as the product itself; businesses cannot adopt BaaS with a mindset of ‘build it, and they will come’. Careful planning must go into the GTM strategy for any BaaS solution. This involves a clear plan to market the product launch, keeping in mind that financial solutions require more communication – customers must both trust the product and understand its value.
I believe BaaS represents the future for banks – not as a separate entity, but complementary to traditional banking.
UniCredit recently announced its agreement to acquire Aion Bank and BaaS technology platform Vodeno. This is the first major European bank to recognise the BaaS model as a future growth opportunity and invest in its development. More investment in BaaS will mean more innovation and more adoption across different sectors.
BaaS 2.0 will likely see additional investment from larger banks. The appetite for BaaS and Embedded Banking is clearly there – both from businesses adopting the solutions and end customers using the products. And, big banks are starting to believe in the BaaS model as a cost-effective path to acquire customers at scale via a B2B2C model.
Neil is CEO of Aion Bank. With over 20 years of experience in senior-level banking, ecommerce, retailer finance, and technology, Neil brings expertise to deliver Aion Bank’s BaaS ambitions across Europe. Neil most recently served as CEO for Vanquis Bank (part of Provident Group plc), where he was responsible for leading all aspects of the Bank, including setting strategic direction for its multiple product lines, management of the regulatory environment, treasury management and full P&L accountability. Before Vanquis, he was CEO of Shop Direct Group Financial Services, the provider of financial services to brands, including Littlewoods and Very, responsible for all IT/digital transformation efforts for the Shop Direct Group.
Aion/Vodeno offer end-to-end financial provision – tech stack + banking licence – with Aion’s full banking licence enabling a comprehensive suite of banking products, underpinned by the Vodeno Cloud Platform. Aion/Vodeno can deliver financial services directly into the customer journey with wide product breadth and geographic coverage, giving clients the ability to create a better experience and meet their customer needs. Aion Bank and Vodeno are separate companies and both backed by global growth investor Warburg Pincus LLC, NatWest Group, and EBRD. Earlier this year, UniCredit announced their agreement to acquire both Aion Bank and Vodeno, pending regulatory approval.
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