New research from ClearBank and Aite-Novarica Group reveals that half of fintech companies are losing $11 million per year due to product delays related to Banking-as-a-Service (BaaS) providers. The report indicates that fintech firms need to adopt an embedded banking approach.
Currently, 82% of fintech companies utilize BaaS, with BaaS-related services accounting for 45% of their overall revenue. The report was based on interviews conducted with 20 fintech companies in the UK and Europe, each with at least 50 employees and average annual revenues of $25 million, during June to September 2022.
The report titled “Confusion, cost, and compliance: The bifurcation of BaaS and Embedded Banking” highlights that many fintech firms overly depend on their BaaS providers to expedite market entry, increase revenues, and adhere to compliance requirements. However, as these firms grow or diversify their product offerings, BaaS providers often struggle to keep pace. This disconnect can lead to lost revenue, escalating costs, and attention from regulators.
In a discussion with Finextra, John Salter, Chief Customer Officer at ClearBank, and Enrico Camerinelli, Strategic Advisor at Aite-Novarica Group, emphasized the importance of distinguishing between embedded banking and BaaS, noting that industry experts frequently use the terms interchangeably.
Camerinelli pointed out that it is not solely the BaaS providers’ fault; fintechs must ensure they are equipped to collaborate effectively with technology partners and know their responsibilities as well as what they can delegate. This understanding necessitates a shift towards embedded banking.
The fintechs interviewed were already providing services to their clients but sought to integrate banking products via BaaS providers to broaden their offerings. Many of these firms hold electronic money institution licenses, allowing them to transfer money but not take deposits. BaaS providers without banking licenses can offer APIs or technical orchestration but cannot replicate all the functions of a traditional bank.
Camerinelli stated, “The industry’s challenge arises when BaaS providers can only manage transactions and struggle to meet broader needs, sometimes redirecting clients back to banks. This can lead to dissatisfaction and delays in product launches.”
He also noted that the report focuses on the transition from BaaS to embedded banking, highlighting the added complexity of embedded banking. To meet user expectations for transparency, fintechs must address compliance and risk—the latter typically managed by banks. Those providing aggregation functions without the necessary regulatory framework are at risk of falling short.
Salter echoed this sentiment, pointing out that while bank accounts are vital for building client relationships, there is often confusion around the differences between a bank account and a safeguarded account from an EMI. “People often don’t know where their money is held, which raises concerns.”
Education throughout the value chain is essential, particularly regarding the definitions of BaaS and embedded banking. BaaS is described as the distribution of regulated banking products by licensed or non-licensed distributors, while embedded banking involves a licensed bank provider integrating services directly into the end user experience.
Camerinelli summarized BaaS as “the product” and embedded banking as the optimal method to present and commercialize it to users. “Embedded banking promises a seamless experience, but it’s crucial to possess the right credentials or risk being excluded.”
Salter concluded by stressing the distinction between embedded banking and embedded finance. “Embedded finance is primarily about lending and credit, which is only one aspect of financial services. Many in the industry are focused on offering bank accounts rather than financing options, which highlights the need for clarity in these terms.”