Banking-as-a-Service (BaaS) is undergoing a significant transformation, entering what industry insiders are calling a “responsible era.” Over the past two years, the sector has experienced a dramatic decline in investor interest, falling from $1.9 billion in investments in 2021 to merely $136 million in 2023—a staggering 92% drop. However, founders, CEOs, and experts in the field assert that the industry is far from dead. McKinsey forecasts a bright future, estimating that Europe’s addressable market for BaaS will be valued between €90 billion and €105 billion by 2030. This optimism stems from the belief that the initial stages of BaaS have merely run their course, giving way to a more mature and responsible third wave that focuses on meeting the nuanced needs of end-users.
Shift Towards Need-Driven BaaS
This third wave is characterized by a shift from product-led approaches to need-driven solutions. According to Neil Chandler, CEO of Aion Bank, consumers fundamentally don’t seek out loans, credit cards, or mortgages, but rather the end goals these financial products facilitate, such as purchasing a home or going on a holiday. Early iterations of BaaS often failed to grasp this, focusing too narrowly on the financial products themselves rather than the underlying consumer needs they sought to address. The new wave aims to understand and meet these core needs, making products that offer genuine customer value. Such a change not only enhances customer satisfaction but also builds long-term loyalty.
Lars Markull, founder of Embedded Finance Review, echoes Chandler’s sentiment, suggesting that the focus is now on embedding fintech functionalities into existing applications or solutions. This integration must create perceptible value for customers to drive adoption. Markull believes the future of BaaS lies in niche solutions where financial features are seamlessly incorporated, making them almost invisible to the user yet deeply valuable in the background. This approach requires a thorough understanding of different customer segments and the challenges they face, ensuring that the financial services provided are not just functional but integral to the user experience.
Embedded Finance and Customer Value
Success in this new era of BaaS will heavily rely on close collaborations with retailers and marketplaces to embed financial services earlier in the consumer’s journey. This could manifest in practical ways, such as aiding retailers in filtering product options based on a customer’s financial capacity. A responsible lender, for example, would steer a debt-carrying customer away from expensive items and toward more affordable options, gauging sustainability and affordability over sheer profit. Such partnerships can lead to more personalized financial experiences, enhancing the value proposition for all involved parties.
Regulatory considerations are paramount in this era. With regulators increasingly scrutinizing as-a-service providers and insisting on improved compliance measures before new business ventures are approved, adherence to regulations has become a critical focus for BaaS providers. The drive towards what has been termed the “responsible era” means understanding both compliance and the traditional banking landscape. This regulatory emphasis is poised to bolster transparency and cooperation, laying a sustainable foundation for future growth. Ensuring that financial services are delivered responsibly and transparently not only fosters trust but also mitigates potential risks associated with non-compliance.
PSD3 and Future B2B Potentials
The responsible era is further shaped by upcoming EU regulations, like PSD3, which, while not exclusively targeting BaaS, are anticipated to drive banks towards offering APIs that will spur new business services. Simon Taylor, founder of Fintech Brainfood, predicts that while the consumer neobank boom has largely plateaued, the B2B space still holds substantial opportunity for embedded finance, such as lending within accounting software or insurance in B2B marketplaces. This shift opens new avenues for BaaS providers, allowing them to cater to the nuanced needs of businesses, thereby driving sustained growth.
The convergence of traditional banking and fintech models is a notable trend in BaaS 3.0. This integration is epitomized by moves like UniCredit’s recent acquisition of Aion Bank and BaaS platform Vodeno. According to Chandler, this marks a significant shift towards anticipating and catering to future consumer demands. The future landscape may see a blending of traditional banks, neobanks, and BaaS providers, with some consumers opting for single providers while others diversify across multiple platforms to meet their complex financial needs. This convergence will likely create a more cohesive financial services ecosystem, offering customers a holistic and seamless experience.
Merging Traditional and Fintech Models
Banking-as-a-Service (BaaS) is experiencing a significant transformation, heralded as the beginning of a “responsible era” by industry experts. The last two years have seen a dramatic decline in investor interest, with funding plummeting from $1.9 billion in 2021 to a mere $136 million in 2023, marking a stark 92% drop. Yet, despite this decline, industry leaders, including founders, CEOs, and analysts, maintain that BaaS is far from obsolete. McKinsey predicts a promising future, forecasting that Europe’s addressable market for BaaS could reach between €90 billion and €105 billion by 2030. This optimism is rooted in the belief that the initial, experimental phase of BaaS has concluded, paving the way for a more mature and responsible third wave. This new phase aims to address the specific and nuanced needs of end-users more effectively, positioning BaaS for sustainable growth. The past challenges have, in fact, set the stage for a more robust and user-centered approach to BaaS solutions.
