Setting the Record Straight: Demystifying Banking-as-a-Service

banking service

By Kim Van Esbroeck

There is a lot of hype around Banking-as-a-Service (BaaS), and with good reason – according to Gartner, it is one of the four technologies with potential for high levels of transformation in the banking sector. 

Although BaaS is a significant trend, several misconceptions around the topic remain. Some of these misunderstandings may keep a business from effectively leveraging the BaaS opportunity. BaaS adopters need greater awareness of what BaaS does and doesn’t do, and who stands to benefit from it. 

With this in mind, following are some of the most common misconceptions today.  

Misconception: BaaS and embedded banking are the same

One of the most common misconceptions around is that BaaS and embedded banking are interchangeable terms. While the two are related, they are key distinctions: BaaS refers to the foundational tech stack and relevant regulatory requirements that underpin a financial service, and embedded banking is when brands integrate banking products directly into their ecosystem (website or app), thereby becoming the face of the financial product to their end customers. 

Misconception: BaaS only has B2C applications

Many initial BaaS use cases have focused on B2C offerings, however there is a huge opportunity for BaaS on the B2B side. 

Today, more organisations are offering BaaS powered banking services to their value chains, including vendors, suppliers and intermediaries. According to research, the B2B eCommerce market is set to exceed $20 trillion globally by 2027, with companies like Amazon distributing around $5 billion in loans to SMEs to support their growth, in turn, driving loyalty to the Amazon platform. Uber has also offered strong use-cases, developing financial products that help drivers buy vehicles, handle payments and extend fuel credit cards.

Products like merchant financing – essentially BNPL for SMEs – are also gaining in popularity amongst marketplaces. While access to credit can be difficult for SMEs, merchant financing allows marketplaces to help their vendors obtain upfront capital that they can use to produce, buy and sell goods. Vendors can repay the capital secured once goods are sold and profits are realised.

Misconception: All BaaS providers will take care of compliance 

One critical misconception surrounding BaaS that adopters need to understand is that all providers offer the same compliance expertise and support. BaaS providers without the right compliance infrastructure can leave non-financial businesses at risk of being underserviced. Ultimately, these businesses may need to outsource compliance responsibilities to an additional provider, which means they may face delays in their time to market or incur additional costs.

In reality, compliance remains a critical aspect of any financial service. When choosing a BaaS provider, brands must be aware of the provider’s regulatory protocols and credentials and be prepared to manage compliance on their own if their partner can’t support. Data security, privacy and anti-money laundering measures should never be compromised, and businesses should not assume that all BaaS providers are equal in terms of compliance support. 

Misconception: BaaS is a threat to traditional banks

This is perhaps the most common misconception surrounding BaaS – that it will render traditional banking obsolete, as more consumers look to their favourite brands for their banking needs. In reality, banks are well-positioned to take advantage of BaaS by offering their services to more users via a B2B2C model. BaaS is quickly becoming a way people can get better access to financial services, and banks – as the licence holders behind the banking product – still play an important part in making sure the service is fully compliant.  

Unlocking BaaS for your business

BaaS is transforming the financial services landscape. However, to fully harness its benefits, businesses must have a full understanding of what it can and cannot do for them. By understanding the needs of their customers and partnering with BaaS providers that can offer full end-to-end service, adopters can unlock the true potential of BaaS.

About the Author

Kim VEKim Van Esbroeck is Chief Revenue Officer for Vodeno/Aion. Kim is responsible for growing Vodeno/Aion’s business through commercial activities and business development. Aion Bank and Vodeno are commercial partners offering embedded banking services in Europe, combining Vodeno’s API-based technology with financial products based on Aion’s ECB licence and regulatory and compliance expertise. Together, Vodeno/Aion are uniquely positioned to offer comprehensive embedded financial services for banks, lenders and merchants across multiple sectors.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.