Today, BaaS is used by 82% of fintech companies, with BaaS-related services representing 45% of a fintech’s overall revenue stream. To produce this report, Aite-Novarica Group interviewed 20 fintech companies in the UK and Europe with at least 50 employees and average annual revenues of $25m between June and September 2022.

The report ‘Confusion, cost, and compliance: The bifurcation of BaaS and Embedded Banking’ finds that fintech firms are too reliant on their BaaS providers to speed up time to market, boost revenues, and meet compliance demands. However, as these organisations scale up or evolve their product offerings, BaaS providers are struggling to keep up. This has led to lost revenues, rising costs, and regulator intervention.

In conversation with Finextra, John Salter, chief customer officer at ClearBank and Enrico Camerinelli, strategic advisor at Aite-Novarica Group highlighted why it is important to acknowledge the difference between embedding banking and banking-as-a-service and why experts use the terms interchangeably.

BaaS providers are not to blame; it is the responsibility of fintech firms to ensure they are fully prepared to collaborate with a technology company and are educated about what they are responsible for or what can rely on others for. This why a transition to embedded banking is required.

The fintech firms that were interviewed for this report were already running business for their clients, but desired to add banking products through BaaS providers to expand their portfolio. Typically, these players hold electronic money institution licences so they can move money, but they cannot hold deposits. BaaS providers that do not hold a banking licence can operate as distributors of APIs or technical orchestration, but do not have the capability of doing everything a bank can do.

Camerinelli explained that “where the industry is falling short is when BaaS vendors are unable to provide more than just money movement and therefore, find it difficult to satisfy needs, or worse, they are forced to tell their clients to speak directly to the bank. This creates dissatisfaction and creates delays in time to market deliveries.

“The focus of the report is the transition from banking as a service to embedded banking, because embedded banking increases more complexity. To satisfy the needs of the end user who expect transparency, fintech firms must also consider compliance and risk, which is normally on the shoulders of banks. It has to be taken care of, and those who are providing the aggregation functions without also having the regulatory element are the ones who are falling and are creating that gap,” Camerinelli said.

Salter shared the same view and mentioned that while bank accounts are a crucial product when building client relationships, they are still not fully understood, and most cannot tell the difference between a bank account and a safeguarded account through an EMI. “Therefore, people don’t really understand where their money is being held at any point in time and that’s not a good thing.”

Education across the value chain is of paramount importance, particularly around the definitions of BaaS and embedded banking. While BaaS is defined as the distribution of regulated banking products by distributors, often aggregators, which may be licensed or non-licensed, embedded banking is the integration of banking services only by a bank-licensed provider directly into the experience of the end user.

In Camerinelli’s view, BaaS is “the product and embedded banking is the best way to promote it and to commercialise it to the user. The promise of embedded banking is doing everything seamlessly and from within the enterprise over the system of the non-financial company that is offering that service to its own clients. Embedded banking is a good bandwagon you want to jump on, but make sure that you have all the credentials to stay on that bandwagon. Otherwise you will be kicked out of it.”

Salter concluded: “Embedded banking for me is a new class and we think it's important that you separate embedded finance, which seems to be the new in vogue phrase, and I have used the word finance deliberately. For me, that is all about financing. Embedded finance is one side of the balance sheet, it's lending and credit facilities. That is not what embedded banking is.
“Don't confuse embedded banking with embedded finance. If you go to any conference, that language is so unclear. People that we talk to are very clear that they they're not in the financing business. They want to provide bank accounts, to their users, who save with them regularly.”