Aite-Novarica Group today announced the launch of a new study, commissioned by ClearBank, that reveals one in five fintechs are losing $11m per year in product delays due to BaaS (Banking-as-a-Service) providers. The report “Confusion, cost, and compliance: The bifurcation of BaaS and Embedded Banking” reveals that fintechs are increasingly reliant on their BaaS providers to speed time to market, boost revenues, and meet compliance demands. However, as fintechs scale and look to offer more complex services, BaaS providers are struggling to keep up. This is resulting in lost revenues, rising costs, and at worst intervention from the regulator, as fintechs start to churn towards Embedded Banking providers. 

Aite-Novarica Group interviewed 20 major fintechs in the UK and Europe with at least 50 employees and average annual revenues of $25m between June and September 2022. BaaS is defined as the distribution of regulated banking products by distributors, often aggregators, which may be licensed or non-licensed. Whereas Embedded Banking is defined as the integration of banking services only by a bank-licensed provider directly into the experience of the end user. The research aims to unpack the growing market confusion between BaaS and Embedded Banking, the benefits and disadvantages of working with a BaaS provider, and establish the appetite and motivations to move to Embedded Banking. 

Key findings from the report include:

Speed to market, new services, and compliance are driving BaaS 

• BaaS today is a ubiquitous tool utilised by 82% of fintechs, with BaaS-related services representing, on average, 45% of a fintech’s overall revenue stream.
• Accelerating time to market and adding services (60%) are the primary drivers of BaaS adoption.
• A third of respondents (33%) cited regulatory scrutiny as an emergent driver. 
• While the initial investments into BaaS were driven by technology and capability, they are increasingly being driven by regulatory demands. 

BaaS is primarily used for payments and accounts, but more complex demands are emerging

• 76% of fintechs identified domestic accounts and payments as primary BaaS uses. A further 59% of respondents identified FX conversion services.
• In the next two years, fintechs are looking to offer more complex BaaS capabilities including:
  • Investments (56%)
  • Crypto services (50%)
  • Wealth management (38%) 
• Today BaaS is primarily used for payments and accounts, but fintechs are looking to BaaS providers to enable them to offer more complex services in the future.

Market needs are evolving beyond BaaS due to complexity and compliance

• As fintech priorities shift towards investments, crypto, and wealth management, BaaS aggregators and EMI license holders will be incapable of directly managing the governance processes and stringent regulatory controls associated with these services.

Lost revenue, increased costs, and regulatory intervention for fintechs due to BaaS issues

• 47% of fintechs experienced product delays which resulted in an average of $10,900,000 in missed revenue annually due to poor BaaS performance.
• 7% encountered unforeseen cost rises to the tune of $690,000 annually.
• 40% saw services go down and 33% have lost customers.
• 20% of fintechs have faced regulatory intervention due to their BaaS partner.

Fintechs are leaving BaaS providers and embracing Embedded Banking

• 31% of fintechs have changed their BaaS provider and 23% are currently planning to.
• 25% of fintechs said they will be using an Embedded Banking provider in the future - despite confusion in the market between the two categories

“The term BaaS is loosely defined, and often confused with another fast-growing term: Embedded Banking,” said Enrico Camerinelli, Strategic Advisor at Aite-Novarica Group. “Why does this matter? As fintechs look to deliver customer facing benefits and reduce their regulatory burden there is a clear difference between the two. Embedded Banking not only allows fintechs to embed licensed services directly into the user experience, it also embeds the mechanisms that automatically control regulatory compliance – rather than shift this responsibility onto the fintech as is the case with many BaaS providers.”

“The next two years will see a clear separation between BaaS and Embedded Banking providers as the market bifurcates,” concludes Camerinelli.

“Many BaaS and Embedded Finance offerings are no longer meeting the needs of their customers. They don’t offer the precision customers are demanding, and they can make it unclear what protections are in place to keep consumer funds safe,” said John Salter, Chief Customer Officer, ClearBank. “There must be a change to provide fintechs with the level of service they require and ensure account holders are aware what type of safety their money is afforded. We commissioned this research to better understand the state of the BaaS and Embedded Finance market, and how it can be improved. As a result, we’ve revealed some crucial issues and uncovered an appetite across European fintechs to move towards a new category, namely Embedded Banking.”