Artificial Intelligence

Artificial intelligence, also known as AI, is a term used to describe software that anticipates consumer needs and reacts intelligently to consumer choices. AI is strongly correlated with pattern recognition, and operates behind the scenes across the digital world to keep consumers and their data safe by identifying and stopping bad actors. AI and predictive analytics are not new. Machines were created at Bell Labs in New Jersey in the early 1950s that could predict human behavior with 65% accuracy. These machines, metal boxes as large as modern microwave ovens, used only 2 bytes of storage, or 0.0000000018 of one gigabyte.¹ Today, predictive analytics or AI has grown considerably in complexity as computer power has increased, and so has data collection.

If paired with the proper data, AI can make highly accurate guesses about customer intentions. Deployed properly, this can boost the bottom line while also delighting customers.

Not all use cases of AI result in a happy customer. AI also runs the risk of irritating or offending customers, even if the guesses the software makes are correct. The classic case of AI overreach in the retail world was the megastore Target, which used software that determined customers buying a certain combination of items were likely to be pregnant, and made offers appropriate to this situation. Imagine being the father of a teenage daughter and receiving a personal offer for discounts on diapers and baby bottles? It is easy to see how even a correct guess here might not please the recipient of such offers, or their parents, and feel like an overstep and violation of privacy. Data management is a thorny issue that must take regulations and social concerns into account. Fast-moving technology outruns both social norms and compliance.

Mobile Computing and Digital Onboarding

The use of mobile computing has grown so swiftly that two decades after it first gained popularity it is now ubiquitous, in every corner of the globe. Mobile banking may have connected nearly everyone in the world, but much of the world still lacks access to the financial tools that can lift them out of poverty. Close to 80% of the world's adults own a smartphone, and a further 10% own feature phones.² By 2025, it is believed that 70% of the world will do its computing solely on mobile devices. Paired with digital onboarding, mobile ubiquity means customers and businesses can connect at any time and any place.

Digital onboarding sounds simpler than it is in practice. Authenticating customers is a difficult business. A certain amount of data must be collected, but if too much is asked for, many customers will not complete the process, a behavior commonly referred to as abandonment. Convenience is one of the top priorities of every customer, and when it becomes inconvenient to sign up for a service with pages and pages of requests or questions, customers will look elsewhere, as there are often other options available.

As the world becomes more and more global and people move for new jobs or to be closer to family, their digital onboarding gets more complex when the customer's account involves multiple countries. Regulators have played an active role here and smoothed the way for customers to safely identify themselves in a number of contexts, and AI plays an important role in aiding the companies by performing checks against fraud and malfeasance. While complicated, digital onboarding is imperative for a seamless customer experience. Companies that primarily deliver services digitally but do not offer entirely digital onboarding will face severe challenges in customer acquisition.

APIs

APIs, also known as application programming interfaces, allow two different pieces of software to communicate and exchange data. In a way, APIs fulfill the early promise of the internet, connecting everything and everyone. They were first introduced to the mainstream by Salesforce in 2000 and have been the reason behind the possible rise of fintech since the 2010s, with many fintechs leveraging the services of banks through APIs and repurposing them in a new way with a new value proposition to their end customers.³ On the surface, customers think they are only interacting with said fintech, but on the backend, nine times out of ten there is a traditional bank offering the core capabilities through their API. APIs allow your bank account or payment credentials to connect anywhere, and securely transmit data in order to make a payment or take out a loan. APIs are the reason a generation is growing up that may never need to physically handle money, visit a financial institution or even to some extent, have a primary banking app if they uniquely rely on invisible payments and embedded finance for their day-to-day needs and wealth management propositions for their savings. APIs enable customers to access multiple services with a single click. They allow businesses to open online with a single line of code pasted into their website.

APIs are simultaneously growing more sophisticated, from the perspective of developers, and simpler, from the perspective of users. They are everywhere, seamlessly connecting services to meet customer needs across the internet, allowing not only the mega banks with billion-dollar tech budgets and hundreds of developers but small banks and credit unions as well to offer their services through APIs.

Two of the most important developments entirely based on API technology that play a vital role in developing compelling embedded finance propositions are Open Banking and BaaS. These concepts at times get confused and even people in the industry mistakenly use them interchangeably, but there are a few key differences between the two.

Open Banking

Open Banking allows customers to transport their data or credentials safely, initiate payments from their bank account directly from third-party applications without having to log into their bank account, and allows applications to be built around banking data and services. One key item to note here and one of the real values of Open Banking, is that this is always with the customer's consent.

Open Banking implementation thus far is in the early days in terms of opportunities. Helen Child, founder of Open Banking Excellence (OBE), shares, “Consumer awareness and adoption will rapidly accelerate innovation of use cases beyond aggregation and payments. It will enable building consumer centric products and services, where banking becomes invisible.” In a recent marketing sizing report Accenture forecast the Open Banking addressable market in the next three years as $418 billion.⁴

While early, in Europe, Open Banking is already showing traction. Helen shares:

In 2018, the UK created the “blueprint” for Open Banking, and as of January 2022, just celebrated its fourth anniversary with over 4 million users. The leading use case in the UK is HMRC, Her Majesty's Revenue Collection, processing £2.6 billion of transitions. The UK market is advancing rapidly with new standards such as Variable Recurring Payments (VRP), NatWest being the first in the market with this game-changing payments enhancement.

Open Banking is in a highly embryonic state in the US today, but is far more developed in the UK and Europe. It is changing how customers view, manage, and access their money, build budgets and prepare their taxes, obtain loans, open accounts, and make payments. It is helping consumers better understand their holistic financial situation today and in the future while enhancing their experience with the fintech propositions they already use.

The use cases for Open Banking are quite vast. Probably the most popular use case centers around account aggregation. Account aggregation involves utilizing APIs to allow people to get an overview of their accounts. One of the most successful account aggregators globally is a company called Plaid. As of 2021, Plaid is a fintech company that is used by more than 4,500 companies to connect you to other third-party financial applications without directly sharing your login information. You may have utilized Plaid to apply for a personal loan, an auto loan, pay a contractor, open up a digital bank account, etc. Another such example of a company that fits into the account aggregation space is Tink out of Europe. With more than 3,400 banks and institutions integrated, a presence in 18 markets, and 10,000 developers using their platform, Tink claims to have built “Europe's most robust Open Banking platform – with the broadest, deepest connectivity and powerful services that create value out of the financial data” and provides the ability to instantly verify account ownership or verify income in real time on top of access to business and personal financial transaction data.⁵

The next use case for Open Banking, which saw great popularity in the late 2010s, centers around personal financial management, also known as PFM. PFM software allows you to see your entire financial life in one place to then make informed decisions about spending, saving, and investing. Have you ever wanted to know how much money you spent across all of your credit cards this month or how much you spent this quarter on take-out food? Plenty of fintechs focusing in the PFM space allow this desire to become a reality. Two of the most popular companies in this space are Mint (sold to Intuit and boasting over 15 million users as of April 2021) and Personal Capital (sold to Empower for over $1 billion in 2020) but there are plenty of others in the space from Every Dollar to Moneydance.⁶ Needless to say, there is a strong desire for people to budget and track expenses, plan for the future, and set goals, and no shortage of options to help them get there. Some of the more sophisticated PFM offerings also incorporate the ability to track subscriptions, allowing users to monitor how and where they are spending money on a recurring basis. They also make it easy to cancel any subscriptions you no longer need. There are criticisms of PFM, that it doesn't reach the people who need it most, but with machine learning and additional data inputs, there's no denying PFM can powerfully aid those who choose to use it.

As previously outlined, the BNPL movement and the ability to receive instant credit approval are two of the best examples of Open Banking in action. Before Open Banking, lenders would have to put together multiple pieces of data from a potential customer and the decision could take days or weeks, with a chance that the customer is no longer interested in the loan. Through Open Banking, lenders can now get an almost real-time overview of a potential customer's credit history, and provide decisions in minutes or even seconds while the customer waits. Some of the biggest players in this space are Affirm in the US (public as of 2021), Klarna in Europe (last valued at $46 billion as of fall 2021), and many others from GoCardless, Splitit, Quadpay, and more.⁷

Another use case of Open Banking centers around opening new accounts digitally. Many of the biggest neobanks in the world take advantage of the enhanced capabilities of online account opening but many traditional players take advantage of these services as well. One of the most important aspects of online account opening centers around Know Your Customer, better known as KYC. Essentially, KYC provides all the necessary components to confirm your identity. Yet again, there are a myriad of players in this space that have gained much traction over the years with some of the biggest being Onfido (with over 1,500 customers as of 2019), Socure (valued at $4.5 billion as of November 2021), Jumio, Trulioo, and many others tackling different part of identity verification like Alloy.

While the use cases for Open Banking are vast and there are similarities across geographies, interoperability is the critical component for global success. Helen shares a helpful analogy:

Currently each country creates individual API standards that are not instantly compatible with the rest of the world. A good analogy here to describe the current state of play would be the electrical plug sockets, with each country having their own standards. And as we all know when traveling to a different country, we need an adaptor for our electrical appliances to work. A common set of global standards would provide global interoperability.

Banking-as-a-Service

Banking-as-a-Service, most commonly referred to as BaaS, is an end-to-end process that ensures the overall execution of a financial service provided digitally. It can take on a few forms but, typically, people think of it as a model in which licensed banks integrate their banking services directly into the products of other nonbank businesses.

To understand BaaS as it is today and how it has become the main pillar of embedded finance propositions, we need to go back to the early days of its inception. As we have seen earlier in the book, neobank propositions were launched around 10 years ago. This was made possible by the arrival of APIs in fintech—which were required to connect to banks to access and distribute financial services in a new way, the fintech way—and by the arrival of BaaS providers such as Bankable and the late Wirecard, which enabled the launch of prepaid card-based propositions for retail and small and medium enterprises, or SMEs, for users in a matter of weeks. This was a revolution, enabling banking innovation at a pace never seen so far.

Neobanks and fintechs were the first type of customers served by BaaS providers. Shortly after, some banks launched their own separate digital banking propositions, with the support of BaaS providers, in an effort to catch up with those new propositions, launch in new geographies, or reach out to new target segments especially the younger demographics like millennials or Generation Z.

The banks that chose to launch a digital bank themselves took a variety of paths. NatWest launched their digital bank for businesses called Mettle with the support of the digital finance consultancy 11:FS.⁸ Other banks chose to outsource such projects to the likes of Fidor (now part of Sopra Banking Software) or others.⁹ Fidor in particular played a prominent role in Europe and beyond and was behind the ADIB Bank community-based digital proposition.¹⁰ There are many other large players who are gaining traction, including Bankable who supported ABN Amro's Moneyou development by adding current accounts and payments to their savings bank proposition, and BPC who is powering the launch of Tinkoff Bank in the Philippines.¹¹

While BaaS first developed in Europe and gained very strong traction in the US in the past years, it hasn't developed in China in the same way as in the West. Yassine Regragui, fintech specialist and expert on China, explains that the core business of the likes of nonbanking apps such as Alipay and WeChat is technology. While they rely on banks to offer loans or to do the KYC, because one cannot use Alipay or WeChat without having a bank card—linking those apps to one's bank—they are technology companies. For this reason, they have developed everything in-house and are providing their technologies to other wallets, in Southeast Asia in particular, where they have partnered with many wallets to enable them, thanks to their white-label technology, to speed up the payment processes to offer value-added services such as lifestyle services. Until now, there hasn't been any BaaS model because fintechs and other businesses typically go through the Alipay or the WeChat Pay onboarding process rapidly without the need for another third-party provider to build their service.

Regragui believes that BaaS may appear at some point in China because they will be interested in looking into it and potentially finding new use cases for it in a context where the number of Chinese fintech is growing at a very fast pace. Lately, many new players have developed their own payment solutions, including Douyin, TikTok's name on its native soil, and Baidu, the Chinese Google, which now offers financial services too. The current trend is for further nonbanking solutions to develop their own infrastructures, but we see collaboration with banks increasing. Newcomers will have the choice to collaborate with these tech companies, with banks, or both.

With a market opportunity in the trillions, it isn't surprising to see the multitude of companies entering the BaaS landscape. We would go as far as to say that BaaS is at the very beginning of its journey and the competition in the field is still very low, as many providers focus on specific use cases that others do not support. Also, while some BaaS providers have initially launched a one-size-fits-all proposition, more and more players are entering the market to solve the challenges for specific customer segments. We will walk through detailed examples of BaaS in practice both by traditional players, the banks, and nontraditional players later in this chapter, but, first, we must address a key pillar in true embedded finance success: regulation.

Regulation: Europe

European regulators have led the way in easing regulations to open up the market and support consumer choice. Payment Service Directive 1 (PSD1) allowed nonbank players to carry out financial transactions and required transparency around fees for services. It also helped define the single Euro payment area to facilitate payments across international borders. This directive launched in 2011. In 2015, a revised directive, PSD2, allowed payments services companies to access account information held at banks.

The EU also drives innovation with passporting, which allows a company registered in one Eurozone country to do business across the region. This lowers barriers to doing business across the entire region and compares advantageously to the US, in which money service businesses or MSBs are required to register with each and every state. This can take years and cost millions of dollars, an obvious barrier to innovation as well as consumer choice.

Passporting is a great asset to multinational companies, which can incorporate in a country with friendly local laws such as Lithuania, and use that as a jumping-off point to larger economies within the zone. Jean-Baptiste Graftieaux, CEO Europe of Bitstamp, also believes that the upcoming European Commission's Regulation of Markets in Crypto-assets (MiCA), which is a regulatory framework to provide a single licensing regime across all member states by 2024, similar to the passporting system, will enable crypto platforms to expand more easily, which ultimately will benefit embedded finance-powered crypto use cases around crypto exchanges, NFTs, and the Metaverse.

Adam Bialy, founder and CEO of Fiat Republic, considers the Payment Service Directive 2 (PSD2) to be one of the biggest developments of the past five years, as it created the framework which enabled the use cases and value chain of embedded finance. As the discussions around PSD3 are starting, he places his bet on the continued focus by the European Union on driving competition in the market. He also believes that PSD3 will provide the framework for quicker, faster, more accessible cross-border payments to all the players of the ecosystem by focusing on the upgrade of the protocols.

The UK, which is not part of the EU following Brexit, which took place in 2020, has been leading the way in fostering fintech innovation for many years. With more than 300 banks, 45 building societies, 260 EMIs, and a further 77 foreign EMIs offering services in the UK, the UK is one of the most dynamic financial services centers in the world. Thanks to its innovative and open approach to fintech, fostered by the UK Parliament mandate to promote competition and by the Financial Conduct Authority (FCA) for the implementation of this mandate, seven in ten UK citizens now use at least one fintech company to fulfill their financial services needs. In response, revenues from UK fintech rose to £11 billion in 2019—almost double from four years before and accounted for almost 10% of the global total of fintech revenues.¹³

One of the primary projects of the FCA include Project Innovate, aimed at lowering entry costs and barriers to the financial services industry. This project has since been complemented by the creation of the regulatory sandbox, in which new ideas are tested safely, with the support of the FCA, before reaching the market.

In an effort to continue to best support the UK fintech sector growth moving forward, the Chancellor asked Ron Kalifa OBE to carry out an independent review as part of its Budget 2020.¹⁴ The recommendations of this report included:

• Ways to make the Initial Public Offerings in the UK more attractive through improvement to tech visas to ensure a continued qualified workforce for UK fintech.
• The creation of a regulatory Fintech Scalebox aimed at providing further regulatory support to growth stage fintechs.¹⁵
• The establishment of a National Center to promote local fintech ecosystems coordination, some of which are already under implementation, including the regulatory Fintech Scalebox with the creation of the regulatory “nursery” in 2021 aimed at providing enhanced oversight to newly authorized firms while they develop and grow used to their regulatory status.¹⁶

Some regulators and central banks in Europe have recognized that to foster competition, it was necessary to give fintechs access to payment rails directly, circumventing the existing system for them to have to access it through established agency banks. Until 2014, fintechs needed to contract with agency banks to access the UK Faster Payments system launched in 2008.¹⁷ In a similar way, some European countries such as Lithuania, enable fintechs to access SEPA rails (launched in 2008 and fully rolled out in 2014) directly through the Central Bank of Lithuania while in other European countries, the easiest option to access it is through commercial banks.¹⁸, ¹⁹ By getting direct access to the payment rails, regulated fintechs have more flexibility. The flexibility mainly comes from the fact that they don't have the need to integrate with the legacy bank infrastructure of banks but instead integrate into modern payment rails infrastructure developed in the 2010s. The result is much lower cost because the middle-man—the bank—is removed and, finally, because they don't need to manage an extra stakeholder.

Regulation: US

US regulators have started to open the doors to innovation, such as the Office of the Comptroller of the Currency's creation of fintech charters, the Federal Deposit Insurance Corporation and the Consumer Finance Protection Bureau both enacting Innovation arms, and a handful of other initiatives. Fintech charters offer access to payment rails, obviating the need to obtain licenses state by state, and have generally lighter capital requirements and the other restrictions designed to limit the risk of banks. The less rigorous regulations of these charters are designed to empower fintech companies to offer services to a broader swath of customers, but have drawn opposition from the banks and some municipalities. The US has a complicated network of regulators in the financial services space, and while there are promising signs, there is not yet broad consensus on how to handle the influx of entrants to the financial services space.

It has taken years, but fintech companies are now gaining access to the payment rails that drive the American economy, primarily the ACH (automated clearing house) network and real-time systems such as Fedwire, from the Federal Reserve. Regulators in the US continue to look at fintech companies, particularly cryptocurrency players, with a great deal of skepticism but this is slowly changing. Obtaining access to inexpensive and speedy payment systems is a key part of enabling the launch of embedded finance propositions at scale and low cost.

Regulation: Asia

In China, the regulators have also taken a proactive approach to foster fintech innovation. Yassine Regragui mentions a handful of important regulatory-driven initiatives that are supporting fintech innovation while ensuring the protection of their users:

• Microloans. Two years ago, during the IPO of Ant Group, the regulator decided to regulate microloans to avoid a subprime crisis that would have come from the fact that many people could access them on both Alipay and WeChat, and as a result subscribe to many of them, and to ensure that not only people with high credit scores would be able to widen the gap between social classes. To do so, they gave more weight to the banks by imposing that 70% of microloans are provided by banks and the remaining 30% by Ant Group and other microloan providers.
• Creating an antitrust law. Over the past 20 years, a big share of innovation came from Alibaba and Tencent and the Chinese regulator wanted to ensure that competition is fostered so that innovation relies not only on those two players.
• Data. While China was not part of the General Data Protection Regulation (GDPR), the Chinese regulator wanted to put in place data policies in China, allowing Chinese companies to be ready when they expand globally.
• Central Bank Digital Currency. A central bank digital currency, or CBDC, has been developed in China and is already boasting 100 million users across the country. Widespread adoption will depend on when the infrastructure is deemed fully tested and ready by the Chinese government.

In Singapore, the Monetary Authority of Singapore (MAS), is seeking to accommodate new companies and encourage the building of new businesses and widening of consumer choice. The MAS even offers funding and mentorship for companies building in the island nation, encouraging the best and brightest from around the world to move to Singapore and build their fintech business there. In 2018, in partnership with the World Bank Group's International Finance Corporation (IFC) and the ASEAN Bankers Association, MAS launched APIX which they refer to as the world's first cross-border, open-architecture Global FinTech Marketplace and Sandbox platform aimed at increasing collaboration between fintech and traditional financial institutions, to drive digital transformation and financial inclusion across the Asia-Pacific.²⁰

In 2019, MAS also announced that it would issue up to two digital full bank licenses (DFB) and three digital wholesale bank licenses (DWB), on top of the existing digital banks established under MAS's existing internet banking framework, in an attempt to liberalize the financial services industry.²¹ The selected candidates, which are expected to go operational in 2022, include the Grab-Singtel consortium and tech giant Sea for the two digital full bank licenses and Ant Group as a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong, and Beijing Co-operative Equity Investment Fund Management for the digital wholesale bank licenses.²²

In the summer of 2021, Ravi Menon, managing director of MAS, spoke out in support of the decentralization of finance away from its traditional core.²³ Embedded finance, he noted in a June 2021 report, offers “the prospect of more efficient, more affordable, more inclusive financial services.” And consequently, “Regulatory frameworks will need to become more modular and agile.” But more operators in the space also opens up more potential vectors for fraud, Menon noted.

BaaS: US Banks’ Early Success

One example of a large bank that has made significant traction is Goldman Sachs, who, as Matt Harris, partner at Bain Capital says: “has invested the most dramatically in this. The Apple partnership they have now works well but it wasn't a generic solution that Apple took advantage of, it was a custom solution built for Apple.” Barclays, BBVA, Standard Chartered, and Westpac have started down this path as well along with a few of the other banks.

BaaS Is Not Just for the Big Banks

While there are some great examples of BaaS in practice at the big banks, we have seen good traction with smaller banks, particularly the BIN sponsor banks like Cross River Bank and Metropolitan Bank. (BIN means “Banking Identification Number” and is used to help clients issue credit cards, for example.) Both of these smaller banks have invested a great deal of money in technology and in their program management systems to expand their capabilities beyond being a BIN sponsor or regulatory sponsor. But how large a market opportunity is this for banks collectively? Harris feels that “it's going to be 3–4% of banks who have the wherewithal to do this.” If you look at the US market, as of 2020, there are 4,377 FDIC-insured banks in the United States, using Harris's guess that would be around 130 banks in the US market.²⁴

Kansas City–based NBKC has taken its own approach. It catapulted into the midst of the fintech scene by launching an accelerator, Fountain City Fintech, in 2018. Working closely with startups and helping them scale and succeed transformed the way the bank thought about its business offerings. NBKC now licenses its charter to neobanks, which means it allows nonbanks to maintain deposit accounts insured by the FDIC, and have access to the payment rails and all the trappings of being a bank. It also provides card-issuing services, and offers à la carte checking and savings accounts, as well as FBO accounts. FBO stands for “For Benefit Of,” and is used to manage and pool user funds without assuming ownership of them. Legend says that the peer-to-peer payment app Venmo, now owned by PayPal, began by using one of its founders’ personal bank accounts, but as the service gained popularity, this became impractical (and possibly illegal). What was needed was an FBO account to pool user funds.

Evolve Bank & Trust is an example of a bank leaning into the new ways of doing business. Evolve provides the banking services for the “banking for humans” app Dave, which went public in 2021 via a $4 billion SPAC, or special purpose acquisition company. Evolve provides banking services to a number of fintechs, despite having assets of only $400 million which, for context, doesn't rank in the top 1,500 banks in the US by asset size. The bank began as First State Bank in Parkin, Arkansas, a town with a population of just 641. In 2005, the bank changed its name to Evolve, and in 2009 it moved down the road to Memphis, Tennessee. This move placed it in a large metropolitan area and greatly improved its chances of attracting top-tier talent. Today Evolve comes up in most conversations about tech-savvy banks, and it is highly sought after for partnerships by fintechs. Fintech and BaaS have transformed the bank and this has paid off handsomely for them. As of January 2022, according to Evolve's home page, revenue has increased 74% in the past three years.²⁵ Sila Money is one of the fintechs that has been leveraging the services and license of Evolve Bank & Trust to serve their clients.

BaaS: European Banks’ Early Success

In Europe, where Open Banking and customer ownership of financial data are stronger, many banks have taken on the primary role in BaaS. HSBC was one of the first players in the market by enabling the launch of challenger bank propositions with the retailers Mark & Spencer and John Lewis. The solution consists of white-label services provided by the retailers with a focus on credit cards, insurance, and investment services.²⁶

Through its acquisition of the fintech startup Treezor in 2018, Société Générale has also put a first step in the arena, powering the likes of European unicorns, Qonto, Lydia, and Swile, and has been a strong advocate of the BaaS movement since then.²⁷

ClearBank

ClearBank, launched by Nick Odgen in 2017, is the UK's first clearing bank in more than 250 years. According to Marcus Treacher, member of the board at ClearBank, the company's vision is that “the world of banking will be fully disaggregated in the near future and that elements of banking will be carried out by specialist companies like themselves that will provide a much more relevant solution than universal banks.” For this reason, they exclusively focus on clearing and holding value on behalf of their customers so that they can in turn provide the best real-time payment experience to their own customers, which of course benefits the end customer as well.

In just a few years, ClearBank has become the go-to provider for UK services to the most renowned companies including Nationwide Building Society, Tide, Rapyd, Viva Wallet and Oaknorth, amongst others. Between 2019 and 2020 ClearBank has seen its revenues double from £5.3 million to £10.6 million.²⁸ Currently, Clearbank is working on its European expansion to support its clients across borders.

Solarisbank

Solarisbank is another interesting example relating to their BaaS strategy with a very different approach and target segments. This strategy has had a tremendous impact in empowering the rise of neobanks in Europe. Solarisbank is the enabler of unregulated fintech, enabling them to operate under its banking license, including the SME banking proposition Penta, the crypto banking proposition Nuri, and the sustainability-focused banking proposition, Tomorrow.

Solarisbank has developed a one-stop-shop solution ranging from digital banking, to cards, payments, KYC and KYB, and lending. They were established in 2015 as a part of the Berlin-based fintech company builder Finleap and officially launched in 2016, after receiving their banking license. They have raised multiple investment rounds, including raises from industry players such as Visa, BBVA, and ABN Amro, with the latest round being their Series C €60 million in 2020.

BaaS: Asia and Beyond's Banks’ Early Success

In Asia and beyond, some banks have also taken advantage of the opportunity of BaaS.

Standard Chartered, which is a bank headquartered in the UK with a strong presence in Asia, launched its Nexus BaaS platform in 2020. They announced they were working with a major e-commerce platform and with Sociolla, a leading personal care e-commerce platform, both based in Indonesia, to offer financial products including saving accounts, loans, and credit cards to their customers.

Kelvin Tan, Standard Chartered Ventures’ lead on this project, declared that the agreement with Sociolla was going well beyond a memorandum of understanding. “It is very integrated,” he said. “We want to link product design to the partner. It will be the partner that will provide our interest rates to their deposits, for example. It will be the partner that uses our balance sheet to deliver rewards in order to drive user growth.”

In Australia, the second largest bank on the continent by assets under management, Westpac has taken a proactive stance when it comes to BaaS. Westpac chose the UK-based banking platform 10x Banking and AWS as partners to launch its BaaS offering in just 18 months, which is a timeframe that is quite unheard of amongst traditional banking players when deploying new technology stacks. When referring to 10x Banking, Macgregor Duncan, Westpac's general manager of Corporate & Business Development, declared: “What you've allowed us to do is create a new business model for the Westpac Group – one that enables us to embed financial services to meet the evolving needs of existing and new customers and allows our partners to create a customer experience like no other. That is unique.”

So what role do partners like 10x Banking play? 10x Banking's mission, which was founded by former Barclays CEO Antony Jenkins in 2016, is to provide scalability and stability for digital inspiration of their clients. Leda Glyptis, their chief client officer, attributes the success of the deployment of their BaaS platform projects to three specific factors:

• Make a decision. Making the deliberate choice to select a modern and agile technology partner rather than a legacy partner.
• MVP. Getting the MVP, or minimum viable product right. This sounds simple but often companies, especially traditional players, can overcomplicate this. In Westpac's case, they had a use case in mind that already had strong traction. They partnered with the Buy Now, Pay Later fintech company Afterpay as they saw an appealing first customer proposition which demonstrated strong traction and solid metrics from the start.
• Vision. Having a very clear vision on what Westpac wanted to achieve with the launch of a BaaS offering and why. It is quite easy to get caught up in the hype of the industry or respond to a trend because a competitor is doing it. Westpac's team engaged on the project and had a deep understanding of the fundamental economics of platforms which transcended across all levels of the organization.

BaaS: Through the Lens of Fintech

Traditional banks aren't the only ones who have taken advantage of the immense opportunity of embedded finance. Outside of the banks themselves, there are other classes of players that partake in BaaS. One group is e-money institutions that directly connect to banking partners and serve as the smart API layer distributing banking and payment and card services to the ecosystem at large—the fintechs, banks, and brands. Some of the primary players in this space across the globe include Railsbank, Modulr, Marqeta, Swan, Treezor, Weavr.io, Hubuc, and so on.

BaaS in Practice

Another batch of companies like Bankable or Sila Money focuses on a pure BaaS technology plan, while partnering with banks (Aion and Arkea for Bankable, Evolve Bank & Trust for Sila), to offer a well-rounded proposition to a myriad of players.³⁰

There is no single way to do BaaS. This comes from the fact that there is a variety of BaaS customers with very diverse needs, and we are seeing more and more propositions, such as Fiat Republic's platform, dedicated to answer the needs of specific customer segments. Fiat Republic, a soon-to-be EMI regulated banking and compliance-as-a-service hybrid platform, is focusing on serving the Web3 economy. While the crypto world is experiencing a boom era, amazingly, crypto and other Web3 platforms still struggle to access traditional banking services and are often required to pay hefty risk premiums in lieu of greater assurances of compliance and security. This is the problem Fiat Republic is trying to solve. Designed to bring crypto platforms together under a Consortium to amass collective bargaining power for negotiations with banks and regulators, Fiat Republic's hybrid platform gives crypto platforms access to mainstream and local fiat rails via a single API. The company leverages data so that only the cleanest flows are processed through their banking partners, with full transparency, helping the banking partners unlock the business opportunity that Web3 flows represent. This is a win-win for the Web3 economy as a whole, crypto platforms and banks.

Beyond BaaS, offered by banks directly or fintech companies ultimately relying on banking infrastructure, a notable trend is the addition of BaaS to existing payment propositions to provide an end-to-end experience to users. Plaid, Stripe, Checkout, and others have made the move in such a direction.

The US market is a $4 trillion credit market, which is primarily owned by four companies, Bank of America Merrill Lynch, JP Morgan Chase, Capital One, and Wells Fargo. It is well known that although these banks continue to make large investments in their technology, they still have aging tech stacks. On top of that, some are limited to the number of card programs they can launch in any given year, and they tend to cater to companies with large (one million+ customer bases).

Plaid and Stripe historically focused on one leg of the payments journey but have evolved and are now offering full stack payments solutions to their customers, demonstrating the importance of such a trend in terms of opportunity size. As introduced above, Plaid started by offering account aggregation, but grew from there into offering payment initiation and recently launched Plaid payout in the UK.