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Debunking Seven Misconceptions About BaaS

by internationalbanker

By Kim Van Esbroeck, Chief Revenue Officer, Vodeno/Aion 





The rise of e-commerce and online retail has seen an increasing number of non-financial brands incorporate financial services directly into their applications and/or websites, thanks to banking-as-a-service (BaaS). BaaS providers serve as crucial links between different players in the financial world by leveraging modern API (application programming interface)-based technologies and regulated financial infrastructures.

Today, there are a number of different BaaS providers on the market, all with different infrastructures, licences and core services. Understanding the key principles behind BaaS and the differences between providers is vital to unlocking the potential of embedded banking fully.

Here, we debunk the most common misconceptions surrounding BaaS and embedded banking and clarify the core differences between providers.

Misconception 1: Embedded banking and BaaS are the same.

Embedded banking wouldn’t be possible without BaaS, but they are not the same. While BaaS refers to the technological stack and regulatory frameworks supporting financial services, embedded banking pertains to the smooth integration of banking services into non-financial platforms.

Thanks to BaaS, embedded banking enables businesses to remove friction from customer journeys, providing their customers with access to financial services exactly when they need them. These solutions boost conversions and encourage repeat visits, impacting customer loyalty and satisfaction—a win-win for both the customer and the business.

Misconception 2: All BaaS providers have compliance expertise.

Not all BaaS providers offer complete end-to-end services, including technology, licensing, compliance and risk management. Adopters that don’t have regulatory experience should choose a provider with the expertise to support business-process operations, such as AML (anti-money laundering) and KYC (know your customer), to avoid potential issues and additional costs.

Without this crucial support, BaaS adopters may find themselves underserviced. This means they may have to outsource compliance responsibilities to another provider or recruit an in-house team dedicated to compliance, causing delays in bringing financial products to market and higher costs.

Misconception 3: All providers are licenced in the same way.

BaaS provision goes beyond just the tech stack. Licencing is critical to determining which banking solutions a BaaS provider can offer. Some providers have Electronic Money Institution (EMI) licences, enabling payment solutions, transferring money between different accounts and issuing electronic money.

On the other hand, some providers have full banking licences, granting them the ability to offer more comprehensive suites of banking products—including lending services and holding deposits, along with the compliance guarantees commonly associated with fully regulated banks.

Misconception 4: BaaS is only a payment solution.

Of course, payments are fundamental to BaaS. However, providers with full banking licences can offer a wide range of banking products beyond payments. According to research from Vodeno/Aion, BaaS adopters today are considering much wider ranges of solutions than payments alone. In 2023 and beyond, adopters said they were weighing up foreign exchange (FX) (48 percent), buy now, pay later (BNPL) (48 percent), small and medium-sized enterprise (SME) lending (47 percent) and loyalty programmes (46 percent), among others, for future implementation projects.

Misconception 5: All BaaS providers’ tech stacks are the same.

Not all BaaS providers are the same; providers can differ significantly in their technological capabilities and products. For example, some providers may specialise in particular segments or functionalities (such as payments), while others provide access to a wide range of APIs to offer full-stack financial services—everything from accounts and card issuing to embedded lending and savings accounts.

Many of the best providers are designed to offer customer-centric approaches, utilising blockchain algorithms and low-code systems to ensure that businesses effortlessly define and automate business processes without relying on their BaaS providers. Ultimately, this means that partners can speed up their time to market while still benefiting from the highest levels of protection for sensitive financial information.

Misconception 6: BaaS has only B2C applications.

Many BaaS use cases today focus on B2C (business-to-consumer) applications. However, there is a huge scope for SMEs and sole traders to benefit from BaaS. Today, more and more businesses are offering banking services and payments not only to their end customers but also to their value chains, including vendors, suppliers and intermediaries.

Research1 has indicated that the B2B (business-to-business) e-commerce market is anticipated to exceed $20 trillion globally by 2027, with companies such as Uber Technologies at the forefront, developing financial products that help drivers buy vehicles, handle payments and extend fuel credit cards. E-commerce companies such as Amazon are also leading the charge, distributing around $5 billion in loans to SMEs to support their growth—in turn, driving loyalty to the Amazon platform.

Some marketplaces are offering merchant financing to their vendors. This enables the marketplace to offer up-front capital to their vendors to purchase or produce goods. It also provides SMEs and sole traders with easier financing routes than traditional business loans, as repayments are drawn from the revenues of those goods once they are sold.

Misconception 7: BaaS will mean the end of traditional banking.

The financial-services ecosystem is changing, and consumers increasingly rely on the brands they know and trust to fulfil their banking needs. Our recent research showed that 59 percent of BaaS adopters recognised the rise of “platform banking” through brands, with an additional 60 percent expecting a decline in traditional branch-based banking.

Rather than rendering traditional banks obsolete, BaaS adds a new dimension to the banking ecosystem. Increasingly, tech-savvy banks are forming strategic partnerships with technology providers to offer embedded-banking services based on their licences, enabling them to access new customers via B2B2C (business-to-business-to-consumer) models.

Banks are playing important roles in embedded banking by ensuring that their products are fully compliant, and, in turn, consumers are receiving better access to banking services via the brands they visit every day.

The future is embedded.

BaaS is projected to reach a $7-trillion value by 2030, with banks, brands and consumers all poised to benefit. BaaS-enabled embedded banking is transforming how we access and use banking products, and the brands that better grasp the benefits and potential use cases of BaaS will be well positioned to capitalise on this transformative trend.

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