Banking-as-a-Service (BaaS) has flipped banking on its head. Instead of a destination that required bricks-and-mortar stores, banking has become a part of the journey, embedded into the digital channels of popular brands including retailers and online platforms.
FinTech Magazine caught up with Kim van Esbroeck, Chief Revenue Officer at Vodeno and Country Lead for Belgium at Aion Bank, to explain how the two firms have developed a symbiotic relationship that helps brands unleash BaaS.
How do you assess the state of BaaS today – both in terms of progress and adoption?
In fintech circles, Banking-as-a-Service (BaaS) is one of the buzziest trends today, but the concept is still very new to many businesses, particularly non-financial brands. Interest in BaaS was partly driven by the acceleration of digital trends post-pandemic. Consumers now expect fully digital end-to-end experiences and ecommerce journeys that are completely frictionless, with mobile-first being their preference. Smart brands, facing greater competition online, recognise the value of BaaS-enabled embedded banking products. They can offer the right financial services at the point of need directly in their customer journey, creating a seamless experience without the need to leave their ecosystem. By embedding banking products into the brands that people use everyday, we believe BaaS can help give more access to better financial services to more people.
How has the adverse economic landscape affected BaaS over the last 12 months?
One of the biggest challenges facing BaaS providers is that once the solution is delivered, it is up to the client to market and acquire new users. Commercial success of BaaS is largely tied to the client’s ability to be successful on this front. In the current landscape, where fintechs are prioritising revenue over growing their user base, this has a direct impact. That said, the key for a successful BaaS provider is being pan-region or global. This allows for true scale, as well as access to local payment rails and understanding of specific compliance requirements in each country. Clients want to be able to operate across multiple markets in multiple currencies, so BaaS providers need to accommodate. Additionally, the ability to operate across multiple regions is attracting bigger brands with built in communities to BaaS.
Do you see new use cases or new applications of BaaS opening up?
Our core customers are those brands with big built-in communities. For these brands, loyalty is a huge opportunity where BaaS can help to innovate. Loyalty programmes that focus just on accumulating points are not driving true loyalty. A programme that can offer real value and incentivise customers to come back is the northstar for any brand, and BaaS can help deliver this promise.
We offer a debit card that can link to any brand's loyalty programme. Additionally, the card can be integrated with flexible payment options like buy-now-pay-later (BNPL) and cashback. This gives the customer the ability to earn points while shopping, with the payment flexibility that fits their lifestyle. Brands can also use valuable data to push personalised notifications to engage customers before and after they make a purchase.
We also believe there is a huge opportunity for BaaS with SMEs. We offer a product called Merchant Financing – essentially BNPL for SMEs. Marketplaces can offer merchant financing to their vendors; it gives access to upfront funding to produce, buy and sell goods. The capital that is secured is paid once these goods are sold and profits are realised. SME access to credit can be difficult, but merchant financing empowers SMEs to obtain capital and fully manage their cash flow in line with their turnover.
What are the headwinds you expect to see in BaaS?
There is still a big knowledge gap when it comes to BaaS and embedded banking. Brands thinking about BaaS need to understand if their provider can deliver the products they need across different markets. BaaS providers need two things: the first is API-based technology that is modular and offers a quick implementation time; the second is access to the right banking licence. The scope of products that a BaaS provider can offer is dependent on their licence.
For example, an Electronic Money Institution (EMI) licence, which many BaaS providers hold, is primarily restricted to payment services – including transferring funds between accounts, payment settlement and issuing electronic money. Alternatively, a full European Central Bank (ECB) banking licence enables the provider to offer a more comprehensive set of solutions, including banking accounts with a deposit guarantee and lending products. Those providers with a full banking licence can offer their clients more choice, as well as the ability to scale into additional products as their business grows.
Another factor is regulation, as regulators take a closer look at the BaaS model. As Vodeno/Aion, Aion Bank is regulated by the National Bank of Belgium, and we are the only BaaS provider in Europe that also operates a retail bank. One of our differentiators is our ability to combine API-based technology with an ECB licence and the compliance and guarantees of a European bank. By combining tech with real banking expertise, we are able to make sure our products are fully compliant in the back end, so our clients can focus on servicing their customers.
What opportunities or bright spots do you expect to see in the near future for BaaS?
The exciting part of BaaS is its ability to give more access to better banking products to people via the brands they use everyday, removing the barriers of traditional banking. We believe that banking via brands will continue to gain pace, and our recent survey highlighted that 65% of respondents predicted that more consumers will bank via brands versus traditional branch-based banking in the near future. While branch-based banking might not disappear entirely, it is clear that embedded banking – fully integrated in the brands consumers trust – offers a powerful alternative to make financial inclusion a reality.