Is there a necessity for the payments industry to incorporate Banking-as-a-Service?

In the rapidly evolving world of fintech, Banking as a Service (BaaS) is making waves as a game-changer. This innovative approach allows fintech brands to offer a variety of financial services without the need to become traditional banks.

Leading providers of BaaS in Europe include the UK's Unlimit and ClearBank, France's Treezor (acquired by Societe Generale), and Lithuania's ConnectPay, a licensed Electronic Money Institution (EMI) regulated by the Bank of Lithuania under the European Central Bank framework. These providers ensure their offerings correspond to formal banking or electronic money services, complying with regulations such as the EU's Payment Services Directive 2 (PSD2) and Electronic Money Directive.

The emergence of BaaS has filled a gap left by open banking, which, despite its potential, failed to produce the necessary products. Companies like Plaid have stepped in to bridge this gap, and innovative fintech brands are now expected to develop more creative products that resemble banking products but do not fall under the traditional banking umbrella.

One such example is TransferWise's new investment product, which functions similarly to a savings account but avoids the need for a banking license. Nigel Verdon, CEO of Railsbank, sees this as an instance of clever product development within the BaaS industry.

Railsbank, founded and led by Nigel Verdon, is one of the new banking "utility" offerings. Unlike traditional banks, Railsbank is a utility offering banking services to other companies. This approach allows fintech brands to access banking services more easily, reducing both direct and indirect costs of building a product.

However, the use of BaaS is not without its concerns. Regulators are still catching up with this new trend, and there is a lack of clear cut regulations around products as a service. The Wirecard debacle has highlighted potential issues with regulators passing banks' regulatory status to fintechs. The fear factor of what happens if things go wrong with these creative products is still a concern.

Despite these challenges, the use of BaaS is becoming more common among fintech brands. Being a bank can be challenging, but it's necessary to offer certain products. BaaS provides a solution to this challenge, allowing fintech brands to offer a key differentiator - the speed at which a product can be launched - without the burden of being a traditional bank.

In conclusion, Banking as a Service (BaaS) is transforming the fintech industry, offering a more flexible and cost-effective solution for fintech brands to offer financial services. As regulators continue to catch up and the industry evolves, we can expect to see more creative and innovative products from the BaaS sector.

Is there a necessity for the payments industry to incorporate Banking-as-a-Service?