Banking as a Service (BaaS) is a financial technology that empowers fintech and other businesses that lack their payment infrastructure to access banking and payment capabilities offered by licensed banks or financial institutions. This convenient solution enables businesses to seamlessly integrate banking and payment services into their platform, significantly reducing time to market.

According to Proficient Market Insights, the Banking-as-a-Service (BaaS) Market is projected to reach $11,276.32 billion by 2031, with a robust CAGR of 13.13%, indicating substantial growth on a global scale until 2031.

What is the difference between BaaS and Embedded Finance/Embedded Payments?

BaaS and Embedded Finance share similar objectives but involve different types of service providers. BaaS, or Banking as a Service, operates as a service model in which banks provide their banking infrastructure and services to licensed financial service companies. Conversely, Embedded Finance centers on the integration of financial services into other platforms, wherein licensed financial institutions, such as e-money companies and payment institutions, share their infrastructure with other financial service companies or non-financial entities, granting them the capability to operate under their licenses.

Challenges Confronting Fintech Enterprises: What Are the Key Obstacles?

Many businesses are currently contending with the challenges stemming from global instability. Elevated regulatory requirements, increasing expenses, and the necessity for substantial budgets and rapid market entry collectively contribute to the hurdles faced by these companies.

The regulatory landscape is undergoing significant transformations, characterized by stricter regulations and mounting difficulties in obtaining licenses. This trend is particularly noticeable in the European Economic Area (EEA) and the United Kingdom (UK). Securing a Payment Institution or E-Money Institution license has become notably more arduous due to heightened regulatory demands and enhanced oversight measures. Regulators now impose more stringent criteria on applicants, including the requirement for a local presence and higher initial capital. Furthermore, regulators have shifted from passive observation to proactive monitoring, closely scrutinizing fintech companies even before issues arise. These challenges directly impact the number of licenses issued, resulting in a decrease in licensed institutions in the EEA/UK market. Consequently, companies are seeking alternative jurisdictions with more lenient regulatory environments for their operations. 

However, obtaining a specific license is just one facet of establishing an operational company. Fintech enterprises also require robust IT systems and various technological partnerships. Developing in-house software and building payment infrastructure can be a time-consuming endeavor, often spanning more than a year and incurring costs of approximately €1 million. Given the rapid pace of development in the fintech sector, it becomes evident that one year is an excessively lengthy timeframe for launching a fintech project.

Ready-to-market Banking as a Service solutions effectively address these challenges. For example, utilizing pre-built core banking software that integrates with various embedded finance or BaaS providers can significantly save time and expedite the time-to-market for companies aiming to offer digital banking services. Instead of dedicating over a year to software development and the establishment of a partner network, fintech companies can launch their businesses within a couple of months. Additionally, by partnering with the right embedded finance or BaaS provider, fintech companies can leverage the “license-as-a-service” model and become agents of EEA/UK-licensed institutions, such as PSD or EMD agents, without the need for their own license. Since obtaining a license in the EEA/UK can take approximately 1.5 years and cost at least half a million euros, including initial capital and other associated expenses, becoming an agent presents a lucrative option for expediting the establishment of fintech businesses.

Furthermore, embedded payments/finance and Banking-as-a-Service offer substantial opportunities for cost reduction, faster time-to-market, and the stimulation of growth.

The future direction of Banking as a Service is Embedded Finance

The future of Banking as a Service (BaaS) holds exciting prospects, with the next step being the evolution towards Embedded Finance. As BaaS continues to gain traction, it’s increasingly becoming an integral part of various industries beyond traditional banking. 

Embedded Finance takes this integration a step further by seamlessly incorporating financial services into diverse non-financial platforms and applications. In 2022, the global embedded finance market generated $54 billion in revenue. Future Market Insights predicts it will reach $248 billion within the next decade.

This approach promises to redefine the way customers interact with financial services, offering personalized and convenient solutions tailored to their specific needs within their favorite platforms. With the continued growth of BaaS and the emergence of Embedded Finance, we can expect to see a flourishing ecosystem of interconnected financial services, leading to greater accessibility, innovation, and convenience for consumers and businesses alike.

From both the consumer and provider perspectives, embedded finance represents a significant market trend. On one hand, it enables the inclusion of payment services within different applications, enhancing the overall customer experience. On the other hand, it presents valuable opportunities for non-licensed institutions or licensed institutions without their own developed payment infrastructure to connect with licensed payment or e-money institutions that possess robust payment infrastructure. Additionally, licensed payment and e-money institutions with established payment infrastructure can generate additional revenue streams by sharing their infrastructure with other companies.

Establishing trustworthy partnerships is essential for the smooth operation of any fintech venture. By implementing a core banking system like Macrobank with pre-built integrations, you streamline your operations and time-to-market and secure reliable partners for your business.