Why successful fintech companies are leaving their BaaS providers

The last ten years have seen the emergence of fintech companies in most parts of the world, including the US, Europe, and Asia.

Although they are yet to dominate their respective markets, fintech companies have launched new products, built household brands, and acquired significant numbers of users and customers at a very strong pace. They set out to reinvent how financial services such as payments, lending, or investment are packaged, delivered, and used. Consumers and companies benefit from an easier access to financial services that are embedded into the tools and platforms that they use on a daily basis and from an overall better user experience.

One of the reasons fintech companies were able to grow so fast is their successful partnerships with BaaS providers.

What is a BaaS?

Inspired by SaaS (Software-as-a-Service), BaaS stands for Banking-as-a-Service. It refers to the ability to embed banking services into a software without actually being a bank or a regulated financial institution. Just like SaaS enables companies to use software without hosting it on premise and paying for expensive licenses, BaaS enables companies to deliver banking services with limited complexity and initial investment.

BaaS providers package five components together into a single platform accessible through APIs:

1. A regulatory license, most often in the form of a credit institution, payment institution, or electronic money instruction

1. A direct or indirect membership or access to the payment networks and schemes (e.g., Visa / MasterCard for cards and SWIFT / SEPA for bank payments)

1. One or multiple banking partners in charge of safeguarding customer funds, giving the fintech companies and its customers access to the payment networks and schemes, funding the loans, etc.

1. A core banking system which enables fintech companies to onboard customers, hold customer accounts, generate cards, send and receive bank payments, manage deposits and loans, etc. through a set of APIs

1. Operations and compliance to onboard customers, verify payments, and comply with all KYC / AML / CFT regulations

Some of the biggest BaaS providers in Europe are Modulr, Bankable, Railsr, Solaris Bank, Treezor, Xpollens, and Swan.

Most BaaS providers are not end customer and end user-facing. Fintech companies build web or mobile front-end applications on top of the APIs of their BaaS providers. On a day-to-day basis, customers and users will thus be interacting with the apps of their neo-bank, neo-broker, etc.