Explore BaaS ‘s role in fintech’s evolution, its innovation-driving potential, regulatory hurdles, and its changing reputation in the financial landscape.

BaaS, or banking as a service, has been hailed as a catalyst for innovation while also drawing criticism for possible overreach. Rising regulatory obstacles add levels of complexity as some BaaS firms balance advancement and opportunism.

Michael Galvin, CCO and co-founder of SaaS global banking platform Toqio, explains these subtleties with his acute entrepreneurial vision and experience in the fintech industry.

Over the past ten years, the financial environment has undergone tremendous transformation as a result of regulatory developments that have given rise to banking as a service providers. Challenger banks, neobanks, and embedded finance providers proliferated, all of which were looking to revolutionize the financial services industry. However, things have changed recently. Although BaaS initially had a significant impact on innovation, it has also given fintech its biggest black eye.

In retrospect, many of the businesses founded on the backs of BaaS providers that we previously praised as early adopters bringing about a new era of financial democratization now appear to be a collection of opportunists riding on a bandwagon.

They may now be doomed because of the inventions they promoted (like cryptocurrency) and the rules that made it possible for them to prosper. It would be an understatement to suggest that BaaS is at a turning point. The BaaS infrastructure paradigm won’t go away, but it will alter, in my opinion. Drastically.

Fintech businesses struggle to raise funds. Regulators are tightening down and making it clear they don’t want unqualified enterprises in their area. They want to decelerate the market. Next steps for the BaaS market are unknown. Will business as usual continue with fewer participants? Will incumbents use this opportunity to force out opponents, and will new AI hype eclipse finance innovation?

Radical change

A recent analysis by WhiteSight, The State of Banking-as-a-Service in the UK & Europe report, commissioned by Toqio, claims that the potential for BaaS in Europe might bring about a radical change in the financial services sector. BaaS and BaaS-powered business models are evolving quickly, since changes have already started and are picking up speed.

The article claims Fintechs and embedded finance are two crucial market potential that BaaS opens up for the banking sector. The first has to do with the increased integration of financial services into the customer journeys of non-financial businesses with substantial client bases, like those in the retail and e-commerce sectors. The second focuses on developing, niche-focused fintech companies that, through technological and business model advances, provide customized financial products for particular customer segments.

There has already been a noticeable increase in BaaS across Europe. The European BaaS market is now dominated by a small number of large firms, although mid-sized to large incumbent banks are gradually increasing their market share by forming partnerships with technology companies to offer new proposals.

The BaaS market is also changing quickly in Europe and the UK. Key drivers have been the existence of a variety of participants, rules, and a healthy financial environment. For the past three years, the market has accelerated, with a few early-stage fintechs expanding their presence outside of Europe and the United Kingdom, followed by the emergence of regional competitors vying for market share in specific regions. With capital becoming more scarce and banks entering the market with their own BaaS or open banking solutions, we are currently witnessing a re-trenching of this expansion.

Growth catalysts

Early stage innovation has always been one of the major use cases for BaaS. However, it appears that fresh use cases are required to fuel development as fewer early stage enterprises are expected to enter the market during the next couple of years.

We predict a change in the composition of players as more established organizations, particularly those outside the financial services sector, strive to benefit from BaaS. As a result, we anticipate a market consolidation around maturity. Smaller, regional players are likely to be acquired or completely fail. It’s also obvious that established banks, if they can change their mindsets, will play a significant role.

Larger banks will be able to use their balance sheets and compliance infrastructure to create a safe haven for larger market participants as a result of increasing regulatory hurdles.

BaaS is here to stay. However, as it inevitably develops into embedded finance, the actual power of BaaS will show itself rather than being employed only as a neobank pipeline. Over the next few years, we’ll witness a wide range of new use cases and creative applications of financial services from manufacturers to FMCG shops to distribution companies.

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