The European banking-as-a-service (BaaS) landscape is a key enabler for embedded financial services. By abstracting away regulatory, compliance and infrastructure complexities, BaaS providers lower the barrier to entry for non-bank companies to incorporate regulated banking activities (such as holding funds and making payments) into their platforms.

It is a significant product and revenue opportunity for platforms and marketplaces – for example, an accounting software provider that wants to offer invoice payments and payroll, or an e-commerce platform that is helping merchants to collect funds and pay suppliers across international markets. The total opportunity is estimated by McKinsey to be worth €100bn by 2030.

Given the diversity of use cases, financial products and customers, we are seeing the market segmenting across a few dimensions:

• Regulatory licenses (BaaS vs PaaS): Despite offering similar services at face-value, many ‘BaaS’ players are not in fact banks at all, but are rather payments businesses. With licenses such as EMI, they allow customers to collect and disburse money from payment accounts but partner with fully-licensed third-party banks to actually hold customer funds. Other BaaS providers have taken the longer road to secure full banking licenses, and often partner with other regulated fintechs that are seeking access to payment rails and safeguarded accounts.
• Regional vs cross-border focus: Many BaaS providers are regionally-focused and offer flexible and configurable accounts and payments infrastructure. But larger payments businesses such as Adyen and Airwallex have also broadened into BaaS product offerings in the last few years. These platforms often have a deeper cross-border (and e-commerce) focus, supporting merchants as they scale internationally.
• Adjacent technology providers: such as unlicensed orchestration platforms, compliance solutions, data and payments infrastructure such as card issuing, and core banking software systems.

Well-documented news stories have highlighted some of the key challenges facing providers in this space, not least of which is the complexity of managing compliance and regulatory risk. Modularising financial products has lowered barriers to entry for platforms and increased product flexibility, but has also compartmentalised financial operations and risk across providers. Managing risk through multiple interconnected parties has proven difficult to manage for providers that are reliant on the licenses of third-parties in both Europe and the US, putting increased regulatory scrutiny on the BaaS model.

However, the depth of opportunity in this space is vast for those providers that can combine the right compliance and regulatory operating model with a flexible and modern core financial infrastructure to drive fast time-to-value for customers, stickiness and strong net revenue retention.