Last week, we introduced the concept of FinTech enablers, and this week, we are diving straight into the world of banking enablers. This emerging field of banking-as-a-service (BaaS)accounted for USD $105 billion in FinTech investments in 2020, and it is just beginning. Just as there are e-commerce enablers such as Shopify, Shopee, PayPal, Wix.com, there are a growing number of banking enablers in the finance world. Banking enablers focus on providing the technological aspect of banking services, so their clients can concentrate on acquiring and serving customers.
Embedded Finance Part II: Banking Enablers and Banking-As-A-Service
The Appeal of Providing Your Own Banking Services
There are three main reasons why companies are looking into providing their own banking services.
- The first is many of the early adopters of BaaS are actually challenger banks hoping to improve banking services through innovation.
- The second reason is many sites with ample online traffic can monetize their user base by offering banking and other FinTech services.
- Lastly, companies that have good monetization models can add value through banking services and improve the retention rate of their users.
Many of the incumbent banks today fall short because most do not have the technological capability to provide banking as a service. Many still operate using decades-old, on-premise systems with scattered data collection and databases that need updating, and they certainly don’t have an open API. However, there are some outliers such as BBVA, The Bancorp, and Goldman Sachs. These incumbent banks have managed to stay on top of the changing tides.
Different Types of Banking Enablers and Banking-as-a-Service
In order to provide banking services, two things are required: technology and a license. There is a wide range of banking enablers, each providing different scopes of BaaS.
Some just provide the middleware required to connect users to the data, banking licenses, and banking products that the incumbent banks have. One notable banking enabler of this kind is Railsbank, founded in 2016 in the UK, but later expanded to North America and Asia. Railsbank has raised over USD $120 million in funding to date. There are also a number of incumbent banks that are FinTech friendly in this field, such as Cross River and CELTIC Bank.
However, there are some banking enablers that provide both the banking system and the banking license. These can be broken down into three types:
- Incumbent financial institutions are flexible and fast enough to catch up with new trends. We previously mentioned BBVA, Goldman Sachs, and The Bancorp. However, other examples include GreenDot, Sumishin SBI Net Bank, and GMO Aozora Net Bank.
- Startups that provide both B2C banking services and B2B banking-as-a-service, such as Starling Bank and Fidor Bank.
- Startups that only provide B2B banking-as-a-service. Examples are Solarisbank, ClearBank, and Treezor. Solarisbank, established in Germany in 2016, has raised more than $350M in funding and is arguably the largest banking-as-a-service company in Europe, maybe even in the world.
Finally, there is one other type of banking enabler that provides not only the banking system in the backend but also helps clients design the UI/UX. Essentially, they provide a white-glove, end-to-end banking service. Notable companies are Moven, founded by the famous author Brett King, and Solid, which Headline has invested in as a lead investor.
Comparing Europe, US, and Asia
In Europe, most of the banking enablers are startups, who either acquire their banking license or work with a sponsor bank. The top players in the USA are financial institutions such as The Bancorp, Goldman Sachs, and Green Dot.
In Asia, it’s still anyone’s game. However, both startups and incumbent banks are working on this topic as startups are acquiring virtual bank licenses and incumbent banks are building their APIs. So far, the first movers in Asia are the incumbent banks, such as Sumishin SBI Net Bank in Japan and Ping An Insurance in China, whose banking enabler subsidiary OneConnect has gone public on NYSE.