Should financing ventures rely on Service-as-a-Bank approach?

In the ever-evolving world of fintech, Banking as a Service (BaaS) has emerged as a game-changer for many brands. This innovative offering, which allows fintech companies to integrate financial services into their own products, has become increasingly popular over the last few years. One of the companies leading the way in this industry is Railsbank.

Railsbank, founded by Nigel Verdon, is a banking "utility" offering, serving as a platform for various financial services. The speed at which a product can be launched is a key differentiator for Railsbank, a factor that has contributed to its success in the BaaS industry.

Nigel Verdon, the CEO of Railsbank, sees the services offered by some BaaS providers as clearing services, which can be served by e-money licences. This perspective is backed by Railsbank's utility-like approach, providing financial services without the need for all parties to become full-fledged banks.

TransferWise, another notable player in the industry, has demonstrated creative product development by creating a new investment product that is not a traditional savings account. This innovative approach showcases the potential for growth and diversification within the BaaS sector.

However, the fear factor of what happens if a product goes wrong remains a concern in the BaaS industry. The lack of clear cut regulations around products as a service and whether they are formal banking services or e-money services is a current issue that needs to be addressed. The Wirecard debacle has highlighted the potential issues with regulators not fully catching up with Banking as a Service (BaaS).

Despite these challenges, BaaS can be seen as a solution to the failure of open banking to be effectively implemented. Companies such as Plaid have come in to fill the gap left by the failure of open banking, providing a platform for fintechs to build products using open banking APIs.

Regulators have focused on encouraging end consumers to demand open banking, but it is the banks and fintechs that need to build the products using open banking. Fintech companies like Pleo and lemon.markets have offered Banking as a Service (BaaS) by integrating investment account features that enable business customers to invest idle cash into low-risk money market funds. Neobanks such as Qonto, N26, and Finom have developed business accounts with innovative digital features beyond classic banking, while Tomorrow Bank offers a planet-based sustainable account with functionalities like real-time notifications and sub-accounts.

Not all situations require being a bank, but some do. While BaaS offers a solution for many, it is important to remember that being a bank allows for the offering of certain products. The interview with Nigel Verdon provided valuable insights into the current state and future potential of BaaS, underscoring the importance of this innovative industry in the fintech landscape.