BaaS Industry Insights from a Pan-European Search
By Evita Lune, PhD, Partner, Global Head of the FinTech Practice at Pedersen & Partners.
During the last month, I've been working on a high-profile search for one of the most promising pan-European BaaS companies. Here’s what I found after talking to more than 30 executives:
🌍 BaaS is still an uncharted territory. Some companies will come out as winners, and some as losers. A strategy with a clear focus (like clearing and settlement or working capital solutions for merchants) tends to be more successful than trying to offer everything to everyone.
📈 The industry is evolving with major changes, such as Clear.Bank acquiring a European banking license in the Netherlands and Unicredit looking to acquire Vodeno and Aion.
🔗 Clients (usually merchants and Fintechs) prefer providers with two main features: full API connectivity and a banking license.
💸 The main area to explore for revenue is embedded lending. Payments were expected to be the big thing, but they got commoditized in Europe pretty fast.
📉 On the liabilities side, AI-driven investments and deposits have taken off well, but this could change if interest rates go down.
🛡️Relationships with regulators and strong, business-oriented compliance/AML teams are crucial. Several players, including market leader Solarisbank, have faced AML and fraud issues, hampering both business development and access to funding.
🏦 To offer full BaaS services, including lending, working capital solutions, and BNPL, a significant balance sheet is required, especially if the goal is to onboard larger marketplaces, retailers, franchises, and corporates as clients.
🤔 BaaS providers working directly with merchants sometimes underestimate the challenge of clients' lack of digital savviness, which can impede scaling despite having impeccable technology.
⚙️ While tailor-made technology solutions might seem best to attract clients, standardized tech solutions are a better choice for high growth and scalability.
💼 Financial investors are still cautious, holding back due to the US elections and high demands from regulators.
🚀 Some consumer neobanks have decided to enter the BaaS sector by offering their technology to other fintechs (acquirers, processors, A2A providers). Examples include XYB (Monese), Vodeno (Aion), and Lunar.
👀Leading players to watch: Clear.Bank, Banking Circle, Solarisbank, Vodeno, LHV, Magnetiq.
