BaaS or BS? How to separate hype from value in embedded finance

In a candid conversation among banking and fintech experts, it was refreshing to hear them cut through the nonsense and noise surrounding banking-as-a-service and embedded finance. Given their battle scars in servicing millions of customers in bank tech and fintech, the point of the BaaS or BS fireside chat was to skip past the buzzwords and get our heads out of the clouds and into reality.

The host, Sam Kilmer, a self-professed recovering banker and Managing Director at Cornerstone Advisors, kept the conversation flowing with Ahon Sarkar, GM at Helix by Q2, and Chris Truelson, VP and Head of DPS Global Strategy at Visa.

The discussion separated the actual use cases from buzzwords, debunked the myths, addressed the challenges, and shed wisdom on going about the embedded finance journey. But, before separating the wheat from the chaff, the speakers broke down the definition of BaaS. 

“It's a definition that has evolved. But, from our perspective, what it means is taking the core elements of banking and allowing non-bank companies to embed that inside their existing product ecosystem,” said Sarkar.

For non-bank brands, the aim of embedding banking features into their products should be to enrich their offerings in the marketplace. It generally fits the needs of a company that wants to incorporate banking services into an existing application, process, or platform. The purpose is to make the entire product and ecosystem better in a meaningful way that adds value for customers. 

Often, companies pursuing embedded finance are trying to move money or credit around commerce within a particular context. For example, a high-fashion, haute couture company could extend a line of credit and offer rewards to its A-list customers. However, since non-bank brands are not banking experts and often seek an easy solution, they end up misguided by the buzzwords. So, the panel of experts sought to set the record straight. 

Separating BaaS from BS

“Everyone who has been in the payments industry for more than a few minutes knows that scale is everything. It's absolutely everything,” said Truelson. 

According to the panel, the needs of a program servicing 5 million customers are very different from those of a programmer who wants to get their first 500 customers. The reality is that it's difficult enough to launch a program that customers will transact with daily, let alone scale it. 

Most companies want to build embedded finance cloud services to onboard 10 million users, ignoring that it takes intentional evolution over a significant period to develop fault-tolerance thresholds that can host a million users. 

Truelson stresses that it is not the number of accounts, cards, or credentials you put in the market that will increase revenue and grow your business, it’s the usage and transactions generated.

Companies seriously considering BaaS need to play to win. They need to think deeply about how to incorporate BaaS and spend the time making a unique product integrated into their ecosystems. And while at it, they must remember they cannot offer such a service for free.

Dispelling the myths

“There is no solution that solves for one person out of their garage, all the way up to a Fortune 500 company,” said Sarkar. He warned newcomers that not only is ‘scaling infinitely’ technologically impossible, but buzzwords like ‘launch in weeks’ should sound alarm bells. 

From the issuer processing side, Truelson said he is astounded by the sheer number of bright-eyed entrepreneurs seeking to serve everyone with the exclusive use of APIs. Firstly, servicing everyone demonstrates a lack of focus – likely leading to a bloated balance sheet. 

Secondly, they forget the API is not a feature. Instead, it is just an access point. In other words, a feature that exists behind that API probably requires some operational know-how, integration, and a lot of rigor. 

Addressing the business case and challenges

The question for companies venturing into the vast waters of BaaS is: Are you trying to drive engagement and retention as a way of driving long-term revenue, or are you trying to drive quick monetization? 

As soon as they dip their feet in, they will find that interchange, as alluring as it may be, cannot be the only source of revenue. Yes, shiny plastic credit cards can quickly generate income, but the operational rigor in maintenance and scaling is intense. A lot of hard work is required to fine-tune financial programs to ensure they can get maximum usage out of those cardholders.

The correct way of treating an embedded finance product is not as a feature, but as a revenue-generating business all by itself. And one of the first steps is finding the right partners, with real expertise, to avoid the roadblocks of compliance and help you figure out how to build a relevant, robust, and scalable product that speaks to customers. 

“There isn't a client we talked to that, at some point in the early conversation, does not bring up the need for global expansion,” said Truelson.

Before dabbling in BaaS, customers should note the difference between what they desire and the actual reality. The reality is that there is a current collision between cloud-based digital applications and the underlying legacy infrastructure, and you might run into some headwinds as a result. Another thing to remember is that compliance is the name of the game. Pretending that regulation does not exist might land you in hot water.

BaaS is so much more than transaction processing. It is also about the people behind the products. Building strategic partnerships in the equation of one-plus-one-equals-three is what makes companies succeed and scale. The logic, the way you think, and the way you build the product is what makes it unique, differentiates it from other solutions, and adds value for the customers.