Are regulatory change and BaaS changing the tide for fintech innovation?

The balance between regulation and innovation is a difficult one to find and maintain. The parabolic growth of the fintech industry has heralded extraordinary advances, but it has also posed problems for regulators who are still trying to catch up.

In order for fintech to thrive, there must be open, transparent, and friendly cooperation between industry players and the people charged with maintaining the safety of customers’ money and the financial system at large. Thankfully, this is exactly what we are seeing.

The European payments industry is a good example of the industry-regulator partnership working hand in hand. Innovative companies, plus sensible regulatory oversight, have combined to help build a thriving fintech environment. New legislative developments and technological advances have instigated healthy competition, transformed legacy experiences, and implemented important safeguards. 

The changemaking regulations 

To understand the impact of regulation on European payments innovation, we need to look at some of the key European initiatives: 

1. The EU Passporting System enables banks and e-money institutions in the European Economic Area to have one licence, in one country, but operate across Europe by “passporting” this licence – crucial for international scale. 

2. The advent of instant payment schemes, including Faster Payments Service and Instant SEPA, allows for payment processing in real time, 24 hours a day, 365 days a year. Instant payments allow for faster business transactions and increased trust on both sides of the transaction. 

3. The EU Payment Service Directive (PSD2). Aimed at creating safer, more innovative payment services, PSD2 has supercharged innovation and given rise to healthy competition by enabling a customer agency model where data is sourced, or payments are made, by a payment institution on behalf of someone else.

Enter Banking-as-a-Service

In addition to these regulatory developments, another major shift has been gaining widespread adoption in recent years. The Banking-as-a-Service (BaaS) model leverages standardised infrastructure from established players. BaaS providers overlay this with their own technology and regulatory knowledge to develop more intuitive services for enterprise businesses.

The BaaS model enables enterprise businesses to provide their customers with banking services without having to apply for their own EMI or banking license. These digital banking services are provided through simple APIs for ease of integration and speed - unlike their cumbersome legacy banking counterparts.

BaaS dramatically widens access to financial services. It provides a simple means by which businesses can interface with important banking and payments infrastructure, and allows them to embed financial services within their existing products and services.

The next wave of innovation

The proliferation of BaaS means the fintech industry can focus on building more imaginative value propositions and user experiences. As well as providing the backbone for innovation, BaaS acts as a catalyst for growth and scale, enabling new services, healthier profit margins, and broader market reach.

And it’s evolving. BaaS increasingly incorporates more specialised services and integrated experiences. BaaS providers can now integrate with multiple service providers to offer an ecosystem of services through a single API – becoming a one stop shop for banking and payment experiences across the world, promoting banking without borders. As well as this, they can cater for specific verticals like neobanks, PSPs, crypto companies, or marketplaces, all of whom have unique banking and payments challenges. BaaS opens banking and payments up to industries and sectors that have been traditionally under-served by the legacy institutions and their decreasing risk appetites.

A new future for fintechs

With this new way of provisioning banking and payments services, fintechs can finally implement the processes and capabilities that will allow them to fulfil their potential and see them deliver the next wave of innovation.