Fintech Fusion: How Integration is Driving Change

In the landscape of financial services, a multitude of 'as a service' models have emerged, revolutionizing how both financial and non-financial institutions (such as retail and HR Tech) offer financial services to their customers. Gone are the days of complex, lengthy implementation and regulatory projects. Financial services can now be readily accessed through a diverse array of 'Embedded Banking' and 'Banking as a Service' (BaaS) solutions.

Within this expansive "finance as a service" ecosystem, companies offer varying layers of abstraction:

• Card Issuing Processors, such as Marqeta, Enfuce, or ByQwest, remove the complexity of issuing cards and connecting to international payment schemes like VISA or MasterCard, or to card issue/personalization providers like Idemia or Tag Systems UK.

• BIN Sponsors, including Stripe, Adyen, Swan, or Tresor (along with Marqeta and Enfuce), extend beyond card issuing processors by providing a card BIN range (a specific range of card numbers) at major card schemes and the ability to manage funds on the card.

• Embedded Banking/Finance Players enable the seamless integration of various financial services (payments, credits, insurances, etc.) into non-financial journeys, effectively transforming any company into a fintech entity. This integration is facilitated through modern API integrations or plugins. The "customer" of these services only needs to focus on front-end integration, while the provider manages the rest. This category can be further categorized based on the type of service offered, e.g., embedded payments via PSPs like Adyen, Mollie, MultiSafePay, Buckaroo, MangoPay, or Stripe, accounts via embedded account providers like Shopify Balance, Gemba, or Treasury Prime, credits via embedded lending providers such as Banxware, Zopa, YouLend, Lendflow, or Capify, or via BNPL providers like Klarna, Affirm, or Afterpay. Insurances are offered by embedded insurance (InsurTech) companies like Qover, Trov, Cover Genius, Bsurance, or Wrisk.

• BaaS Players not only provide payment, account, and card services but typically extend to other banking services and often come with their own banking license. This group can be divided into three sub-categories:

  • The pure BaaS players, which launched their business specifically to offer BaaS services. Examples include Solarisgroup, Treezor, Contis, Railsr, Bankable, ClearBank, 11:FS Foundry, or Cambr.

  • Traditional core banking software providers, who are now offering their solutions also in a SaaS and BaaS offering, e.g. Finastra, Temenos, Sopra Banking, Avaloq, Finacle (Infosys), FIS or BPC.

  • Incumbent and neo-banks, which have white-labelled their own banking systems and operations to offer them to third parties, e.g., Fidor, BBVA, Starling Bank, J.P. Morgan, and Goldman Sachs.

However, all these companies are converging towards similar offerings:

• BaaS players are making their rich offerings more componentized, allowing customers to choose and customize the products and services they require.

• The other players are broadening their services from pure payment and card services to regulated accounts and value-added services like lending and investments, offering a more complete suite of services to avoid the need for customers to contract and integrate with multiple providers.

The customer (banks, fintechs, and non-financial companies wanting to offer financial services) aims to avoid the burden (i.e. the heavy lifting) of setting up the underlying infrastructure, which consists of three main components:

• Banking Software encompassing both the initial implementation and ongoing software maintenance. For example, a gateway connected to the VISA or MasterCard scheme must regularly update its software to comply with mandatory releases imposed by the payment scheme.

• Regulatory, Licensing and Membership Requirements: the financial services industry is heavily regulated, necessitating compliance with various rules, procedures, and requirements from governments, payment schemes, partners, suppliers, and customers. This includes

  • Licenses: almost any type of financial service is regulated by the government, meaning that the institution needs to obtain a license from the regulator (e.g. National Bank) to execute the type of financial activity. As not every financial activity has the same risk level, several types of licenses exist, like an AISP/PISP license, a payment license, an EMI license, a credit institution license, an investment broker license or a banking license. These licenses are expensive to obtain and can take years of negotiation with the regulators. Additionally a license comes with a lot of regulatory overhead, like extra audits, regulatory reporting, capital requirements…​ Therefore building your service on top of an entity, which has already the necessary licenses, can be a huge cost-saver and reduce time-to-market enormously.

  • Standards and certifications: banks need to be certified for several activities, e.g. ISO 27001 for managing information security risks and ensuring regulatory compliance, ISO 22301 for Business continuity Management or ISO 31000 for IT Risk Management. Additionally compliance with standards like PCI-DSS is mandatory for connecting to payment schemes.
    These standards and certifications are also costly, as every process needs to be carefully documented, improvements need to be made to all systems and the audit needs to be executed by an external auditing/certification agency. Additionally these certifications need to be renewed every X years.

  • Memberships: financial institutions need to become members or partners of several entities in order to successfully do their business. These memberships can be very time-consuming and costly (both to become member, but also for the yearly membership fees). E.g. becoming member of VISA or MasterCard, becoming member of protocol-standards like CTAP or EP2, Swift membership…​

• Operational part: although automation plays a significant role, financial services still require substantial human involvement for validations, supervision, third-party interactions, and exception management. Moreover, certain operational services, such as AML and KYC/KYB, demand expertise due to their intricate nature and potential for significant financial penalties for errors.

Customers must strategically decide which services to keep in-house and which to outsource to external providers. This strategic decision involves trade-offs between speed to market, control, flexibility, cost, and focus on core business. Startups often begin by partnering with service providers for quick, cost-effective solutions. As businesses scale, they may consider insourcing certain services, ensuring a well-planned decoupling strategy from the outset to prevent excessive lock-in and loss of control over critical business aspects.

This trend is not unique to finance. In the realm of eCommerce, businesses can also choose from a spectrum of options, e.g.

• You can build your website yourself and even integrate all payment methods yourself.

• You can build a website using a website builder (e.g. Wordpress, Drupal or Wix) and use a PSP to easily integrate payment methods (e.g. Mollie, MultiSafePay or Buckaroo)

• You can use a full eCommerce platform (e.g. Shopify, Magento, PrestaShop or WooCommerce), with also various levels of integration and value-added services. For example Shopify allows to setup easy an eCommerce webshop and even offers logistic services like stock management and fulfillment services and financial services like Shopify Balance (a bank account), Shopify Bill Pay (to pay your bills as a merchant) or Shopify Capital (to get financing).

• You can finally even go one step further and not build a platform yourself at all, but leverage an established marketplace like Bol.com, Amazon, eBay to offer your products.

Similarly, financial service companies or non-financial entities looking to offer financial services now have a range of abstraction levels to choose from when engaging external providers to establish their financial services.

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