The Evolution of Banking-as-a-Service (BaaS) Business Models; Open Banking Open API Specs; Vertical SaaS: Now with AI Inside;

In this edition, we dive into the latest on the rapid rise of Banking-as-a-Service (BaaS), the game-changing potential of stablecoins in payments, and the evolving landscape of embedded finance

Insights & Reports:

1️⃣ The Evolution of Banking-as-a-Service (BaaS) Business Models

2️⃣ Evolution of stablecoin use cases

3️⃣ How banks generate revenue from embedded finance

4️⃣ Europe's Local Card Schemes on a Steady Decline

5️⃣ Vertical SaaS: Now with AI Inside

6️⃣ Business spend management and embedded finance

7️⃣ How has digital banking development varied across regions?

8️⃣ Open Banking Open API Specs

9️⃣ Banking for Small and Medium Enterprises (SMEs)

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TL;DR:

Hey everyone, welcome to this week’s edition of the Fintech Wrap Up! We've got some exciting updates from the world of fintech, payments, and banking, so let’s dive right in.

First, let's talk about the evolution of Banking-as-a-Service (BaaS). The BaaS landscape has come a long way from its early days in the 1990s when big retailers like Tesco and Sainsbury’s partnered with banks to offer financial products. Fast forward to today, and we’re seeing banks take a more direct approach, working with tech vendors to offer embedded financial services. Regulatory shifts, especially in the US, have played a big role in this, pushing banks to maintain tighter control over fintech partnerships.

Speaking of evolving trends, stablecoins are really making waves. While they’re currently used mostly for crypto trading and hedging, their potential goes way beyond that. Companies like Circle are showing how stablecoins can disrupt traditional payments by streamlining cross-border transactions, reducing fees, and cutting settlement times. It’s only a matter of time before we see widespread adoption of stablecoins for everyday payments.

Next up, embedded finance is transforming how banks generate revenue. Banks are increasingly partnering with tech companies to offer financial products through their platforms. This model is helping banks expand beyond their local communities and grow both net interest margins and fee income, with some banks already seeing huge gains in new deposits and customers.

In Europe, local card schemes are struggling to keep up with the dominance of Visa and Mastercard. A lack of innovation, slow adoption of digital wallets, and limited cross-border reach are just a few of the reasons why these local schemes are losing ground. It's clear that without significant changes, they may continue to decline.

On a related note, vertical SaaS is entering a new era. The combination of cloud, fintech, and now AI is revolutionizing business models. By integrating AI, companies like Mindbody are automating tasks in marketing, sales, and customer service, which is increasing revenue per customer and making operations more efficient. The future of vertical SaaS looks incredibly promising with AI at the forefront.

Lastly, business spend management is getting a much-needed boost thanks to embedded finance solutions. As companies grapple with SaaS sprawl and other challenges, better tools for managing business expenses are crucial. Embedded finance is stepping in to help businesses regain control and improve financial oversight.

That's it for this edition! 

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Insights

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The Evolution of Banking-as-a-Service (BaaS) Business Models

1. Pre-BaaS Era (1990s-2000s):

During this period, large retail brands such as Tesco, Sainsbury, ASDA, and others entered financial services by partnering with traditional banks. These joint ventures allowed supermarkets to offer in-store banking products, leveraging their physical presence and customer trust. Examples include Tesco's partnership with the Royal Bank of Scotland and Sainsbury’s Bank collaboration with the Bank of Scotland. These early models were tightly controlled by the banks, ensuring compliance while capitalizing on the brands' extensive reach. This period laid the foundation for what would evolve into modern embedded finance and BaaS.

2. API Brokerage BaaS (2013-2021):

With the fintech boom, API brokerage providers emerged as key enablers in the BaaS space. Acting as intermediaries, these brokers facilitated partnerships between banks and fintechs, helping fintechs quickly launch financial products with minimal upfront investment. This model accelerated fintech innovation by enabling banks to outsource functions like due diligence and client onboarding. However, challenges such as regulatory scrutiny and unit economics arose, particularly as larger brands sought direct relationships with banks. Despite these obstacles, the API brokerage model played a crucial role in the expansion of BaaS, particularly in addressing underserved markets.

3. Bank-Direct BaaS:

The current phase of BaaS sees a shift toward direct partnerships between banks and technology vendors, driven by growing demand from non-financial brands (e.g., in travel, e-commerce, and telecom) to offer embedded financial services. In this model, banks retain control over core functions such as regulatory compliance and transaction monitoring while technology vendors provide the APIs and infrastructure needed to deliver banking services. This evolution allows banks to meet the rising demand for embedded finance while ensuring they remain compliant with regulatory standards, offering seamless, integrated financial services through non-banking brands.