A Finextra report on the future of digital banking in Europe 2024 published in June referred to embedded payments as the foremost use case for BaaS, noting that embedded payment revenues are predicted to increase from US$43bn in 2021 to US$138bn in 2026.

Unlike traditional integrated payments (where payment processing is connected to a third-party service) embedded payments are native to a company’s ecosystem.

According to Neil Chandler, CEO of Aion Bank (which was acquired by UniCredit in late July) it is no surprise that solving payment headaches is a common starting point when companies engage with BaaS providers.

“However, providers with a full banking licence can also embed banking services, including accounts, savings and lending products,” he adds.

Other services driving BaaS demand include:

• Account management – digital-first account solutions that offer streamlined onboarding and user-friendly interfaces.

• Digital wallets – secure, convenient platforms for storing and managing various payment methods and currencies.

• Payment processing – fast, efficient systems for handling transactions across multiple channels.

• Low-cost cross-border payments – solutions that make international transfers more accessible and affordable for individuals and businesses.

• Card issuing – the ability to quickly launch branded debit or credit cards, often with customisable features.

“These services are particularly appealing because consumers are increasingly seeking agile, digital-native providers that offer lower cost alternatives to traditional banks” suggests Richard Kalas, Client Solutions Director for retail banking at GFT. “The appeal lies not just in the cost savings, but also in the exceptional customer experience these platforms tend to deliver.”

Solaris is seeing increased demand for accounts, cards, loans and KYC capabilities says CFO, Konstantin Kavvadias, who notes that products such as bank accounts and cards provide a daily touchpoint for consumers, while branded cards also provide a valuable physical marketing tool.

“When it comes to KYC, there is demand not just from banks but also other organisations that must conduct similar processes to onboard customers, such as telecommunications or insurance companies,” he says.

Deposits alone are not enough to sustain a BaaS platform – the key driver in 2024 is lending. That is the view of Vlad Lounegov, CEO of Mbanq, who reckons lending-as-a-service has emerged as the new paradigm, offering BaaS providers a crucial revenue stream.

“The ability to provide an issuing capability is still a driving force, but there is also a trend towards commercial accounts,” says Will Sowell, Divisional President of banking-as-a-service at Pathward. “Fintechs want their bank to be able to support multiple diverse product lines, such as money movement capabilities and acquiring.”

Non-financial companies are increasingly interested in offering card-based payment options. Typically, those new to issuer payments are looking for solutions that offer speed to market with minimal upfront investment.

“BaaS providers appeal to this audience,” says Jim McCarthy, CEO at Thredd. “However, we are increasingly seeing embedded finance players wanting more control over their programmes and having custom requirements that cannot be met by an ‘out of the box’ solution.”

A number of BaaS providers have scaled back their operations or closed down this year. In April, Synapse filed for Chapter 11 bankruptcy protection and Evolve was the subject of an enforcement action by the Federal Reserve Board in June, while there have been redundancies at Synctera, Treasury Prime and Unit.

“It is clear that the market still has an appetite for embedded finance, digital payments and other products empowered by BaaS,” says Jovi Overo, Managing Director of Unlimit’s BaaS division. “However, the shenanigans at Evolve and Synapse have shown that it is not enough to simply meet demand – you have to do so in a way that safeguards both the client and their end customers.”