If you’re a digital innovator looking to bring embedded finance into your platform, there’s more than one route ahead of you. You could build the system yourself if you had infinite money and time. You’d be becoming a bank – and the complexity involved in engineering and keeping such a system compliant is an insurmountable obstacle even for the biggest businesses. Not surprisingly, no one takes this route.
Alternatively, there’s Banking-as-a-Service (BaaS), which might look like a full solution. But once you dig a little deeper, you realise there are a tonne of processes and players you need to bring together to make BaaS work. If you take on this task and eventually emerge on the other side, you’ll realise you’ve become a fintech even though the core of your business is likely non-financial and you probably wanted it to stay that way.
Basically, BaaS can often end up like buying a fixer-upper house at auction: behind the low cost is a mountain of work that needs doing to make it a viable solution.
The cost of that work can quickly make any potential savings evaporate, and often you won’t know what the demands will be until you’ve already committed your time, resources and investors’ funds. But armed with the right questions, you can see what the reality of your BaaS journey would look like beyond the promise of the sales pitch.
1. How much do I need to worry about risk and compliance?
Keeping up with risk and compliance is one of the biggest barriers that stop innovators building their own embedded finance solution. But if you decide to go down the BaaS route instead, how much of that burden will your supplier take off your shoulders?
All too often the answer is: they won’t do much. Some might provide a few tools to get you started or promise a Compliance-as-a-Service offering, but generally, that won’t go beyond holding the financial licence for you – everything else, from onboarding customers and doing KYC checks to handling all monitoring and reporting, will have to be sorted by the innovator at extra cost.
2. How flexible are those compliance tools?
Not all compliance is the same. Depending on the kinds of transactions flowing through your platform, you’ll need to fine-tune your compliance tools so that they make sense for what your customers are trying to do.
Imagine one of your top users is so taken with the advice given by your personal finance platform that they sell their house and transfer all the proceeds from their traditional bank account into a virtual account within the platform. If the risk and compliance tools aren’t set up to expect that kind of behaviour, their default settings might see that transfer as potentially fraudulent and block the platform account. Context is everything.
It’s a sensible precaution on one level, but not exactly a great user experience. Your best customer might well become your ex-customer. To catch fraud at the same time as protecting your top users, you need flexible financial controls… and not every BaaS supplier allows this. If yours doesn’t, you risk leaving holes in your system that your best, and now frustrated, customers will fall through. Again, context is everything.
3. How much support is provided for specialist security elements?
Whenever you’re handling sensitive financial data like customer card numbers, you need to be able to show that it’s being stored responsibly. That means getting data security certification like PCI-DSS, completing regular auditing, and engineering a robust system that keeps everything protected.
Few BaaS providers will want to take on those responsibilities themselves. To be clear, that means you’ll have to. Getting each of these specialist elements right is a small project in itself, and without any support, many innovators don’t realise until too late what a monster it can all become.
4. Will there be support for key UX features?
Whether or not your embedded finance investment is a success will come down to the UX you deliver. It’s not just about delivering financial capabilities – it’s also about creating a platform your customers can use in the way they want.
If your customers want to use Apple and Google Pay, or authenticate payments using touch or Face ID, will your BaaS provider support those features? If not, accepting a compromise at the start of the journey can mean hobbling your platform’s chances of success later on.
5. What are my regulatory obligations?
When getting started with embedded finance, everyone hopes for tech you can drop straight into your platform without hassle. But most BaaS providers will have a long list of obligations that come with using their service, from registering your board with regulators to completing audits and drafting compliance policies, all at the cost of tens of thousands.
These tasks aren’t one-and-done either. If receiving annual audits wasn’t intimidating enough, financial regulations change all the time and compliance constantly needs reviewing. You need to be completely clear at the start on what obligations your provider will be passing on to you, otherwise, you can guarantee some unwelcome surprises later.
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