Banking-as-a-service (BaaS) has been on the rise in Europe in recent years, driven by favorable new regulations, the region’s thriving fintech ecosystem, increased collaboration between banks and fintech companies, and changing customer expectations.

Moving forward, BaaS will carry on its momentum in the region, triggering a “revolutionary shift” in the financial service industry, a new report by WhiteSight, a fintech-focused research firm, and Toqio, a fintech-as-a-service platform provider, says.

The State of Banking-as-a-Service in the UK and Europe report, released in April 2023, provides an overview of the Europe’s BaaS landscape, examining business models, the competitive landscape, regulatory oversight, and demand drivers.

According to the report, changes in the financial services industry brought about BaaS have already begun and are now picking up speed.

Incumbents in the UK and Europe are increasingly better big on BaaS as a key driver of growth of innovation. Use cases for BaaS are expanding well beyond account and payment services to now encompass identity verification, loan origination, business-to-business (B2B) buy now pay later (BNPL) and earned-wage access (EWA). And financial service providers are recognizing the need for wider ecosystem collaboration. This includes working with fintech startups, digital platforms, traditional banks and technology firms.

As Europe’s BaaS industry continues to grow and mature, the sector is expected to see consolidation. Providers will seek to scale their operations and expand their customer base and pursue acquisition opportunities, the report says. This trend will further be accelerated by factors including increased competition, regulatory pressures, and the need to provide a broader range of services to customers, it predicts.

The report also forecasts heightened regulatory scrutiny of BaaS providers in Europe as adoption grows. Regulators in the UK, Germany and Lithuania, in particular, are introducing more stringent rules to mitigate potential risks, including money laundering, fraud, and financial instability.

The Consumer Duty, a new set of regulations proposed by the UK Financial Conduct Authority (FCA), is expected to have a significant impact on BaaS providers in the UK by setting higher and clearer standards of consumer protection across financial services.

In the European Union (EU), new guidelines on the outsourcing of payment services by licensed electronic money institutions were recently issued, emphasizing the need for more effective risk management and anti-money laundering (AML) controls.

The European BaaS landscape

In Europe, the UK and Germany are at the forefront of the BaaS revolution, making up for around 60% of the market share in the region. But over the past few years, the BaaS movement has been picking up pace in several other European countries, including Lithuania, Sweden, Finland, Spain, and France.

Banking-as-a-service players in Europe, Source: The State of Banking-as-a-Service in the UK and Europe, WhiteSight/Toqio, April 2023

BaaS is expected to grow at a compound annual growth rate (CAGR) of 15-16% globally by 2030, a rate that’s projected to be witnessed in Europe as well. According to McKinsey, the target addressable market (TAM) for BaaS in the European Economic Area (EEA) and the UK is set to reach EUR 90-105 billion by 2030.

The growth of Europe’s BaaS market will be driven by developments in embedded finance or the integration of financial services and tools into the customer journeys of non-financial companies, as well as the rise of fintech companies and specialized players.

Increased adoption of embedded finance will result in a TAM of between EUR 75-85 billion by 2030, while the continued growth of nonbanking-licensed fintech and specialized companies will to create a revenue pool of EUR 15-20 billion by then, the consultancy firm predicts.

Banking-as-a-service target addressable market by 2030, Source: McKinsey, September 2022

The rise of the European BaaS market comes on the back of soaring adoption of these solutions by the business community.

A recent study by BaaS provider Vodeno and Belgian digital bank Aion Bank polled 1,000+ business decision-makers in the UK, Belgium and the Netherlands on their views and predictions for BaaS. The survey found that 39% of respondents have already implemented BaaS products, with an additional 38% considering using it in 2023.

BNPL (48%), foreign exchange (FX) (48%), small and medium-sized enterprise (SME) lending (47%), and loyalty (46%) were cited as the most popular products businesses are considering implementing.

The study also found that business leaders are confident in the prospect of BaaS. 64% of decision-makers believe that BaaS will achieve mainstream adoption in the next five years, with the cost-of-living crisis acting as a catalyst, according to an additional 56%.

Featured image credit: Edited from freepik