This week, I address a topic that has come up frequently in postings and conversations. Despite the fact that I didn't write a specific article about it (until today), some individuals came to my blog via Google Search in an attempt to find the answer to this question.
Describing the differences between Embedded Finance (EF), Banking-as-a-Service (BaaS) and Plug-and-Play-Finance (PnPF) is comparatively easy. I'll do that in the first half of this article. In the second half, I want to delve into a bit more details and describe a few further thoughts.
Embedded Finance (EF)
The term Embedded Finance refers to the scenario in which a non-financial service provider (such as a marketplace or a SaaS provider) offers a financial product that is seamlessly incorporated into their non-financial product offering. I described this in one of my earlier blog posts. Great examples of this are the delivery service Lieferando (German brand of Takeaway.com), which offers financing products to its restaurant partners in Germany, and the tech-gadget rental service Grover, which offers a debit card as a loyalty feature. As you can see, Embedded Finance only explains the service itself and it makes no mention of how the product was created.
Banking-as-a-Service or short BaaS refers to an offering that consists of technology and a licence which enables third party companies to offer financial products. BaaS describes the product offering and the company offering it, is usually referred to as a BaaS provider. Most known BaaS providers in Europe are Solaris from Germany, Treezor from France and Modulr and Railsr from the UK. The first BaaS providers in Europe emerged (I think) in the early & mid 2010s and powered much of the early wave of Fintech. The term BaaS might be used for many different providers, but in my opinion, it is a requirement that a BaaS provider offers payment accounts (with access to local payment rails) to justify the term. Usually these providers also offer card issuing capabilities. If a provider offers only cards or lending without account capabilities then the term BaaS is not suitable.
Similar to BaaS, when we talk about Plug-and-Play-Finance we refer to a product offering that enables third party companies to offer financial products. The company offering the PnPF product is referred to as the Plug-and-Play-Finance provider. These providers started to emerge at the end of 2010s and beginning of 2020s and are powering many new Embedded Finance offerings. Most popular names in Europe are Weavr from the UK (Disclaimer: I worked at Weavr until November 2022), Swan from France or Dock Financial from Germany. The term BaaS is very widely used and I believe most people would define it the same way. On the other hand, the term PnPF is not commonly used yet and the PnPF providers are often mixed with BaaS. While this may sometimes be the right choice, very often the two should not be mixed up. The big difference between PnPF providers and BaaS providers is their ideal customer profile and the way their product is built (to address the needs of their ideal customers). Personally, I would say a PnPF provider is the perfect partner when (among other things) a) the company building the financial product does not have much Fintech experience/knowledge and b) speed is important. On the other hand, a BaaS provider is often chosen when a) the company building the product wants to control (a bit) more of the financial offering and b) when only the BaaS providers can fulfil certain specific banking capabilities. But more on the differences and similarities further down.
But let’s dive a little deeper into four questions that often arise when talking about Embedded Finance, BaaS and PnPF.
What is the ideal customer profile of a BaaS vs. PnPF provider?
Both providers are enabling the same thing: third party companies can create payment accounts and often issue cards with them. The real difference between both players is their ideal customer profile - and directly connected to that the way their customers are using the product. Most BaaS providers were founded around a time when the only potential customers were Fintech companies. Therefore, the product is also built in a way to cater to these companies. With a traditional BaaS provider you are usually looking at an integration time around six months or sometimes even more. Often this is not only driven by technology but also by the fact that the customer has to fulfil compliance or regulatory requirements. It’s also not uncommon that a company integrating with a traditional BaaS has to source their own identification provider (KYC/KYB). All these things are typically different with PnPF providers who provide an out-of-the-box solution which can be integrated and put live in just a few weeks. While this may sound like the PnPF is always superior, it really depends on what the requirements and preferences of the customer are.
Who will work with BaaS and who will work with PnPF?
Typically, companies who are in their early stages or bigger companies that want to launch MVPs are often attracted to the newer upcoming PnPF providers. On the other hand, bigger companies that feel like they have a certain level of certainty of their product plans might be more likely to go with a traditional BaaS. But all of this is just a rough picture, and it might look very different for a specific company. Personally, I am curious to see if some of the traditional BaaS providers will try to make changes on their product portfolio to also cater to the long tail (that is typically more attracted to PnPF). I guess this will depend among other things on their expectation how EF will further develop and which part of the market is the more interesting one to serve.
Can you say that PnPF is basically BaaS 2.0?
I have seen different posts where PnPF players like Weavr, Swan or Dock Financial have been described as BaaS 2.0 players, and honestly, I have used the same language in the past. But by now, I believe it is better to use different terms for two reasons. Firstly, the two type of providers enable companies to do the same thing, however, their approach is very different. There might be situations today where a BaaS is competing with a PnPF provider for a certain deal, but I believe this will become less and less as they focus on specific customer profiles. Secondly and directly connected to the first point, PnPF players will not replace BaaS providers and are not the superior choice for each and every company building Embedded Finance products.
How will the market of Fintech Infrastructure providers develop?
Who knows. But what I strongly believe is that Embedded Finance is in its very early days. I expect that the need of brands building financial products will become clearer in the coming months and years. Personally, I wouldn’t be surprised if we see specific Fintech Infrastructure providers focusing on specific types of customers. For example a provider targets only very specific industries such as insurance, retail or manufacturing.
But we will only know the answer when we see further adoption of Embedded Finance. And I will watch that development very closely!
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