“There is no alignment of risk and reward in this model any more,” says the CEO of BaaS provider Weavr in a recent interview. “I honestly think the BaaS model will not survive as it stands today.”

I agree.

Take Monese, a fintech built on BaaS. It has come to the realisation that transforming its retail banking model into a profitable venture is a challenging and time-consuming process. As reported previously, the influence of investor Investec played a pivotal role in shaping Monese’s new strategic direction. Faced with significant financial losses in retail, the company found it necessary to pivot towards a B2B technology business as a strategic move to enhance revenue generation.

Monese’s decision to drop its original BaaS provider ThoughtMachine is part of this new strategy. It is doubling down on its own BaaS offering, XYB.

But there is a logical disconnect here. Monese is hoping that it can raise revenues by selling its XYB technology to other fintechs, who are likely to be struggling to construct a scalable profitable business, in exactly the same way that Monese was.

It’s like the ancient motif of the Ouroboros – a dragon swallowing its own tail and a symbol of the cycle of life, death and rebirth. If Weavr’s CEO is correct, then BaaS is currently in the death phase of this cycle.

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Fewer startups to sell to

Despite recent signs of a slow funding thaw, today’s more cautious approach to fintech investment is making matters even worse. BaaS companies are likely to experience a decline in their customer base (new fintechs), due to the prevailing “winter” in venture financing within the fintech sector and the limited availability of cost-effective funding alternatives in the current market environment.

Furthermore, fintech companies relying on third-party BaaS providers often find themselves in a homogenous landscape, lacking distinctive features that set them apart. The technological infrastructure offered by BaaS is often too ‘heavy’ and difficult to change and it can become a significant obstacle for these fintech firms when developing modern mobile applications or introducing unique features, resulting in them paying a high price for limited returns.

Regulatory pushback

This homogeneity is a particular problem in regulation and compliance right now. Fintechs built on BaaS foundations are experiencing increasing pushback from regulators.

As an illustration, the Bank of Lithuania’s decision to revoke the license of PayrNet, a subsidiary of the BaaS provider Railsr, had an impact on over 50 fintechs that relied on PayrNet as their service provider. This includes fintechs like Wirex, wamo, Plum, and others.

That’s not a one-off. Other BaaS providers which have experienced regulatory intervention include Solarisbank in Germany, Modulr in the UK, and Blue Ridge Bank and Cross River in the US.

Vanilla is not a winning banking proposition

The core problem is that BaaS seems to result in inadequate attention to AML/KYC/CFT during onboarding. This goes to the heart of the contradiction in BaaS. It imposes standardised processes and features on fintechs that do not necessarily fit the needs of their customers and markets.

The core challenge faced by fintechs relying on external BaaS’s compliance frameworks is this lack of differentiation. On one hand, BaaS providers aim to expand their client base but, on the other hand, they offer a uniform set of compliance settings to all clients, regardless of their specific activities. Introducing modifications to align compliance settings with a fintech’s unique business needs becomes a costly thing.

From my perspective, differentiated compliance settings and products are essential. This approach facilitates quick adaptation to market dynamics and regulatory changes, enabling efficient and cost-effective adjustments tailored to the specific requirements of the fintech. Unfortunately, BaaS as it is currently configured does not address this need.

Raman Korneu is CEO and co-founder of myTU

Raman Korneu is CEO and co-founder of myTU, a neobank that is pioneering the use of cloud-only infrastructure and AI to make essential financial services easier to access, more secure and more cost-effective. Headquartered in Vilnius, Lithuania, myTU was founded in 2019 and has raised €6m to date.