Last week, I wrote about my frustration with the lack of regulatory knowledge and reliance on meaningless “innovation speak” when trying to discuss the real impact that fintech offerings, specifically embedded finance, is having on consumers.
Embedded finance, or the banking-as-a-service business model, involves the delivery of digital banking services by licensed banks, via application programming interfaces — APIs — that integrate directly into the products of non-banking businesses.
Juniper Research predicts that revenue generated from account/card issuing and transaction fees on global BaaS platforms will grow by 158 per cent from this year to 2028; up from $36.4bn in 2024. This expansion primarily comes from API deployment across ecommerce and freelance platforms by connecting consumers to innovative financial tools, and unlocking additional revenue streams for BaaS providers.
In the spirit of fintech generosity and right to reply, I have decided to offer a handful of BaaS providers the chance to answer my roundtable question better than what I heard from those sitting in the room that day.
My question being:
With embedded finance/BaaS, where does the ultimate responsibility to the end consumer lie?
Ansgar Finken, chief risk officer at Solaris, put the onus on the embedded finance provider:
“The embedded finance provider is ultimately responsible for the safety and compliance of its end users, which are typically the customers of a corporate partner. One of embedded finance’s core principles is that it enables corporates to let go of the complex regulatory requirements that come with offering financial services handled by a professional and regulated institute.
“In any embedded finance offering, ensuring compliance and protecting end customers is always the number one priority. Then it’s ensuring customer access to products and services via corporate partners is as seamless as possible. To make this happen, it’s a case of working closely with partners to understand any specific requirements and customer behaviour so offerings can be tailored accordingly.”
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As an on-ramp and off-ramp for embedded finance services, by providing account-to-account payment technology, TrueLayer is more concerned with customer choice.
According to Paiak Vaid, vice-president of global partnerships:
“Consumers don’t explicitly know what ‘embedded finance’ or BaaS is. They simply engage with consumer products that are built on embedded finance services. As an example, most neobanks, new trading/brokerage apps and even consumer loyalty cards are built on embedded finance/BaaS capabilities.
“Even companies that are not fintechs — for example, marketplaces — can offer financial services to consumers without explicitly becoming banks through embedded finance services. Ultimately, the benefit for the consumer is more choice and optionality. There are more ways to store funds, receive funds and/or generate a return on funds without going to traditional banking services.”
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Tom Bentley, head of growth at NatWest Boxed, sees the responsibility to the consumer is one that should be shared.
“Which is why brands need to pick their embedded banking partner very carefully,” he adds.
“From a regulatory perspective, responsibility is with the bank, of course — at Boxed we’ve been in the market a long time and understand how to protect customer data and deliver good customer outcomes in line with consumer duty. These are the benefits you get from working with a well-established bank that has deep experience in regulation, governance, and customer focus.
“But brands have skin in the game too as they own the consumer relationship. If the experience is bad, the consumer will associate that bad experience with the brand (not the bank). So even with the best banking partner, the experience with the brand has to be great too.”
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According to a spokesperson for Klarna:
“In the case of regulated finance, the question is fairly settled. As the credit provider, the regulatory responsibility to the customer lies firmly with Klarna. Retailers who offer regulated credit products are licensed as credit brokers and have a responsibility to be fair, transparent and not misleading in their communications and provide appropriate disclosures. But at least as far as offering credit is concerned, that’s where retailers’ regulatory responsibility to the customer ends.”
However, in regard to the UK government’s proposed regulation on short-term, interest-free credit such as “buy now, pay later”, put more responsibility on the credit provider, says the spokesperson.
“Instead of requiring retailers to be regulated credit brokers, the credit provider will be responsible for the retailer’s communications with the consumer. The regulator has no appetite to suddenly become responsible for regulating an additional 30,000 [or so] retailers, and we agree that the credit provider should shoulder this responsibility,” adds the spokesperson.
The spokesperson says there is potentially an interesting, additional wrinkle to the initial question. “Under the latest proposals, BNPL provided by a third party like Klarna would be regulated, which we agree with, but when the credit is funded by the retailer themselves, it wouldn’t.
“This is because it has proven surprisingly difficult for the regulators to write a legal definition of BNPL which includes the kind of BNPL products that Klarna offers but does not include, for example, a plumber giving you an invoice which you pay by bank transfer within 30 days of them fixing your sink.
“Both are, in effect, 30-day interest-free credit, but nobody believes plumbers should be required to conduct credit checks or be referred to the Financial Ombudsman. Hence the distinction based on who is providing the funding.
“But, under this definition, Amazon’s 14-day interest-free credit, which allows Prime customers to ‘try-before-you-buy’, which they already do, would not be regulated. There would be no regulatory responsibility on Amazon to abide by the Consumer Duty or future BNPL regulations. In effect, no-one would have any regulatory responsibility towards the customer.
“Klarna doesn’t call this embedded finance; it is the retailer providing the balance sheet. Any third party that is involved would be providing the tech.
“Banking is not being provided as a service; it is provided entirely by the retailer. In some ways the model is very old — it is just like your corner shop or market stall providing groceries ‘on tick’. But the size of modern retailers and their ambition to extend into financial services does raise questions over where the regulatory responsibility to the consumer should lie,” adds the spokesperson.
