Last week, I weighed in on the lack of regulatory knowledge and reliance on meaningless “innovation talk” when trying to discuss the real impact that fintech products, especially embedded finance, are having on consumers. I wrote about my dissatisfaction.
Embedded finance, or banking-as-a-service business models, involve the provision of digital banking services by licensed banks through application programming interfaces (APIs) that are integrated directly into the products of non-bank businesses.
Juniper Research predicts that revenue generated from account/card issuance and transaction fees on global BaaS platforms will grow 158% from this year to 2028. This expansion will primarily be driven by the rollout of APIs across e-commerce and freelancing platforms, connecting consumers to innovative financial tools and creating additional revenue streams for BaaS providers.
In the spirit of fintech generosity and the right to answer, I decided to offer several BaaS providers the opportunity to answer my roundtable questions beyond what I heard from those sitting in the room that day. Did.
My question is:
With embedded finance/BaaS, where does the ultimate responsibility lie to the end consumer?
Ansgar Finken, chief risk officer at Solaris, holds embedded finance providers accountable.
“Embedded finance providers are ultimately responsible for the safety and compliance of their end users (usually the customers of their corporate partners). One of the core principles of embedded finance is that companies The ability to free up complex regulatory requirements associated with the provision of processed financial services.
“Ensuring compliance and protecting the end customer is always a top priority in embedded financial services. Second, it is ensuring that customers have access to products and services through our corporate partners as seamlessly as possible. To do this, we need to work closely with our partners to understand their specific requirements and customer behaviors, and adjust our services accordingly.”
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TrueLayer puts more emphasis on customer choice by providing account-to-account payment technology as an on-ramp and off-ramp for embedded financial services.
Payak Vaid, Vice President of Global Partnerships, said:
“Consumers don’t clearly know what ‘embedded finance’ or BaaS is. They're just involved in consumer products that are built on embedded financial services. As an example, most neobanks, new trading/brokerage apps, and even consumer loyalty cards are built on built-in financial/BaaS functionality.
“Non-fintech companies (such as marketplaces) can also provide financial services to consumers without explicitly becoming a bank through embedded financial services. Ultimately, the benefit for consumers is that they have choice and options. There are other ways to store funds, receive funds, and generate financial returns without using traditional banking services.”
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Tom Bentley, head of growth at NatWest Boxed, believes responsibility towards consumers is a shared responsibility.
“That's why brands need to choose their embedded banking partners very carefully,” he added.
“From a regulatory perspective, the onus is of course on the banks. At Boxed, we have been in the market for many years and understand how to protect customer data and deliver positive outcomes for customers in line with consumer obligations. These are the benefits of partnering with a well-established bank that has deep experience in regulation, governance, and customer focus.
“But brands also have skin in the game because they own the relationship with the consumer. If the experience is bad, the consumer will associate that bad experience with the brand (rather than the bank). Even with the best banking partners, the brand experience has to be great too.”
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A Klarna spokesperson said:
“In the case of regulated finance, the problem has been resolved to a large extent. As a credit provider, Klarna has a strong regulatory responsibility to its customers. Retailers offering regulated credit products must be licensed as credit brokers. However, the retailer's regulatory responsibility to the customer ends there, at least as far as the provision of credit is concerned. .”
However, the UK government's proposed regulations around short-term interest-free credit, such as 'buy now, pay later', would place more responsibility on credit providers, a spokesperson said.
“Instead of requiring retailers to be regulated credit brokers, credit providers will be responsible for communicating with retailers and consumers. Regulators will suddenly be responsible for regulating an additional 30,000 I don't care. [or so] “Retailers and we agree that credit providers should take on this responsibility,” the spokesperson added.
A spokesperson said there is a potentially interesting additional wrinkle to the first question. “Under the latest proposals, his BNPL provided by third parties like Klarna would be regulated, which we agree, but if the credit is funded by the retailer itself. Not regulated.
“For regulators, this means that the legal definition of BNPL includes BNPL products of the kind offered by Klarna, but does not include, for example, a plumber who issues an invoice and pays by domestic bank transfer. It turns out to be surprisingly difficult to create a sink that takes 30 days to repair.
“Both are effectively 30-day interest-free loans, but no one believes that plumbers should be required to run credit checks or be referred to the Financial Ombudsman. distinguished.
“However, under this definition, Amazon's 14-day interest-free credit that allows Prime customers to try before they buy, which they already do, would not be regulated. Amazon has no consumer obligations or regulatory responsibility to comply with his BNPL regulations in the future. Effectively, no one has any regulatory responsibility to their customers.
“Klarna does not call this embedded finance. It is the retailer who provides the balance sheet. The third party involved will provide the technology.
“Banking is not provided as a service. It's all provided by retailers. In some ways, this model is very old. It's just like the corner store or It's like a market stall. However, given the size of modern retailers and their ambitions to expand into financial services, questions have arisen as to where their regulatory responsibilities to consumers lie,” the spokesperson added.
