Regulation and compliance are essential when picking the right BaaS provider

The term Banking-as-a-Service (BaaS) has shot to prominence in recent years, but there is no single definition of a BaaS provider - some providers are strictly IT specialists, others hold licences limited to payment products, and a few offer full end-to-end BaaS with services based on a full banking licence.

Today, BaaS has evolved and is available to offer its services to almost any enterprise, empowering non-financial businesses to seamlessly incorporate banking products directly into their websites or applications. Many businesses have realised that by integrating BaaS solutions into their ecosystems, they are able to take advantage of greater speed and cost efficiency while providing a superior, more convenient experience for their customers.

While many BaaS providers today are helping non-financial businesses unlock the full potential of embedded finance, this does not mean every provider is a one-stop shop. Far from it.

Businesses considering BaaS must be aware of the importance of the regulation and compliance aspects of financial services, and they should not assume that every provider will take care of this for them.

In reality, which banking licence (if any) a BaaS provider has dictates the services they are able to offer just as much as their underlying technology. What’s more, when picking the right BaaS partner, businesses should closely scrutinise their compliance and risk management credentials; this will have a marked impact on the outcome.

Getting to grips with compliance

Different financial products are subject to different regulatory compliance requirements, which may also vary depending on the country where such services are offered. This means that, when choosing a BaaS partner, companies should -  first and foremost - ensure their BaaS providers have access to the relevant banking licence. 

While basic payment solutions are often simple to offer, newer lending products like Buy Now, Pay Later (BNPL) can be more intricate due to evolving regulations and the complex credit evaluation process for offering loans to consumers. Again, depending on which solutions a business intends to integrate - payments or credit, insurance or savings - this would dictate the banking licence their BaaS provider should hold. 

The types of licences held by BaaS providers can differ. The Electronic Money Institution (EMI) licence, for instance, authorises their customers to issue electronic money and provide payment services. However, they may lack access to local clearing houses/IBANs and would therefore be unable to accept deposits or offer lending services. 

BNPL has quickly become a key differentiator for many online retailers, and in order to offer split payments to their customers, businesses must collaborate with fully licensed providers to harness the extensive benefits that such solutions provide. By overlooking the importance of compliance and regulation within BaaS provision, non-financial businesses could choose a partner that cannot access the complete scope of financial services.

A costly BaaS mistake

An additional consideration when choosing a BaaS provider is to determine how the financial services offered will be handled on a day-to-day basis. Being able to manage compliance, as well as fraud prevention, is also essential for successful financial service provision. If a BaaS provider is unable to offer such services, a business might be forced to outsource these critical matters to a third party     .

The added complexity that comes from an underequipped BaaS partner can result in delayed product launches, higher related costs, and even make it more difficult to maintain good relations with regulatory authorities. Ultimately, picking a partner who can handle every element of a business’ regulatory and compliance needs avoids unnecessary headaches, allowing them to instead focus on what they do best.

What technologies are involved?

There are several key technologies that brands should be aware of when picking a BaaS provider. Robust onboarding solutions are not only essential, but their requirements can vary based on location; secure, end-to-end remote onboarding should be on adopters’ radars.

As well as full compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations in the countries they operate, providers should offer likeness checking and facial recognition, tailored to the specific regulatory requirements of local markets.

These technologies are vital in the defence against financial crime, and businesses that fail to meet their local requirements run the risk of both lasting reputational damage and serious fines for failing counter-terrorism financing and AML compliance.

Bringing it all together

For businesses new to the financial services industry, partnering with a BaaS provider that can meet the technical, banking licence and compliance requirements is imperative.

BaaS adopters should actively seek out providers that have demonstrable compliance expertise and that incorporate advanced technologies to ensure compliance with all necessary regulations. By choosing a BaaS partner with a well-rounded compliance framework, businesses can focus on their customers, confident that their provider is handling everything in the back end.