BaaS is sexy: solarisBank has raised $28M, BAASIS and Railsbank are on the way
Read full story in the new issue of Money Of The Future 2016\2017 report
While the US and European fintech markets seem to have stalled, Asia continues to show robust growth.
Japanese financial conglomerate SBI Holdings and a subsidiary of German media company Bertelsmann SE & Co KGaA have backed Berlin-based solarisBank AG, a fully licensed startup bank that enables businesses to offer digital financial services to their customers. The bank has raised 26.3 million euros ($28 million) in a Series A funding round from investors, and that it planned to use the capital to improve its products, and expand into Asia, Europe, and the US. The funding came from three new investors, as well as existing backers Yabeo Capital, UniCredit, and Finleap. solarisBank offers fintechs looking to provide banking services access to its suite of banking products, and to its European banking license.
That two of solarisBank’s new investors hail from Asia suggests the region’s importance to the company. solarisBank’s new backers include Hypovereinsbank, Germany’s third-largest private bank; Arvato, a Japanese financial services company. solarisBank plans to develop “joint ventures” with SBI, in which solarisBank would take a 40% stake to SBI’s 60%. The first such collaboration is due to launch in Asia in early 2018.
Moving into Asia will give solarisBank access to a wealth of new customers. With VC investment in Asia outstripping funding in Europe and North America, the region will likely see more new fintechs emerge than the US or UK in the near term. This proliferation of additional players represents an opportunity for solarisBank: Many fintechs aim to provide banking services, but becoming regulated remains a difficult process, and solarisBank’s offering addresses this pain point. By concentrating on Asia, solarisBank is positioning itself to take advantage of a region that’s historically lagged behind Western markets, but now seems ready to take off. Right now www.BAAS.IS, “the first pan-Asian bank-as-a-service platform” (BaaS), is raising $5M A-round of financing.
Last year’s proliferation of FinTech startups increased pace of integration among leading companies (such as Dwolla, Kantox, CurrencyCloud, Braintree, OnDeck and many others) via open APIs — and now there are hundreds of them. True, why to reinvent the wheel, if this feature, or engine, or something is not your competitive advantage and there are many quality solutions on the market. On the other hand, abundance of possibilities for integration and obsolescence of their back ends incentivized banks, such as BBVA, to switch from one-by-one integrations to massive deployment of new stacks of solutions with help of APIs specially created for this purpose. In countries, where there are no such banks — and we are talking here about most countries in the world — or where startups are very eager to speed up their expansions by partnership with several banks in several countries, BaaS (bank-as-a-service) platforms has emerged.
Big banks felt that such platforms together with FinTech startups with well-made APIs represent a hidden threat for them, commoditizing their business and levelling their advantages (such as availability of licenses, processing center, compliance depot or card issue service) and began to promote an idea of BaaP (banking-as-a-platform), where bank represents a focal point of startup ecosystem and “services-customers” chain (ABN Amro and Sberbank fall under this case). The explanation for such a behavior is quite easy to come up with — banks want to secure the last mile. In China, FinTech giants AliPay and WeChat Pay follow the same footsteps.
Historical homeland of BaaS approach is USA. Such players as The Bancorp and CBW Bank have been systematically acting as platforms successfully hosting American FinTech startups. New players like BBVA struggle for this piece of pie too. Wherein Spanish BBVA applies different strategies at different markets — where it doesn’t have big client base (as in USA), it plays in the spirit of BaaS, but where it dominates the market (Spain), it makes an emphasis on BaaP strategy. Speaking of minuses of American (and Chinese) BaaS platforms, we should note, that none of these platforms gives an international access, while there is a great need for this. There are 50 countries in Europe. In Asia, where most of Earth’s population lives, the majority of it being unbanked, there are 48 countries, in Africa — 54, in the Middle East — 19.
The most actively developing BaaS market is Europe. Partly due to support of regulating bodies, which incentivize banks, insurance companies and other players to open access to their platforms to external players — in particular, by issuing PSD2 directive — partly due to emergence of new players, who satisfy general market need in technological mediator. The largest of such players is German Wirecard — valued at $5B, it has expanded to the majority of European countries and opened office in Singapore in order to penetrate Asia and Near East markets. The goal of this company is to expand its services worldwide. In every country company seeks to obtain its own license, but at a number of markets it is forced to work with local bank (thus turning into BaaP solution with respect to this bank).
Despite the fact that Wirecard hosts a number of prominent startups, such as N26, Curve, Monzo, TransferTo, Loot, Revolut and others, it is far from doing as lucrative a business with them as its American peers — and, consequently, it grows mainly be serving large traditional players, which look closely at new financial services: e-wallets (AliPay), telecom companies and retailers. As Wirecard states, however, we are at the very beginning of the journey and market could easily incorporate another 3–4 big players. In Europe, new competitors spring up on a permanent basis: SolarisBank (Germany), IbanFirst (France), UAccount (Great Britain). Solarisbank has a peculiar business model — the company is a part of FinLeap accelerator (like Rocket Internet, but in FinTech), which has created a single center of infrastructure development for its startups and delivers their products as white-label solutions to final clients with the help of open APIs. At the end of 2016, the project secured its first banking license in Germany (while IbanFirst was able to get a hold on banking license in Belgium).
With the exception of BAASIS in Singapore, one can hardly find a project promoting BaaS approach in Asia, Africa or Near East. If such projects do not appear in the near future, then, considering infrastructural unpreparedness of local environment impending ability of FinTech startups to launch quickly and scale up efficiently, the majority of incumbents will die together with hopes of Singapore/Hong Kong/Seoul/Tokyo to become next FinTech hubs. Unlike its peers anywhere, BAASIS focuses on infrastructure development in Asian-Pacific area and does not want to obtain any licenses (and compete with local banks), anywhere — instead, it intends to choose one partner bank per country, enabling traditional players to rent their infrastructure (in a manner Amazon rents its infrastructure via Amazon Web Services) to startups.
Many traditional back-end (core banking systems) solution developers, like Swiss Crealogix (CLX) and Malaysian Silverlake, see great potential in serving needs not only of traditional players, but of newcomers, too. They try to find their niche in more and more BaaS-oriented world (although for the moment they only offer tuning of banking systems to make them BaaP-enabled).
In January British RailsBank, a banking-as-a-platform (BaaP) startup led serial entrepreneur Nigel Verdon that promises to provide access to global banking services with 5 lines of code, has signed its first banking partner and released its API to the global developer community. RailsBank says it will enable banks to digitally deliver the services fintech companies desperately need at a low cost; and with a lower compliance risk as conformance with anti-money laundering rules is designed into the platform.
Customers will have access to a core digital ledger banking platform and a complete range of ‘Product Rails’, including Iban creation, issuing cards, sending, receiving and converting money, and accessing credit, provided by financial service partners. Nigel Verdon, co-founder & CEO, Railsbank, says: “Our platform massively reduces the time, cost and complexity of connecting to and managing, multiple financial service providers and their legacy technologies as well as enabling both parties to have a trusted compliance relationship”.
Arkéa Banking Services, a subsidiary of Credit Mutuel Arkéa, has signed up to be first on the platform to deliver Sepa payment services and Ibans across Europe. Credit Mutuel Arkéa earlier in January took a 19.5% stake in buy-side software house Vermeg as part of a three-year strategic plan to grow its business in the provision of third party services. Christophe Bitner, president of the executive board of Arkéa Banking Services comments: “As a pioneer in white-label banking services, we are thrilled to onboard new fintech companies via the Railsbank solution. The cooperation between Arkéa Banking Services and Railsbank is fully in accordance with the B2B development strategy of the Group Crédit Mutuel Arkéa in Europe.”
RailsBank is joining a range of other platforms offering similar plug-and-play bundles to startup businesses, including Germany’s solarisBank and Sutor Bank, IbanFirst, and UK-based current account challenger U.
In preparation for a full-scale commercial launch, the firm has joined Startupbootcamp’s FinTech 2016 Cohort as a ‘Startup in Residence’ to showcase its technology and experience to emerging companies selected to join this autumn’s accelerator programme.
Serial entrepreneur and finance veteran Verdon’s previous ventures include founding Currency Cloud, PayrNet, Evolution Consulting Group and RabbitFX. His partner in the business, Clive Mitchell, lists previous ventures PayrNet, Digital Change Partners and Morse Transaction Services, on his CV.
Picking and choosing your bank products like you pick and choose your TV streaming products is inching closer to reality every day. With more and more Fintech’s finding creative solutions to provide consumer-centric experiences and more and more financial institutions realizing the need to serve an evolving consumer base, the “bank-as-a-platform” is slowly melding into reality. “Railsbank is a platform which connects the Fintech world with a global network of small and midsize banks with just five lines of code. It acts as the key to connecting financial institutions that have the regulatory capability with the technology startups that have the consumer user-friendliness and appeal.”
“The reality is the financial institutions and startups need to work together. Banks will never be displaced because you need balance sheets around the world as a safety net of funds, and you need their regulatory knowhow and capability.” “Fintech startups provide the connection between banks and customers which is the real broken part of the financial system. Taking responsibility for the custody of money and assets is a big responsibility and not one that the Fintech’s can necessarily handle even if they think they can.”
“We are focused on supporting the small to midsize banks that are looking for opportunities to operate in the digital world. However, we prefer not to work with startup banks because of the inherent risk these organizations are taking on. More established small to midsize banks are our core focus.
We find that this segment of the market, though established in terms of banking capability, are much easier to work with than with larger banking companies. We typically have access to the CEO and / or shareholders of our banking partners, so we can develop a relationship with the bank that allows us to go live within three months of our first discussion.
The larger banks are in the mindset of developing their own single-bank APIs. With that mindset they lock themselves into being a single bank service provider as opposed to a global multi-bank solution that our FinTech customer want; which is why we focus on building a global network of small to mid-sized banks.
The elephant in the room for larger banks, is that there is still the issue of compliance / risk on-boarding, and no matter how good the tech APIs a large bank has, onboarding a high risk customer still takes upwards of 9 to 12 months, which does not fit into our FinTech Customer proposition — to be live and connected with a banking relationship in 2 months.”
“We have our first partner bank that will give us Pan-European coverage and we have a second bank that is signing up in the coming weeks. Having these two banks live and up and running in 2017 will give us a complete European story. From there we will then be looking to other jurisdictions in 2018 as we grow.
The services we are launching with are enabling FinTech companies to issue individual bank accounts for their end customers across Europe as well as SME bank accounts. These end customers will be able to obtain direct debits, receive and send money into those accounts and be issued prepaid cards.
People doing open banking are largely only focusing on retail and data products instead of complete banking products. We look like a complete set of banking product for API rather than just focusing on retail customers we also look to serve the SMEs.” “We will be charging the Fintech companies an API charge to access the platform. The charge will look, feel and consume just like any other online service they are likely to use.”
Read full story in the new issue of Money Of The Future 2016\2017 report