Banking-as-a-Service is a “dirty word” with US investors, according to the boss of a European fintech, which embeds financial services into the businesses of its B2B clients.

Banking-as-a-Service (BaaS) has been one of the hottest trends in fintech in recent years.

It can be defined as a service whereby regulated financial institutions, which typically hold a banking licence, deliver financial services, such as debit cards and KYC, to non-banking businesses.

However, the definition of BaaS varies between the US and Europe, amid different regulatory structures.

In recent years, BaaS has attracted significant VC money with Israeli BaaS startup Unit reaching unicorn status in 2022.

However, questions have been raised about the BaaS model, including in the US where it has attracted regulatory scrutiny.

Concerns grew even further following the high-profile collapse of US fintech middleman Synapse which led to the freezing of thousands of accounts.

In the wake of the Synapse collapse, the FDIC, the US regulator, has proposed strengthened rules for banks working with partners, strengthening record-keeping requirements for accounts held by fintechs on behalf of their customers, a move that could significantly impact the growing BaaS sector.

Alex Mifsud, co-founder and CEO of Weavr, a European embedded finance provider, said:

“With many of the investors, Banking-as-a-Service is a dirty word. The regulatory uncertainties and the hostile environment is not something investors like to be up against.”

Weavr, which has offices in the UK and Malta, where Mifsud was born, has recently acquired a Maltese Electronic Money Institution (EMI) licence, which it will passport across the EU, offering embedded financial services such as cards and fund transfers to its B2B partners.

Mifsud is critical of the current BaaS model, over issues around which of the BaaS partners is accountable for financial compliance.

He said:

“For us, it’s always been our position that the Banking-as-a-Service model is inherently unstable.

“We think that the BaaS model is quite dangerous because a lot of the financial institutions find it very hard to provide oversight over all of their integrations.

“A financial institution that has 100 programmes running on it, each of them having implemented their own stack and their own operations-how on earth can the financial institution really know what is going on all of the time?”

Furthermore, he said that partners of the financial institutions faced a difficult decision of whether to spend money on making their financial compliance systems “bulletproof” or in other areas such as acquiring more customers.

Mifsud says Weavr’s model is different to the BaaS model.

He said:

“The choice we have made is we will do all the compliance. We do not trust the software businesses, nor do we allow them to build their own compliance stacks. We build the technology, we have the managed service around it, and provide the oversight for compliance.”