New Banking as a Service startup raises capital for embedded banking

• A new Banking as a Service startup aims to sell its offering to nonfinancial companies.
• This gives an early idea of how embedded banking might play out and the risks it poses to financial institutions’ B2C relationships. 
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Swan, a French Banking as a Service (BaaS) startup geared toward nonfinancial companies, has raised a €5 million ($5.6 million) seed round, per TechCrunch. It will reportedly use the funds to meet regulatory requirements and acquire early customers for its platform.

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Swan recently received an e-money license from the French central bank and can now operate payments services, hold deposits, issue payment cards and international bank account numbers (IBANs), and open accounts. As part of its services, Swan will also handle identity verification, fraud detection, and risk assessment for new banking customers. With the platform, nonbanks could create bank accounts for limited purposes and issue virtual or physical cards.

The service allows consumer brands to control both the customer experience and the wiring behind their services. Swan is selling “embedded finance,” a term for nonfinancial companies offering financial products and services to their customers while retaining complete control over the customer experience. A retail brand could, for example, instantaneously issue its own virtual affinity cards as if it were a bank and have customers manage them through the retailer’s digital experience, rather than a bank’s.

Large nonfinancial brands have entered consumer banking with embedded finance, and they could displace cobranded products. Branded financial services already exist within websites: Many ecommerce sites have PayPal or Affirm built into the checkout process.

But consumer brands are starting to take full control of the customer relationship: For Apple Cash, which integrates with the tech giant’s proprietary wallet and messaging app, Apple partnered with Green Dot Bank. And Google has partnered with banks to offer a Google Pay checking account. Although the latter offering is cobranded, Google still controls the user experience.

FIs’ grip on the B2C relationship might loosen thanks to embedded finance, but the BaaS market opportunity is theirs to lose. BaaS services can remove the bank’s direct relationship with the end consumer. In the context of embedded banking, the consumer—via deposit funding, interchange, fees, and interest paid on loans—could remain a revenue source, but the bank’s direct relationship becomes with the nonfinancial company.

“Consumer” banking in this context would actually be B2B, and could render irrelevant today’s digital experiences that FIs offer. But banks like BBVA, with its BaaS offering, show how FIs can adjust to take advantage of changes in the market that they still own.

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