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🧠 BaaS in the UK
The UK is be showing how embedded finance plays out when payments revenue isn't enough, and banks go direct API-first. Plus: Revolut gets a banking licence in Mexico & Petal acquired by Empower.
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Hey Fintech Nerds 👋
Cross-border is so hot right now.
No wonder Revolut is getting a banking licence in Mexico, it helps them capture some of that sweet opportunity, especially since banks have been exiting partnerships with remittance companies in MX. (👀 Things to Know)
Petal has been acquired by a Mexican company too. (👀 Things to Know)
It seems LATAM is the future of US Fintech.
As I write this, I’m on a flight back home to the UK. While much of my audience is following the chaos of the US BaaS ecosystem, I wanted to cover the UK market this week for the 📣 Rant because it offers a peek at how the whole thing will play out.
I’m your ghost of Fintech's future.
Here's this week's Brainfood in summary
📣 Rant: BaaS in the UK is a window into the future of the sector.
💸 4 Fintech Companies:
👀 Things to Know:
📚 Good Read: World Payments Report (WorldPay) - This is an absolute banger, do not skip, go read below.
Weekly Rant 📣
The UK is the future model of embedded finance.
The UK is a peek at the future of embedded finance.
Banks with APIs, going direct. Regulated interchange. And profitable Fintech companies and challengers.
The UK never had a “BaaS boom” like the US experienced in 2019 through 2021. The problem with embedded finance in the UK was that the economy didn't work on card interchange.
Instead, the opportunity in the UK is getting a payments license (EMI) and partnering with the new wave of banks that offer “embedded banking.”
This was enabled by a clear path to becoming a regulated bank. We’ve seen a wave of digital banks that are API-first, like Clearbank and Griffin, as well as consumer and SMB digital banks (Monzo, Starling, Alica, Tide, et al.).
Yet.
Since Brexit and the pandemic it felt like the UK lost its way in Fintech.
That’s changing.
There's an energy about London these days that I haven't felt in a long time. It started last spring, but this year could be something else.
If you believe all payments will eventually get commoditized, then the UK is the model of the future for embedded finance.
Headless (API-first) banks, de-novo charters, and early signs of embedded lending.
Is the UK the future of embedded finance?
Or, Like Adele, are UK Fintech's best days behind it?
Thesis: The UK is the future of embedded finance. Headless banks will unlock profitability and lending, US giants will pick it as their market to enter, and big banks will partner to offer API-first experiences.
BaaS in the UK History
The UK is a payments innovator
Retailers always had co-brand cards (like the US)
New payments entrants enabled the digital and Neobanks boom
Leading to a wave of API-first providers
Then Brexit, then ZIRP, then the Fintech bubble burst
The UK landscape today has major gaps compared to the US
There aren't many banks ready to partner
You can't bootstrap with a debit card because the unit economics don't work
The provider ecosystem isn't as developed
We don't have many home-grown SaaS or marketplace companies
There aren't many lending-as-a-service products
The future of BaaS in the UK
Headless banks
US BaaS provider market entrants
Big banks doing surprising things
Combined with the best builder energy since 2016
The UK model is the future of BaaS
1. BaaS in the UK
a) The UK was briefly a global leader in payments innovation. From 2000 to ~2016, the UK was arguably a world leader in payments innovation. The world's first real-time payments network, Faster Payments, debuted in 2005. The UK was the first market with mainstream contactless (tap-to-pay) cards, and its innovation in Open Banking payments is being copied globally.
More recently, companies like GoCardless, Form3, Modulr, and Clearbank have made real-time payments a default offering.
b) Retailers always had co-brand cards; Tesco, Sainsbury's, and M&S all sell their debit card and insurance products at checkout. The goal was always to get the issuer interchange and customer data. The cost of 0.2% on debit or 0.3% on credit becomes revenue if a customer uses your branded card. You also get to see who bought what and how often, which has been harder with traditional loyalty programs.
In reality, all of these programs look like the banks in bad drag outfits (and with none of the sass). Same terrible tech, customer service, and apps. Tesco had a bank it owned and ran (albeit on legacy Natwest systems), but it just sold that to Barclays.
The UK big-brand embedded finance scene is as dull as dishwater, and the big banks are mostly culpable.
c) A unique pre-BaaS setup enabled new digital challenger banks. The pattern is familiar to those of you in the US. A local bank managed the program and BIN sponsorship. The new entrants also used payment companies like PPS (Edenred), GPS (now Thread), or Contis. Side note: I don't know why they all have dreadful names now.
When Monzo and Revolut burst onto the scene, they followed this pattern and acquired an Electronic Money Issuance (EMI) license. Think of the EMI as an MTL that works in the entire UK and was (in principle) valid across the European Union at the time.
Pre-PSD2, debit card interchange was higher, and this provided a stable revenue source for the Neobanks. Uniquely in the UK, they also had a path to becoming fully chartered (licensed) banks, which Monzo later achieved and Revolut still intends to do.
d) A new wave of providers emerged. Perhaps the most well-known is Railsr, which would compare to Unit or Treasury Prime in the US in offering simple APIs to help companies get to market faster for a lower upfront cost. They'd collapse 5 or 6 integrations into one, and in the case of Rails, they also held an EMI license and account at the central bank.
This meant consumer funds were protected, and businesses got time to market.
It's also worth mentioning Clearbank, a regulated bank focused primarily on payments (although it also offers accounts). It has no branches and no UI; it is API first. While Barclays, Natwest, and HSBC would offer similar payment services through their nonbank financial institution (NBFI) corporate banking teams, Clearbank was a sign of things to come. But it spent the late 2010s trying to be a big correspondent bank and went nowhere fast.
For US Readers, Column or Lead Bank would be the closest equivalents if they only offered payments and accounts.
With Form 3, Modulr, Railsr, Thredd, Solaris, and others, there was no lack of providers in the UK.
e) Then Brexit, then ZIRP, then the Fintech bubble burst. Raislr is a perfect case study of this challenge. When PSD2 happened, debit card interchange was capped, so the revenue on debit cards for clients was limited compared to the US. During the ZIRP years, they'd been highly valued as a darling of UK Fintech but struggled for a raise when the Fintech bubble burst.
Brexit made the UK look less attractive to international investors, and we lost a generation of Fintech companies that could have gone global to the mess and noise of that combined with the pandemic.
Today, Modulr and Solaris (formerly Contis) would compete for this business, but they are much broader offerings and resemble payment companies much more than API-first BaaS platforms. These companies have faced increasing regulatory pushback and scrutiny. While not as loud or as obvious as the BaaS drama in the US, there is still a question about customer ownership, AML, and fraud control quality in the EMI setup.
BaaS doesn't really exist here.
2. The Gaps in the UK market today
a) There aren't enough banks ready to partner. As I alluded to in the previous section, the big banks (with one exception) aren't really innovating. They're only interested in the larger deals, and the ecosystem of smaller banks that might take a risk on a big new idea doesn't exist in the same way as it does in the US. (Side note: HSBC's acquisition of Silicon Valley Bank in the UK could one day be a real unlock here, but I doubt it because HSBC is gonna HSBC, IYKYK).
💡 We generally don't see many lending products or financial product innovations. The EMI license and open banking are amazing, but they're limited to payments.
b) The unit economics on debit don't work. You're not going to bootstrap a business on 0.2% interchange. A company that is getting into offering cards couldn't generate enough revenue to make the effort worthwhile. There's even less revenue if they have to split that with a BaaS provider.
The business model disincentivized scale. Let's say you build a successful Fintech program. As you add accounts, the costs add up faster than the revenue when you add all of the BaaS provider fees, but the revenue doesn't. UK companies would reach a point where being successful would drain their runway, but getting off their BaaS provider would take significant time and effort.
💡 The prize for launching an embedded finance program (except BNPL) is too small.
Side note: Weirdly, Brexit has been a bit of a tailwind for UK Neobanks and challenger banks. Revolut, Monzo, and, to some extent, Wise have cards often used for travel by consumers and businesses because of the low fees and rates. Since Brexit, those transactions made in the EU have generated much higher interchange than when the UK was in the EU.
c) The provider ecosystem isn't as developed. Because it is a bigger market, the US has more companies that do Fintech infrastructure. Those companies have bigger clients and offer more features. As an example, the UK doesn't have a clear leader in Fintech-first digital-first KYB in the way you'd think of Middesk as the default in the US. Plenty of companies are at the seed stage of building that now, but it's just not as mature. Then, when it's built, they'd address a UK home market roughly the size of California in population and GDP.
💡 The opportunity for new providers isn't as massive as in the US. Notably companies like Codat, born in the UK saw more sales from the US in its mid-stage growth phase.
d) There aren't as many home-grown SaaS or marketplace companies. The US is the unquestionable king of vertical SaaS and marketplace companies. The UK has several like Cognism, Perkbox, Gett, and Paddle, but there's a tiny handful in the $50m to $100m ARR revenue sweet spot for embedded finance.
💡 This reduces the demand for embedded finance to things that look a bit like banking.
e) We don't see many lending propositions because they require a balance sheet. Who will supply the capital if lending requires a balance sheet and the big banks aren't innovating? While private credit is in the middle of a boom in the US, I've spoken to several lending startups that tell me the supply side of credit capital markets in the UK is awful.
💡 Without a supply of capital, no lending activity can happen.
Does it have to be that way?
Markets are never static. And the UK has an energy rn.
3. The changes that give me life
a) The new Headless banks. Clearbank just posted its first full year profit and offers deposits and payments as “embedded banking”. It’s clients include Coinbase, and Tide (SMB focussed bank with 10% of SMBs as customers). It quiely powers a good chunk of the UK “BaaS” Fintech ecosystem.
Griffin just completed a Series A and has a full UK banking license. They'll be able to offer interest on deposits or package lending products in an API-first way for software engineers, by software engineers. Yet, having achieved a full UK license means they've also met an astonishingly high bar regarding regulation and compliance. If Griffin figures out credit and can find the right international companies to partner with, they could be on to something. Starling Bank also offers what it calls "banking as a platform."
The jury is out on whether Griffin can build a profitable balance sheet or a big enough payments business to meaningfully compete with Form3 or Clearbank, but watch this space.
b) The US market entrants. More recently, Stripe has entered with its issuing and treasury services. I'd like to see if this brings more global brands to the UK. Companies like Atomic.finance have arrived, enabling US Treasuries and stock purchases via a simple API. Imagine all those vertical SaaS companies for construction and gyms could enter the UK with a ready-made revenue model from their existing partners (like Stripe).
Or better yet, imagine if Stripe, Adyen, and others worked with someone like Griffin to power that.
c) Big banks with pockets of innovation. Natwest Boxed is the name for its partnership with Vodeno, its balance sheet and the technology it built for its challenger SMB brand Mettle. It looks like something that would look like BaaS but by a big bank. API is first a modern technology capable of lending and available to big brands and international companies. Lloyds also partnered with lending specialist New Day for a sort of credit as a service play.
The big players naturally have balance sheets; the trick is unlocking that in a developer-friendly way. If Stripe, Adyen, or any other issuer processor could get that partnership right, there would be a massive demand for a "Stripe capital for more than just marketplaces and platforms" play.
d) Rebuilding the bridge to Europe. Adyen has a banking licence in the UK, Clearbank is applying for them across Europe and LHV bank operates in the UK and Europe. We’ll see many of these headless banks begin to offer deposit accounts and access to the underlying payments infrastructure (like SEPA instant and TARGET2) across the entire continent soon.
e) The builder energy is off the charts. I've started a series of founder-only dinners in London, and I have to tell you that it feels like 2016 again, maybe better. We have Wise, Monzo, Revolut, Starling, Clearbank, GoCardless, Form3, and a wave of US market entrants joining the picture. Many of those companies have an ecosystem of former founders and operators moving on to their next thing, and my GOD the builder energy is off the charts.
4. The UK model is the future of BaaS
Consider the possibility that in the US in 10 years time:
Payments revenue is being commoditized
RTP is the default rail
Open banking is mandated
Payments companies, headless banks, and big banks win at BaaS
The market dynamics we see in the UK today will eventually impact the US market. While these two markets are wildly different, some of the broader themes copy+paste perfectly.
Headless banks will become dominant in BaaS. Big banks will get their act together, and companies like Stripe will quietly gobble up the embedded finance opportunity with offerings like Capital and Issuing.
There's a window of opportunity for someone to figure out balance-sheet-led lending in the UK. This would unlock market entry or new revenue for 1,000s of SaaS companies, marketplaces, and e-commerce platforms and make the UK a more attractive destination.
The future of BaaS is headless banks, lending, and international market entrants winning at scale.
The UK always seems to hit its stride in Spring.
This year will be no exception.
ST.
4 Fintech Companies 💸
1. Uplinq - Global data for default global lending
Uplinq provides over 10,000 connections in 150+ countries with SMB data to understand small business performance. It can evaluate turnover, website traffic, footfall, guarantors, asset value, and supplier and distributor relationships. They serve smaller banks and Fintech companies who want to better price risk in the underserved SMB segment, especially for import/export or minority-owned businesses.
🧠 My first thought: How does a three-year-old company get this much data? The short answer is it stands on the shoulders of a much older advisory practice by the co-founder. The list of data sources is astonishing. It has the feel of a Fintech business built long before "Fintech" was really a term and would be successful. Let's see if they execute.
2. save - The offshore bank account for people in unstable regions
nsave is a UK-registered debit card and app provider that costs £69 per year. It can hold dollars, euros or sterling regardless of where you're based. The team says they're thinking through the material risks and building proprietary transaction monitoring to ensure they don't become a soft target for criminals or bad actors. The aim is to serve people in countries like Lebanon, where inflation can run as high as 90%.
🧠 Being HQ'd in Switzerland is interesting. The narrative is compelling: "a Swiss bank account for everyone else." You almost want to see it succeed, but the devil in the details is that proprietary transaction monitoring. Offering a privacy-centric Swiss bank account with a low entry barrier sounds perfect for criminals. I love that the founders have their eyes open to that danger, but oof.
3. Staq - Embedded Finance as a Service for MENA
Staq provides APIs and white-label components to build KYC, cards, BNPL, and lending products as a direct Fintech proposition or embedded in another vertical (like Insurance or Gig economy).
🧠 Dubai and the Middle East are happening rn. In particular, the UAE and Saudi Arabia are pouring investment and energy into becoming global financial centers. I'd argue the UAE is competing with Singapore for the world's most proactive and innovative regulatory setup. Staq is a proposition we've seen elsewhere, but in markets where the infrastructure hasn't always been easy. In the past 12 months, major cloud platforms have deepened their presence in the region, but the banking and payment ecosystem has a lot of catching up to do.
4. LendAPI - An API for configurable loan origination
LendAPI allows developers to build personal, credit card, BNPL, point of sale, business banking, or personal checking products. It creates a decision engine over existing cores and integrates with ID+V providers, CRAs, payment gateways, and document management providers.
🧠 This is great tech for companies that outsource their tech. Not all lenders are good at software engineering, so they often partner with companies like True North or "side cores" like LoanPro when launching new products. This is a set of tools to give smaller lenders time to market and the companies that serve them a platform from which to build. My challenge is there are so many companies serving this space. It's crowded. Why them? I mean, this is almost exactly how Loanpro describes itself too.
Things to know 👀
Revolut has secured a banking institution licence from Mexico's National Banking and Securities Commission and aims to gain a share of the cross-border payments market.
🧠 This solves a major problem for Revolut. Mexican banks have been exiting partnerships with remittance companies, yet flows from Mexico to USA were up 8% YoY.
🧠 Cross-border is so hot right now. Everyone I speak to is "Cross border!" Exclamation mark. It seems people have figured out it's a great way to make money. Spoiler alert: It always was.
🧠 Fintech companies that get cross-border right are winners. Revolut, Wise, and their B2B equivalents like Airwallex, Nium, and dLocal have always done very well.
🧠 The quiet-part-out-loud issue is that they're also high risk. Whenever I speak to bankers, they're very concerned about the BSA/AML risk these providers bring to the payments ecosystem. There's a bit of sour grapes, but there's also a real concern. The standard a GSIFI correspondent bank is held to is higher than that of many companies who connect local payment methods (e.g., ACH to Faster Payments in the UK vs. using SWIFT). Although companies like Wise are direct members of SWIFT.
🧠 Revolut has gone global like almost no other consumer brand. Getting a license in Mexico gives them a real foothold in America's expanding cross-border flowshey're not that big in the US, but this could give them the wedge in.
🧠 I still think Revolut will never get a license in the UK or US until the CEO departs. Nikolay is a beast. He's uniquely grown that company, and the Revolut feature functionality is unmatched. While everyone is trying to expand revenue with new products, Revolut has already done so. But he's also outspoken and a little too "move fast and break things" for regulators.
The credit-building Fintech consumer credit card Petal has been acquired by Empower, a platform that uses cashflow underwriting to lend to consumers in Mexico. This Acquisition gives Empower a foothold in the US market.
🧠 Petal was one of the first to use cashflow underwriting to lend. This allowed Petal to target consumers with little or no credit history (like immigrant populations).
🧠 Petal's cashflow underwriting innovation is now a default for the industry. It's now common for large banks to use cash flow in their underwriting process for low-income consumers. Indeed, the regulators are actively pushing for it. Petal is a massive reason why that's the case.
🧠 Some early lending businesses build on cashflow underwriting haven't been a massive success, and that's sad. Tomo Credit has shut down, the earned wage access (EWA) sector is in distress, and now Petal has been acquired, likely for far less than its peak $800m valuation. (The exception here is BNPL, which is a whole other animal)
🧠 Acquisition can be a path to success. The X1 card sold to Robinhood, now repackaged as the "Robinhood Gold card," could go on to be one of all-time great Fintech acquisitions.
🧠 Remember Petal spun out Prism data a while back. Great underwriting and a great business are not always the same thing. While Petal may not have gone on to become the massive consumer play it once looked like, Prism data and its underwriting engine live on for others to use.
Good Reads 📚
TL;DR, digital wallets are now the #1 form of payment, cards continue to grow in and out of wallets, A2A hasn’t yet competed with cards, BNPL will grow at 9% CAGR, e-commerce is outgrowing POS by 2:1. Wallets will move from 50% today to 61% market share by 2027, while credit cards will drop from 22% to 15%. A2A services (like UPI and Pix) thrive when the government supports them.
🧠 Wallets win. I’m genuinely curious to see if Paze will be anything more than a history lesson in banks failure, or a real market share grab like Zelle. By contrast, Venmo and CashApp are well placed. The global story is way more fragmented and needs to be figured out by Apple or Google. Both seem useless at consumer innovation lately, so I’m not holding out hope.
🧠 FedNow won’t bring an RTP revolution; but pay by bank might. Trustly, Plaid and others are slooowly, making 2024 the year of pay by bank. But the twist? It’s for high value one-off or recurring payments. It’s displacing ACH and checks (and often runs on ACH).
That's all, folks. 👋
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(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees.
(2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a *. None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.
(3) Any companies mentioned are top of mind and used for illustrative purposes only.
(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held
(5) Citations may be missing, and I've done my best to cite, but I will always aim to update and correct the live version where possible. If I cited you and got the referencing wrong, please reach out