Solaris, the German Bank-as-a-Service (BaaS) provider, confirmed that it will face a “permission proviso” with the Germany regulator, BaFin. Implemented in December 2022 and announced in January 2023, the bank will need approval from the regulator before onboarding any new customers, a restriction that will likely impact its pan-European ambitions. The news confirmed what many European seed-stage fintechs looking for a banking partner have known for months; launching a digital finance product with the German BaaS is now nearly impossible.
The BaFin’s decision to impose this restriction on Solaris comes after a banking supervisory audit by PwC that explored the bank’s operations in 2020. The decision followed similar limits set on N26 in 2021, and, more recently, C24 Bank. The BaFin appears to be cracking down on institutions with full banking licenses due to concerns about “proper business organization.” Post-Wirecard, it is clear that the BaFin is operating with extreme caution.
Fewer Choices, More Competition
This news means trouble for the European fintech space. The restriction creates a much smaller pool of potential banking partners for early-stage fintech startups, especially those looking to offer digital banking, lending, and cryptocurrency products. With a more strategic approach to onboarding new clients, Solaris will likely shift focus on providing embedded finance solutions for established retail, tech, and e-commerce companies with deep pockets instead of for early-stage fintech startups.
For European fintech startups seeking to launch with a BaaS model, alternative options include Vodeno/Aion Bank, a fully licensed Belgian BaaS, or companies operating as Electronic Money Institutions (EMIs). Examples of such BaaS providers include Treezor, Unnax, Weavr, and Railsr, (formerly Railsbank). Partnering with an EMI may be sufficient for fintechs launching a single product offering, but for a potential neobank, the EMI route can be limiting.
Having advised multiple European retail and SME startup fintech on their choice of BaaS providers, Solaris typically emerged as the most attractive option, despite its high cost. In Germany, Solaris has been the catalyst for a vibrant, thriving fintech scene as the BaaS of Vivid Money, TradeRepublic, Samsung, American ExpressAXP
and Penta (acquired recently by Qonto). The provider’s recent expansion into essential retail and SME markets in Spain, Italy, and France, as well as its full suite of banking products, including various lending options, sets it apart. Additionally, its ability to pass on a portion of deposit interest to customers is a game-changer in a time of rising interest rates.
With the restrictions placed on Solaris, aspiring B2C/SME fintechs and neobanks could find it challenging to compete with both “old” and “new” banks. JP Morgan recently announced its upcoming launch in Germany with its eye on other European markets, and the recent acquisition of Penta by Qonto indicates consolidation is on the horizon. Combining the increased competition with growing trends of AI and Web3, and the rise of Embedded Finance, B2C /SME fintechs and neobanks looking to be the next Lunar, Qonto, or PayHawk may struggle.
Filling the void
The 2022 and 2023 cohorts of aspiring fintechs and neobanks face a steep uphill battle with Solaris all but out of the picture. Vodeno/Aion Bank, with its unique dual entity approach, can fill the void being a fully licensed bank. B2C/SME fintechs such as Monese and Intergiro are making a play into the BaaS space, leveraging experience in building consumer facing digital banking products.
The last option for fintechs may be pursuing their own licenses. Notably, regulatory bodies like the Bank of Lithuanian and DNB (the Dutch Central Bank) have established a precedent of granting licenses to ambitious fintechs. Fintechs and neobanks face a make-or-break moment. Their ability to succeed in the European market will rest heavily on continued innovation and scalability of incumbent and new BaaS providers, as well as regulators willingness to support the intricate licensing demands.
