Solaris Setback Spells Trouble For European Fintech Scene – Forbes
FRANKFURT, GERMANY – JUNE 13: A huge euro logo is seen in front of the headquarters of the European … [+]
Solaris, the German Bank-as-a-Service (BaaS) provider, 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 business partnerships, a restriction that could impact its pan-European ambitions. Solaris confirmed via email that “the BaFin placed new partner onboardings subject to approval. BaFin did not impose restrictions on existing partners.” 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 a challenge.
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 restrictions 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.
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.
A Solaris spokesperson told me in an email that “As market leader in the fintech industry, Solaris covers 20% of the market and is the first provider to tap into the enterprise segment. While we will expand our collaboration with incumbents and large ecosystems, we will continue to serve neobanks.” However, that may not account for the current and arguably dire state of fintech startup funding. Venture capitalists are much more conservative in 2023, compared to startup investing in previous years. If the neobank customer segment is not sufficient for revenue in 2023, Solaris could theoretically shift focus away from early-stage fintech startups to embedded finance solutions for established retail, tech, and e-commerce companies with deeper pockets.
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, Swan 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 Express
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.
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 Lithuania 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.
Clarification that the “permission proviso” only impacts new business partnerships and does not impact Solaris’s existing partners ability to onboard new customers.
Additional clarification that the restrictions posed by the BaFin are not the same as N26 or C24, as these banks operate a B2C business model with restrictions placed on the onboarding new retail customers.
Addition of two comments made by a Solaris representative via email confirming the restriction on onboarding new business partnerships and confirming Solaris will continue to serve the neobank market.