Solaris setback spells trouble for European Fintech scene

Solaris, the German Bank-as-a-Service (BaaS) provider, confirmed that it will face a “permission caveat” with the German regulator, BaFin. Implemented in December 2022 and announced in January 2023, the bank will need approval from the regulator before bringing on new clients, a restriction that is likely to affect 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 financial product with German BaaS is now almost impossible.

BaFin’s decision to impose this restriction on Solaris comes after a banking supervisory audit by PwC that examined the bank’s operations in 2020. The decision followed similar limits placed on N26 in 2021, and, more recently, C24 Bank. 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 BaFin operates with extreme caution.

Fewer choices, more competition

This news spells 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. Taking a more strategic approach to onboarding new customers, Solaris is likely to shift its focus to providing built-in financing solutions for deep-pocketed established retail, technology and e-commerce companies rather than premature fintech startups.

For European fintech startups looking 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 may be limiting.

Having advised several European retail and SME fintech startups on their choice of BaaS providers, Solaris generally emerged as the most attractive option, despite the high costs. In Germany, Solaris has been the catalyst for a vibrant, thriving fintech scene such as BaaS of Vivid Money, TradeRepublic, Samsung, American ExpressAXP and Penta (recently acquired by Qonto). The provider’s recent expansion into key retail and SME markets in Spain, Italy and France, as well as its complete suite of banking products, including various lending options, sets it apart. In addition, the ability to transfer part of the deposit interest to customers is a game-changer in a time of rising interest rates.

With the restrictions on Solaris, ambitious B2C/SME fintechs and neobanks may find it challenging to compete with both “old” and “new” banks. JP Morgan recently announced its upcoming launch in Germany with an eye on other European markets, and the recent acquisition of Penta by Qonto indicates that consolidation is on the horizon. Combining the increased competition with growing trends in AI and Web3, and the rise of Embedded Finance, may struggle with B2C/SME fintechs and neobanks that look to be the next Lunar, Qonto or PayHawk.

Fills the void

The 2022 and 2023 cohorts of aspiring fintech and neobanks face a steep uphill battle with Solaris almost out of the picture. Vodeno/Aion Bank, with its unique dual-entity approach, can fill the void by being a fully licensed bank. B2C/SME fintechs such as Monese and Intergiro are playing in the BaaS space, leveraging experience in building consumer-facing digital banking products.

The final option for fintechs may be to pursue their own licenses. In particular, regulatory bodies such as the Bank of Lithuanian and DNB (the Dutch central bank) have established a precedent for granting licenses to ambitious fintechs. Fintechs and neobanks face a make-or-break moment. Their ability to succeed in the European market will largely rest on the continued innovation and scalability of existing and new BaaS providers, as well as the willingness of regulators to support the intricate licensing requirements.

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