Non-bank platforms have captured $22 billion in financial services revenue over the past three years by embedding payments, lending, and insurance directly into their products. Banks have been slow to respond, but that is changing.
Key Takeaways
The transformation has been gradual, then sudden. For the better part of a decade, non-bank platforms have been quietly inserting financial services capabilities into the customer journeys of their core products, buy-now-pay-later at retail checkout, insurance at the point of travel booking, business banking built into SaaS platforms, investment accounts embedded within payroll software. The aggregate revenue impact of that encroachment is now substantial: $22 billion captured from traditional financial services providers over the past three years, according to analysis by Plaid Research and Andreessen Horowitz's fintech team. The banking sector's response has moved from dismissal to urgency to, finally, substantive action.
"What the platforms realised before the banks did is that financial services is ultimately a distribution problem," said Tom Gaines, founder and CEO of embedded lending platform Meridio. "If you control the customer relationship and the transaction moment, you don't need a banking licence or a branch network. You just need infrastructure partners who do. That's exactly what they built." Gaines estimates that the $22 billion revenue capture represents less than 3% of the total addressable market for embedded finance, which implies the disruption is still in relatively early innings, despite its scale to date.
The most significant strategic shift underway in the banking industry is the pivot toward Banking-as-a-Service as a revenue and distribution model. Rather than fighting embedded finance by trying to recapture the customer interface, a battle most banks have already lost to the platforms, the BaaS model repositions the bank as the infrastructure provider that enables embedded finance. Banks provide the regulated balance sheet, the compliance infrastructure, and the payment rails; platforms provide the customer relationship and the distribution. Revenue is shared, typically on a fee-per-transaction or percentage-of-revenue model, and the bank acquires customers at a fraction of the cost of direct acquisition.
Early data from banks that have launched BaaS programmes is encouraging. Customer acquisition economics through BaaS partnerships are running 3–5 times better than through traditional branch or digital direct channels, largely because the platform handles the customer acquisition cost. The challenge is that BaaS infrastructure requires significant upfront investment in API capabilities, compliance processes, and partner management, costs that have proved prohibitive for smaller community and regional banks who might otherwise benefit most from alternative distribution models.
"We are competing against platforms that can offer virtually identical financial products under a much lighter regulatory regime. That asymmetry is not sustainable, and to their credit, regulators are beginning to acknowledge it." , Chief Digital Officer, top-20 U.S. bank (speaking on background)
The regulatory asymmetry issue is reaching a tipping point. The OCC, FDIC, and Federal Reserve have each issued guidance in the past 18 months addressing the risks of BaaS arrangements, with particular focus on the compliance and risk management obligations of the chartered bank partner. Several high-profile BaaS bank failures, most notably the collapse of Synapse Financial in 2024, have heightened regulatory concern about the custody and protection of customer funds in complex BaaS arrangements. The regulatory direction of travel is toward greater oversight, which will raise the cost of embedded finance for non-bank participants and reduce some of the asymmetry that has enabled their growth.
For established banks, the regulatory trajectory is an opportunity as much as a challenge. Institutions that have invested in robust compliance infrastructure for BaaS programmes are positioned to attract platform partners who are increasingly concerned about regulatory risk. The winners in the next phase of the embedded finance evolution are likely to be banks that can offer the reliability of a well-capitalised, well-governed BaaS infrastructure, a combination that requires genuinely significant investment but creates a durable moat once established.
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