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The next payments revolution is unfolding not within banks or fintech unicorns, but across the SaaS platforms quietly embedding financial services into their ecosystems.
Xero’s recent $2.5 billion acquisition of Melio is emblematic of this trend, enabling the accounting giant to integrate bill-pay functions directly into its cloud-ledger offering.
The strategic logic is compelling: why simply process invoices when you can hold cash, underwrite credit, and become your customer’s operating treasury?
Embedded Finance 2.0
Embedded Finance 2.0
This is Embedded Finance 2.0 in action – a sharp pivot from payments as a mere add-on to platforms morphing into quasi-banks.
Shopify exemplifies this evolution, letting merchants accept payments, borrow against receivables, and soon, if regulatory approval lands, hold deposits outright.
Analysts estimate embedded finance will exceed $146 billion next year, rising to $690 billion by 2030.
For software firms, these are not mere incremental gains but venture-scale revenue streams unlocked by ownership of cash flows.
However, such ambitions are colliding with a harsh regulatory reality.
Regulatory Reality…
Most SaaS platforms do not hold banking licences, instead renting them from sponsor banks such as Cross River or Evolve.
This arrangement sufficed when platforms earned only a slice of interchange. Yet, as they warehouse payroll funds and tax escrows, the risk profile changes.
The Synapse collapse, which left customers stranded without access to deposits, served as a watershed moment, prompting the FDIC to issue consent orders mandating real-time visibility into fintech partners’ ledgers and board-level oversight.
In parallel, new proposals require sponsor banks to maintain customer funds at the individual account level, a move that will increase compliance costs and potentially threaten the economics of bank-as-a-service (BaaS) models.
Across the Atlantic, the Bank of England’s Prudential Regulation Authority and Australia’s APRA are signalling similar scrutiny, refusing to dilute prudential standards for software firms aspiring to offer banking services.
How then can SaaS platforms navigate this regulatory gauntlet without killing growth?
Become a Bank?
Some, such as Intuit, are pursuing full banking charters to sidestep sponsor dependencies, despite the capital and compliance burdens this entails.
Others, including Stripe, are diversifying sponsor relationships to mitigate concentration risk, albeit at the cost of integrating multiple core banking APIs and fragmenting operational architecture.
Meanwhile, next-generation BaaS providers like Unit and Treasury Prime are reframing compliance as a service itself, offering automated KYC, granular ledger reporting, and regulator-ready dashboards embedded in their APIs.
Their pitch is simple: let software firms focus on their customers while they manage the regulatory plumbing.
Yet, this new oversight could deliver an ironic outcome: entrenching incumbent banks rather than displacing them.
Community institutions, squeezed by compliance costs, may exit BaaS partnerships, leaving megabanks as the only viable sponsors.
Policy whispers of deposit-rate ceilings to prevent non-banks from poaching deposits at unsustainable yields could further throttle innovation.
Ultimately, Embedded Finance 2.0 is no longer a race to launch the next feature; it is a race to master compliance so comprehensively that regulators become strategic partners rather than adversaries.
For SaaS founders, the metrics of tomorrow may not be daily active users, but capital adequacy ratios and liquidity coverage thresholds.
As embedded finance volumes scale towards systemic significance, regulators may conclude they cannot afford to exclude platforms from the financial system’s core.
But if software wants to be the bank, it must first learn to think – and comply – like one.
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