The concept of banking as a service would have been nearly inconceivable ten years ago. This is not just because of technical limitations, such as hardwired legacy payment processing systems, but also because banking is so heavily regulated. A company cannot simply call itself a bank. The barriers that have historically made banking relatively insulated from experimentation and innovation are steadily lowering — perhaps nowhere more dramatically than in Europe.
The European Union has led the charge toward open banking, creating a regulatory framework through PSD2 that requires banks to open up their APIs to support expanded financial services. The shift has given rise to numerous FinTechs and neobanks such as Revolut and N26. Creating a hospitable regulatory environment and actually bringing novel financial services to market are two very different things, though, and FI incumbents with banking licenses are not necessarily eager to give up their market shares.
Denmark-based Lunar knows this well. The company began as a startup that offered a card app that could be linked to third-party bank accounts, but it then took the unusual move of formally becoming a bank, reversing a common trajectory found in the BaaS space in which established banks branch into digital services by allying with FinTechs and other technology platforms. Lunar is a FinTech that became a bank.
“With our own banking license, we [are] now in full control of partnering up with the companies [that] we would like to partner with when it comes to the financial infrastructure,” Lunar chief operating officer Morten Sønderskov told PYMNTS in a recent interview. “The second dimension of this is also being able to be in full control of what kind of other partnerships we would like to engage in, what kind of other products we would like to be able to present.”
Obtaining a banking license was not a simple process for Lunar, which operates in Denmark, Sweden and Norway. Sønderskov said getting the license took almost two years, but doing so has opened new frontiers for the bank, enabling it to bring the same seamless, mobile-oriented financial services it offered consumers to a sector that could sorely use them: small business.
New banking use cases for the creative economy
An essential premise of the BaaS model is that it allows entrepreneurial firms and individuals to find new use cases for banking services to address specific market pain points as they emerge. One such use case is the growing freelance economy — an increasing share of professionals are now working as contractors in fields ranging from engineering to graphic design. These workers may be skilled in their professions but they could have little experience managing the administrative and financial aspects of a business.
Lunar’s early forays into the B2B sector have focused on this segment. Sønderskov pointed to a freelance photographer and a small production company as examples.
“They need to have an account where they can receive and send money and they need to have some payment cards on top of that,” he said.
Offering creative professionals those basic banking services and layering them with financial management tools gives the professionals the ability to better manage their expenses, he added. Businesses can also open accounts online and have them be active within ten days — a key benefit during the pandemic.
Lunar also makes digital financial management tools available to businesses similar to those offered with consumer debit accounts. These tools can be integrated with third-party ERP and accounting systems, which also help small and microbusinesses keep track of expenses and expenditures for tax purposes. Offering such services is not necessarily about creating new revenue streams, Sønderskov explained.
“It’s a collaboration [with other financial service providers],” he said. “The combination may not in itself generate new revenue streams, but overall it just improves the value proposition of the product.”
An approach that solves the financial pain points of smaller market niches can also be scaled up and applied to larger markets. Sønderskov cited insurance and mortgages as examples.
“We [realized] that there were so many pain [points] in the market that we could take away,” Sønderskov said. “I have the feeling that we have just scratched the surface when it comes to whatever kind of value creation we are able to provide together with other companies.”
These kinds of innovations can happen when players in the financial services space start thinking outside the box of conventional banking.
Novel banking services for novel times
Changing attitudes around spending, saving and investing are key drivers of the BaaS market. Younger generations — millennials in particular — have shown a willingness to switch to financial institutions that offer genuine value and to walk away from those that do not, however trusted or venerable they may be.
This is how Lunar got its start: by offering a sleek, highly functional card app that could be integrated with any bank account.
“The journey of our customers is that they download the app, they try to use the product and they discover that the whole experience is just at a completely different level compared to what they're used to,” Sønderskov said.
The key difference between Lunar and other neobanks is that the company is licensed to take deposits.
“It’s not just a just a virtual account but a real account that is connected to the national infrastructure,” Sønderskov said.
The COVID-19 pandemic and ensuing shutdowns have severely impacted every economy around the world, and spending and transaction volumes have declined. Yet, Lunar has also experienced a paradoxical effect. New account sign-ups have been steadily increasing since the outbreak. Sønderskov believes part of the reason is that banking customers have had more time to think about their existing banking and financial relationships and make changes.
“We have seen an increase in the uptake of new customers month-over-month during this time, and I think that has actually also been to our benefit,” he said. “People have just had more time to reflect, ‘Is this time for me now to actually change, is it time for me to try something else?’”
Businesses and consumers around the world may be having similar ideas these days, especially as the pandemic presses on.