Diving into the new year with big plans up his sleeve, the head of SEB’s Banking-as-a-Service (BaaS) offshoot SEB Embedded, Christoffer Malmer, wants to see BaaS use-cases dominate the headlines this year.

2023 is an exciting year for Malmer and his team’s brain-child SEB Embedded in many respects. The BaaS platform broke away from SEB’s innovation hub, SEBx, in November last year. Cutting the business loose is a vote of confidence in its performance to-date, Malmer explains, as the bank is keen to see how the new business unit will be able to commercialise its BaaS solution in the wider market.

What is SEBx and SEB Embedded?

When Malmer took the SEB Embedded reins late last year, he took with him the entirety of the SEBx headcount to build his team of just over 90 employees. The team is weighted towards engineering, with its business and IT teams running in parallel. “This is because it isn’t just about designing an organisation to rebuild technology, but designing an organisational culture which is driven from technology and engineering blended with our heritage of financial services,” adds Malmer.

The new head of SEBx is Nicolas Moch, previously CIO for SEB, who has been tasked with creating the “next big thing” for the innovation studio. Moch could soon have some very large shoes to fill.

Before being tapped to helm SEB Embedded, Malmer led the SEBx innovation hub, overseeing its initial product, UNQUO which offers a specific user experience for self-employed people, and formed the basis of the platform that SEB Embedded now runs on. 

“It was launched via the app store in 2020, and it is in the iterative process of finding its product market fit. Critically, UNQUO provided validation that through this new banking platform, we could actually begin delivering BaaS to ourselves [SEB].”

In late 2022, Malmer sat down with the bank’s CEO and discussed the potential opportunity to scale SEB Embedded given the strong marketplace interest they had received.

In order to bring these products to market as soon as possible, Malmer and SEB decided the best course of action would be to carve SEB Embedded out from the SEBx innovation platform, allowing it to stand independently and prioritise its BaaS suite.

As SEB Embedded remains under the same banking license as the SEB, it is able to access its capital balance sheet and liquidity.

“We took the bank’s balance sheet: capital and liquidity, laid a new cloud-native tech stack on top of it for everything from product processing, through to regulatory compliance, risk management, ledgers, transaction monitoring, and fraud prevention. We worked with pioneering technology companies to achieve this, partnering with leaders for everything from cloud infrastructure with Google Cloud, and native core banking with Thought Machine, to data collection by Roaring.”

Malmer notes that they are also working on proprietary development pieces in areas where they believe they have a competitive advantage.

In April 2022, SEB Embedded announced its first external distributor, Humla, a fintech startup from  Swedish retail conglomerate, Axel Johnson, which had wanted to build financial services into its offering without becoming a bank.

“We announced this in Q1 2022, and we now plan to position ourselves in such a way that we will be a leading BaaS player in Europe. We want to be in the lead by 2030.”

At the time, Sara Öhrvall, board chair of Humla and COO of Axel Johnson, stated: “At Axel Johnson, we believe retail will change more in the coming decade than it has done over the past century. The opportunity to include financial services in a thoughtful way into the customer experience will play an important part in the future of retail, and we are excited about the things we can achieve with this partnership."

Without providing the names of any new clients which have signed since Axel Johnson, Malmer says the market has been very receptive to the solution. He argues that SEB is an established brand that takes risk management very seriously. SEB, along with several Nordic banks, was fined for deficiencies in its work to prevent money laundering risks in the Baltics in 2020.

“Our offering means that anyone who accesses our APIs will effectively access the full range of products and services within SEB – they are accessing a fully licensed, fully regulated entity, stretching all sorts of products with access to capital and balance sheet.”

“We are now working with quite a list of prospects spanning a broad range of different industries. We hope to be able to speak about these soon.”

What are the challenges facing BaaS in 2023?

Malmer notes that competition is not the only factor presenting a significant challenge for BaaS providers at the moment.

The broader macro-economic environment pressures are a concern, and Malmer says BaaS players are monitoring where interest rates are heading very closely and wondering about the depth of the potential recession which will inevitably impact our industry at large. Having said that, he does remain optimistic about BaaS.

“The underlying trajectory of embedded finance and banking as a service, is pretty strong. There are so many opportunities and arguments in favour of a brand to offer financial services in their name. It hasn’t really happened to the same extent in the past, because it has been too difficult to make it seamless and embed this financial offering in an easy way. The arguments in favour are too strong for BaaS to not come to fruition.

“Clearly I’m biased here, but I think this can be seen in the conversations we have with customers too.”

In terms of competition, Malmer explains, pressure has been emerging from the fintech and wider technology space rather than from incumbents. “There are a lot of very successful BaaS providers, boosted by the injection of venture capital.”

Malmer believes that the point of differentiation for SEB Embedded is being part of a bank. “From our value proposition perspective, we can really offer the full suite of products, the benefits that come with us holding a banking license and a balance sheet to tap liquidity.

SEB’s “strong balance sheet” means that the BaaS provider can access funding at extremely competitive rates, and, as SEB has been regulated as a bank it can provide SEB Embedded with expertise around risk management and regulatory compliance which are “critical components when piecing together an offer like this.”

“Technology is clearly an enabler, but blending that with in-depth industry knowledge, access to capital funding and licensing, is a perfect combination. Prospective customers say to us, we like the fact that you are a fully regulated bank and a brand that we know and have dealt with before. We are trying to differentiate ourselves by offering that full range of services, being part of a licensed, established bank with a reputable brand.”

Furthermore, Malmer highlights the importance of equipping customers with the tools to build and control their products themselves: “be it insights, loyalty schemes or twin analysis, it is fully in their hands. This focus on customer control is something that really sets us apart from other BaaS providers in the market.”

What are the key drivers for BaaS?

The first driver that Malmer flags is that the way in which BaaS is being received and pushed within the market, is tied to customer engagement.

“We enable our BaaS customers to create loyalty and engagement with their own customers through the use of financial services.”

SEB Embedded tries to do this by offering products and services that allows the BaaS customer to  strengthen and prolong relationships with their clients, because keeping customers engaged on these channels can increase the frequency with which the company can deliver its services.

Second, Malmer notes that BaaS throws open the doors to a whole range of data that wouldn’t otherwise be accessible within the typical financial services relationship.

New revenue streams is another highly attractive driver of BaaS solutions, as companies now realise the huge advantage in being able to capitalise on their customers’ needs for financial services, and provide as much of this internally as possible.

“We also think this could help to create a more responsible lending environment – especially in the consumer finance space where buy-now-pay-later has taken off. We think we could strengthen the alignment and incentives around responsible lending.”

He concludes that the final pressure is cost efficiency, arguing that, particularly in areas with high transaction intensity, the use of technologies enable companies to work with their own financial services providers which offers potential savings from a cost management perspective.

Will new BaaS use-cases emerge and grow during 2023?

2023 will be the year for new BaaS use-cases, according to Malmer.

“When use-cases come to fruition and value is being created for end users, that is what ultimately needs to happen for BaaS to gain further traction.”

As this happens, more and more brands will realise that BaaS (specifically SEB Embedded) is an opportunity to move into a space which traditionally required more investments, a lot of technology, and discussions with regulators.

“The more we can see those crisp, value-creating, embedded finance use-cases come to fruition, the more other brands will sit up and pay attention."