EP977: The theory and practice of BaaS

This interview with George Toumbev of NatWest Boxed details the rise of Banking-as-a-Service (BaaS), highlighting partnerships with Saga and The AA. Toumbev predicts most retail banking revenue will shift away from traditional channels by 2030, necessitating "embedded banking" that utilizes a bank's license and balance sheet on brand platforms. Successful implementation requires strategic coherence between the brand and financial product, balancing technical excellence with strong banking credentials for safety. To ensure scalability, Boxed uses standardized "Lego block" modules rather than bespoke designs. Ultimately, this model allows brands to increase revenue and sales while outsourcing complex risk management and regulatory compliance to the bank

Transcript

SPEAKER_01 0:00

Imagine it's uh the year 2030. You're sitting on your couch, you know, just scrolling through your phone, doing some online shopping.

SPEAKER_00 0:08

Right. A totally normal evening.

SPEAKER_01 0:10

Exactly. Yeah. You're buying specialized gear for a hiking trip, maybe checking flights, booking a rental car, and right there, seamlessly integrated into your favorite outdoor brands app, you don't just pay for your stuff.

SPEAKER_00 0:23

You're doing actual banking.

SPEAKER_01 0:25

Yes. You open a high-yield savings account to like stash funds for the next trip, or you take out an unsecured personal loan to cover the flights. You're managing investments.

SPEAKER_00 0:36

And you're doing all of this without ever opening a banking app.

SPEAKER_01 0:39

Exactly. In this vision of the near future, the vast majority of your retail banking doesn't happen at a bank at all. It happens everywhere else, just hidden in plain sight.

SPEAKER_00 0:49

It's a well, it's a profound shift in how we interact with our money. We're talking about the complete decoupling of the financial product from the traditional brick and mortar institution.

SPEAKER_01 0:58

Trevor Burrus, Jr.: We're even their standalone digital apps, right?

SPEAKER_00 1:01

Trevor Burrus, Jr.: Yeah, exactly. The bank becomes entirely invisible. It just operates as the silent machinery behind the consumer brands you interact with every single day.

SPEAKER_01 1:08

Aaron Powell And deciphering that invisible machinery is our mission for today's deep dive. We're drawing from this really extensive August 2025 interview in the IBS Psi FinTech Journal.

SPEAKER_00 1:20

Aaron Powell Oh, the one with George Tubeff, right?

SPEAKER_01 1:22

Yeah, the chief commercial officer of Nat West Boxed. We are going to explore this quiet revolution of uh banking as a service or boss.

SPEAKER_00 1:32

Aaron Powell It's a huge topic.

SPEAKER_01 1:33

Aaron Powell It is. The goal here is to figure out why major brands are suddenly offering savings accounts, how the underlying technology actually works without breaking the global financial system, and what this means for where you will actually put your money in the future.

SPEAKER_00 1:48

Aaron Powell To really ground this, I mean the source material points to very recent partnerships that NatWest Box secured, and they just perfectly illustrate the scale of this shift.

SPEAKER_01 1:57

Yeah, let's hear them.

SPEAKER_00 1:58

First, there's a seven-year agreement with Saga. They're a massive UK provider of services specifically for people over 50. This deal allows Saga to launch a whole suite of their own savings products. And the second one is a Q1 deal with the AA, the Automobile Association.

SPEAKER_01 2:14

Right, the car breakdown folks.

SPEAKER_00 2:15

Exactly. It enables them to offer instant access savings and even unsecured personal loans directly to their members.

SPEAKER_01 2:22

Okay, let's unpack this because before we figure out why a car breakdown service wants to offer you a personal loan, we have to define what this actually is.

SPEAKER_00 2:30

Yeah, the terminology gets super confusing.

SPEAKER_01 2:32

Aaron Powell It does. People hear these terms thrown around all the time, specifically embedded finance versus embedded banking. And they're not the same thing.

SPEAKER_00 2:42

Aaron Powell The distinction is critical. And honestly, it explains why a traditional powerhouse like Nat West is the one powering these deals.

SPEAKER_01 2:50

Aaron Powell So break it down for us.

SPEAKER_00 2:51

So embedded finance is a massive, very loose umbrella term. Like if you're buying shoes online and you clicks a simple buy now pay later button at checkout.

SPEAKER_01 2:59

Right, or even just processing a credit card payment on a website.

SPEAKER_00 3:02

Exactly. That's embedded finance. It's largely just transactional.

SPEAKER_01 3:05

Aaron Powell But embedded banking is an entirely different beast.

SPEAKER_00 3:08

Oh, completely. Embedded banking requires a full official banking license and a massive balance sheet to absorb the risk.

SPEAKER_01 3:16

We're talking about the really heavy, highly regulated stuff.

SPEAKER_00 3:20

Right. Holding consumer deposits, issuing unsecured loans. We aren't just talking about a tech company building a digital bridge to move your money from point A to point B.

SPEAKER_01 3:30

It's the core structural functions of a bank.

SPEAKER_00 3:33

Yeah, operating entirely beneath the surface of another company's brand.

SPEAKER_01 3:36

And the reason this distinction matters is driven by this really staggering prediction from the interview. Post 2030, the expectation is that the majority of retail banking revenues will actually occur away from traditional banking channels.

SPEAKER_00 3:50

Let that sink in. Most of the money banks make from retail customers won't come from people walking into a branch.

SPEAKER_01 3:56

Or even logging into the bank's own branded app on their phone.

SPEAKER_00 4:00

Right. It's all going to come through third-party platforms.

SPEAKER_01 4:03

Which forces traditional banks to fundamentally rethink their survival strategy, right? They have to act as the manufacturer of these products.

SPEAKER_00 4:10

Aaron Powell Because they have to find growth where consumers actually want to engage. If you want to finance a major car repair while you're messing around in your automotive app, the bank has to be there.

SPEAKER_01 4:20

Aaron Powell If they force you to stop, open a separate banking app, and apply for a loan over there. Trevor Burrus, Jr.

SPEAKER_00 4:25

They're going to lose you to a frictionless competitor. It's that simple. They're protecting their market share by becoming this invisible utility powering your transactions. Aaron Powell Okay.

SPEAKER_01 4:35

So let me try an analogy here to see if I have the mechanics of this right. Is this essentially just like high-stakes white labeling?

SPEAKER_00 4:41

Trevor Burrus, High-stakes white labeling. I like that.

SPEAKER_01 4:43

Aaron Powell Like when I go to the grocery store, I can buy the big name brand cereal, or I can buy the generic store brand cereal. Now the grocery store obviously doesn't own a cereal factory.

SPEAKER_00 4:53

Aaron Powell No, they buy it from a massive agricultural manufacturer and just slap their logo on it.

SPEAKER_01 4:58

Aaron Powell Right. So is Nat West basically the cereal factory here? Are they just churning out generic personal loans for the AA to put their logo on?

SPEAKER_00 5:08

Aaron Powell The underlying logic there is sound, but we really have to escalate the stakes to understand the true dynamic. Well, if that grocery store buys a batch of generic cereal and it goes stale or the packaging is flawed, it's I mean, it's a minor write-off and annoyance. But if a financial product, say an unsecured personal loan, is improperly structured or a savings account isn't properly ring-fenced, it can financially ruin a consumer.

SPEAKER_01 5:35

Oh well. Yeah. The consequences are a bit different.

SPEAKER_00 5:37

Trevor Burrus The legal, regulatory, and systemic consequences are catastrophic.

SPEAKER_01 5:42

Trevor Burrus, Jr.: Right. A bad loan destroys lives, a bad bowl of cereal just ruins breakfast.

SPEAKER_00 5:46

Aaron Ross Powell Exactly. And that harsh reality is exactly why banks must be the manufacturers. Financial products are already incredibly complex and they're strictly regulated.

SPEAKER_01 5:56

Aaron Powell And it seems like it's only getting stricter.

SPEAKER_00 5:57

Trevor Burrus Oh, absolutely. Moving forward, they're only going to get more expensive to maintain. Regulators are aggressively pushing to protect consumers from predatory practices.

SPEAKER_01 6:06

Aaron Powell So a standalone consumer brand, no matter how successful they are, just can't afford that.

SPEAKER_00 6:11

Aaron Powell They simply cannot afford to build that manufacturing and compliance capability from scratch. The traditional banks are the only entities actually equipped to manufacture these highly regulated products safely.

SPEAKER_01 6:22

Aaron Powell But wait, if traditional banks are the only ones with the regulatory muscle, why do they need to partner with consumer brands at all? Well for that matter, why couldn't a flashy, agile tech startup in Silicon Valley just build a brilliant app, create some slick APIs, and cut the legacy banks out entirely? We see tech companies disrupt regulated industries constantly.

SPEAKER_00 6:45

It's the defining tension of this entire industry, actually. Toombeb argues in the journal that you cannot choose technical excellence over traditional banking credentials, or vice versa.

SPEAKER_01 6:54

You need both.

SPEAKER_00 6:55

The ecosystem absolutely requires both.

SPEAKER_01 6:57

I mean, technical excellence is non-negotiable for the consumer today. You need software that can easily plug into an existing ecosystem, like the AA's app.

SPEAKER_00 7:05

And it has to be available 24-7, never crashing.

SPEAKER_01 7:08

And lightning fast. We know modern consumers have zero patience for a loading screen, let alone a clunky interface that feels like a 1990s bank website.

SPEAKER_00 7:18

Aaron Powell Right, but technical excellence alone cannot sustain a banking product. You need the balance sheet strength and the regulatory approval that only a licensed bank possesses.

SPEAKER_01 7:27

Aaron Powell Tubev mentions the cheap cost of capital as being vital for lending here. Let's break that mechanism down for the listener.

SPEAKER_00 7:35

Sure.

SPEAKER_01 7:35

What does a cheap cost of capital actually look like in practice? And why does it lock out the purely tech-driven startups?

SPEAKER_00 7:43

Aaron Powell Think about where the money for a loan actually comes from. A massive traditional bank holds billions of dollars in consumer deposits, checking accounts, savings accounts. Trevor Burrus, Jr.

SPEAKER_01 7:54

Right. They just have an enormous pool of capital sitting there securely. Trevor Burrus, Jr.

SPEAKER_00 7:57

And because they pay relatively low interest on those deposits to you and me, their internal cost for that money is incredibly low.

SPEAKER_01 8:04

Oh, I see.

SPEAKER_00 8:05

So they can turn around and lend that money out for a personal loan at a highly competitive rate while still making a solid profit.

SPEAKER_01 8:13

Whereas a pure tech startup doesn't have billions in deposits just sitting around.

SPEAKER_00 8:17

They don't. A fintech startup has to go borrow money from hedge funds, institutional investors, or venture capitalists just to fund the loans they issue.

SPEAKER_01 8:25

And that borrowed money is expensive.

SPEAKER_00 8:27

Very expensive. Because their cost of capital is higher, they have to charge the consumer higher interest rates to make any margin. A tech startup simply cannot compete with the sheer financial gravity of a traditional bank's balance sheet.

SPEAKER_01 8:41

Okay, but here's where it gets really interesting to me. If the tech is getting so frictionless, if it's incredibly easy now to just take an API and plug a financial product into literally any website or app, doesn't that inherently mean we are proliferating massive financial risk out into the wild? Let's be honest, a car breakdown company, as fantastic as they are at towing vehicles, does not have floors of compliance officers.

SPEAKER_00 9:06

Tracking anti-money laundering laws.

SPEAKER_01 9:08

Exactly. Or running complex know-your customer algorithms.

SPEAKER_00 9:12

That is a very real, very pressing concern, and the source material tackles it head on. As it becomes easier to embed these digital bridges everywhere, the risk profile of the entire market completely changes.

SPEAKER_01 9:24

Because the distributors of these products, the consumer brands, are naturally going to be less familiar with complex regulatory constructs.

SPEAKER_00 9:31

They're experts in retail or travel or automotive services, not financial compliance.

SPEAKER_01 9:37

Which means the person designing the user journey for your high-yield savings account is primarily focused on selling you a better set of tires, or, you know, a vacation package.

SPEAKER_00 9:48

And that is precisely why the traditional banking partner is the non-negotiable safety net here. There is an intense regulatory focus right now on what they call consumer duty.

SPEAKER_01 9:57

Right. Laws that legally require financial institutions to guarantee good outcomes for consumers.

SPEAKER_00 10:03

Ensuring the products are fair, transparent, and suitable. The proliferation of embedded finance cannot be stopped at this point, but it absolutely must be managed.

SPEAKER_01 10:12

So the bank acts as the ultimate guarantor.

SPEAKER_00 10:15

Exactly. They ensure these products are designed, manufactured, and distributed strictly within the bounds of those consumer protection laws. The brand brings the audience and the engagement.

SPEAKER_01 10:24

And the bank brings the legal and structural safety net. That makes sense. But it raises a strategic question, though.

SPEAKER_00 10:30

Okay. Should we have a question?

SPEAKER_01 10:30

If the technology is seamless and the banks are willing to absorb all that regulatory risk and provide the balance sheet, should every brand become a bank? Oh, I see where you're going. Like why doesn't every company with a massive customer base, say a huge fast food chain or a streaming service, start offering checking accounts to boost their revenue?

SPEAKER_00 10:50

The answer from the industry is a definitive no. There is a specific threshold a brand must meet, which Toombev defines as strategic coherence.

SPEAKER_01 11:00

Strategic coherence.

SPEAKER_00 11:01

Right. A brand might have massive scale, incredible commercial viability, millions of daily active users. But if the financial product doesn't naturally align with the consumer's mindset when they're interacting with that brand, it will fail.

SPEAKER_01 11:15

The example from the text that perfectly illustrates this is Nike. Nike is an absolute global powerhouse, enormous customer loyalty. Huge. But it is not coherent for Nike to offer a high-yield savings product.

SPEAKER_00 11:28

Because you have to look at the core problem the brand solves. Nike is about athletic performance, lifestyle, aspiration. When a consumer is interacting with Nike, they're thinking about running a marathon.

SPEAKER_01 11:37

Or buying some sweet sneakers.

SPEAKER_00 11:39

Exactly. A savings account completely breaks that psychological state. It creates friction. The consumer would look at it and think, why is my shoe company asking for my social security number to open a deposit account?

SPEAKER_01 11:51

It lacks coherence.

SPEAKER_00 11:52

Completely. But contrast that with the two deals Nat West Boxed actually executed. Look at Saga.

SPEAKER_01 11:59

Right. Their entire business model is built around serving people over 50.

SPEAKER_00 12:03

What is the primary psychological driver for someone in that demographic? They're thinking about retirement, managing their Nesteg, long-term financial stability.

SPEAKER_01 12:13

So embedding a suite of savings products directly into the Saga ecosystem is incredibly coherent. It naturally solves a problem the consumer is already primed to think about.

SPEAKER_00 12:24

The AA partnership operates on the exact same logic, but for a totally different emotional state. When do you interact with a car breakdown service?

SPEAKER_01 12:32

Usually it's a moment of acute stress, you are stranded.

SPEAKER_00 12:35

Facing a sudden, unexpected, and often massive expense, like a blown transmission, offering an instant access, unsecured personal loan at the exact moment a customer is staring down a repair bill they can't afford. That is perfect strategic coherence.

SPEAKER_01 12:51

It solves an immediate painful liquidity problem directly aligned with the brand's core service.

SPEAKER_00 12:57

But on.

SPEAKER_01 12:58

And if a brand ignores this rule, if they just see the potential revenue and try to bolt on an embedded finance product that doesn't fit their core strategy.

SPEAKER_00 13:08

The warning in the journal is pretty stark. Toombev says it will just wither on the vine.

SPEAKER_01 13:12

Consumers will just ignore it.

SPEAKER_00 13:14

Yeah. The integration costs will sink the project and it won't be commercially viable.

SPEAKER_01 13:18

Aaron Powell Which brings us to the actual mechanics of how this arrangement sustains itself. If a brand determines that offering a banking product is strategically coherent, we have to look at the math.

SPEAKER_00 13:28

Follow the money.

SPEAKER_01 13:29

Always. How do both the brand and the bank make money without passing exorbitant hidden fees onto you, the consumer? Let's deduce the brand's angle first, because obviously the AA isn't offering loans out of the goodness of their hearts.

SPEAKER_00 13:44

No, definitely not. Beyond a simple revenue share with the bank, they are fundamentally playing a cross-selling game. By offering financing right at the point of need, they drive incremental sales.

SPEAKER_01 13:56

They increase the conversion rate of a service that a customer might otherwise have had to abandon because they literally lacked the funds.

SPEAKER_00 14:03

It increases the basket size, absolutely. But arguably the most massive financial benefit for the consumer brand is cost avoidance.

SPEAKER_01 14:10

Oh, because of the regulations we talked about.

SPEAKER_00 14:12

Exactly. The crushing weight of banking regulations, hiring hundreds of compliance officers, building anti-money laundering tracking software, maintaining capital liquidity requirements.

SPEAKER_01 14:23

By utilizing a banking as a service platform, the brand completely sidesteps all of that.

SPEAKER_00 14:28

They outsource all of that incredibly expensive overhead to the bank.

SPEAKER_01 14:32

Okay, I see the brand's angle clearly. But the bank is taking on the actual risk of the loan, plus all that compliance overhead. They must be relying on sheer volume and balance sheet growth to justify providing this service.

SPEAKER_00 14:47

Balance sheet growth is the primary driver for the banking provider here. Every new savings account brings in deposits they can leverage.

SPEAKER_01 14:54

And every new loan generates interest income.

SPEAKER_00 14:57

Right. Depending on the specific commercial agreement, that revenue is shared, but it significantly expands the bank's asset base. Plus, the bank earns steady fee income simply for running the underlying software platform that makes it all possible.

SPEAKER_01 15:11

I do have a pushback on how scalable this actually is, though.

SPEAKER_00 15:13

Okay, let's hear it.

SPEAKER_01 15:14

If I'm Saga, I want my savings product to feel entirely unique to my brand. I want the interface, the terms, the user journey to feel perfectly aligned with my over 50s demographic.

SPEAKER_00 15:26

Right.

SPEAKER_01 15:27

And if I'm the AA, I want my personal loan to feel uniquely tailored to emergency automotive repairs. If every single brand demands intense, unique customization, doesn't all that bespoke software development totally destroy the bank's profitability? Yes. How can one bank build thousands of totally unique platforms efficiently?

SPEAKER_00 15:46

That is the operational bottleneck of the entire industry. And the solution requires rigid discipline from the bank. The fundamental rule here is that customization is the enemy of scalability.

SPEAKER_01 15:57

Wow, okay.

SPEAKER_00 15:57

If a bank cannot scale its technology infinitely, it cannot be profitable. They solve this through standardized but highly curated modules.

SPEAKER_01 16:05

Aaron Powell The text uses a great analogy here about Lego blocks.

SPEAKER_00 16:09

It's the perfect way to visualize the architecture. Embedded finance must be treated as a set of standardized product modules. Think of one Lego block as the identity verification engine. Okay. Another block is the interest calculation algorithm, another is the payment processing gateway.

SPEAKER_01 16:26

So a standard red two by four Lego brick is structurally identical whether you use it to build a fire truck for the AA or a castle for saga.

SPEAKER_00 16:33

Exactly. The underlying mechanism, the heavy lifting of the banking compliance, the security protocols, the back-end software is identical across every partnership. It's fully standardized.

SPEAKER_01 16:43

But the bank works with the consumer brand to configure those standard Lego blocks in different combinations.

SPEAKER_00 16:50

Right, to create a customer experience that feels unique, even though the machinery underneath is exactly the same.

SPEAKER_01 16:56

It's the difference between buying a bespoke suit and an off-the-peg suit. A bespoke suit is tailored from scratch to your exact millimeter measurements. It's incredibly expensive, takes months, and only fits one person.

SPEAKER_00 17:08

And embedded finance cannot operate like a bespoke suit.

SPEAKER_01 17:12

It has to be off-the-peg. Standard sizing that is pre-manufactured efficiently at scale, which you then just lightly alter at the cuffs and hem to fit the specific brand.

SPEAKER_00 17:21

If a brand insists on a bespoke suit, the commercial model simply collapses. The development costs would just outweigh the revenue.

SPEAKER_01 17:29

So how does a brand stand out then?

SPEAKER_00 17:31

True differentiation doesn't come from custom software. It comes from pricing strategy. A brand might choose to intentionally give away a portion of their own profit margin in order to offer a slightly higher interest rate on a savings account.

SPEAKER_01 17:44

Or a lower rate on a loan.

SPEAKER_00 17:45

Exactly. They use the standard off-the-peg product, but they subsidize the pricing to win market share or drive deep loyalty to their core business.

SPEAKER_01 17:53

So, synthesizing all of this, what does this mean for your future as a listener? Are we headed for a new normal where you manage absolutely all of your finances at your favorite retail shop or travel brand?

SPEAKER_00 18:07

The consensus is a grounded no. We're not looking at a total abandonment of traditional banking channels. You are likely never going to get your complex commercial mortgage from a shoe company.

SPEAKER_01 18:19

Or manage a complicated trust fund through a grocery app.

SPEAKER_00 18:22

Right. The new normal is that you will no longer turn to your primary bank for every financial need. You will manage specific pockets of your financial life through the consumer brands that offer strategic coherence for that specific need.

SPEAKER_01 18:34

Which ultimately brings us to the bedrock of this entire ecosystem: trust.

SPEAKER_00 18:39

It all comes down to trust.

SPEAKER_01 18:40

If you're going to deposit your life savings into an account branded by a travel agency or take out a loan through a car breakdown service, you have to implicitly trust that the invisible machinery underneath won't fail.

SPEAKER_00 18:52

And that scale of trust is what legacy banks leverage. The fact that a provider like Nat Westboxed is backed by an institution supporting 19 million retail customers in the UK that sets the standard.

SPEAKER_01 19:05

You can have the most visually stunning, frictionless app in the world. But if the fraud protection fails even once, the consumer's trust evaporates instantly.

SPEAKER_00 19:16

The underlying bank has to back their tech with the capacity to scale safely, securely, and consistently. Boring, invisible reliability is the actual product here.

SPEAKER_01 19:25

If we connect this to the bigger picture, it introduces a fascinating friction regarding human behavior and brand loyalty.

SPEAKER_00 19:32

Oh, I like where this is going.

SPEAKER_01 19:33

In the retail and consumer world, our trust is incredibly fickle. Switching your loyalty from one clothing label to another or deleting a food delivery app because an order was late is instantaneous. We abandon consumer brands at the slightest inconvenience.

SPEAKER_00 19:46

But banking requires deep, lifelong trust and absolute security. So as we approach this 2030 vision, we're left with a really compelling question.

SPEAKER_01 19:55

Let's hear it.

SPEAKER_00 19:55

How will that friction play out for you? As you begin opening savings accounts or taking out loans through your favorite consumer brands, how will our habit of instant fickle retail loyalty collide with our psychological need for permanent financial security? When the shiny, ephemeral brand interface inevitably clashes with the rigid, highly regulated reality of the bank operating beneath it, how will that reshape the way you view your money over the next decade?

SPEAKER_01 20:24

It's a phenomenal thought experiment. I mean, if you get furious at a brand for a botched customer service experience and just delete their app from your phone, what happens to the high yield savings account you had running in the background?

SPEAKER_00 20:37

It gets complicated very quickly.

SPEAKER_01 20:38

It certainly makes you look at the checkout page of your favorite app with a lot more scrutiny. Well, thank you for joining us on this deep dive into the invisible world of embedded banking.

SPEAKER_00 20:47

Thanks for having me.

SPEAKER_01 20:48

The next time you are offered a loan or a savings account by a brand that doesn't look like a bank, take a closer look. You now know exactly how the machinery underneath it actually works. Until next time.