Banking-as-a-Service: What It Is & How To Play

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Learn about the ongoing evolution in Banking-as-a-Service, the key market players, the market structure and how incumbents deal with new challengers.

Banking services have always been confined inside the vertically integrated walls of banking institutions. Banks independently manufacture financial goods and services, provide them to consumers, and interact with them. This has continued despite changes in customer expectations, new business models, value creation, and financial inclusion goals that have caused a digital services explosion across industries. Even if the need to create and trade value is urgent, in terms of commitment, these companies extensively engage and integrate with the products, services, and procedures of banks. Banking-as-a-Service, also known by its abbreviation BaaS, is becoming more and more popular as a result of the demand for simple financial service consumption within organizations.

BaaS is an end-to-end procedure that allows third parties such as FinTech, non-FinTech, developers, and other businesses to access various financial services without having to construct them from scratch. Through APIs, BaaS allows third parties to interface with the core systems of financial services providers to create banking services infrastructure. It strives to merge the capabilities of third parties with those of financial services providers into a complete procedure. On top of the regulated infrastructure of the banking providers, third parties can construct their banking solutions using BaaS APIs.

Evolution of BaaS Models

In simple words, BaaS helps in the distribution of banking goods and services by third parties. BaaS products enable new, customized offers and accelerate their market time by combining non-banking enterprises with regulated financial infrastructure. These modern-age financial offerings with elements of specificity and agility are displacing existing ones and, in the process, are disaggregating many lucrative components of the traditional banking value chain.

Anything and everything about BaaS  

BaaS is made possible by the seamless integration of financial products and services into other consumer activities, frequently on digital platforms that are not financial. Consumers are using these platforms more frequently to access services including e-commerce, travel, retail, health, and telco. Thus, a non-financial company can offer financial products under its brand so that customers believe they are purchasing from that company, even though the financial product is being offered by a financial institution. A financial institution can put up a platform for this purpose based on the most recent affordable, scalable, cloud-native technology, which will lower its cost to serve consumers.

Key Players in BaaS Ecosystem

BaaS is a promising opportunity for a financial institution to acquire more consumers at a significantly lower cost. The outdated technology and methods that make up the traditional banking paradigm are exorbitant. Herein customer acquisition cost is typically higher but with a brand-new, greenfield BaaS technology stack, the cost can significantly be brought down. 

The distributors can increase their revenue streams with favourable margins by offering financial solutions to customers. It can also solidify its relationships with retail and SME clients and take advantage of cross-selling opportunities. 

How big is the BaaS opportunity?

BaaS is opening up countless opportunities and laying the foundation for embedded finance.

Without a doubt, the entire financial services ecosystem will certainly benefit from the implementation of BaaS. It will soon be as easy to incorporate regulated products into the customer journey as setting up a social media account. Although the global BaaS market, which includes banks, wealth management firms, insurance providers, and startups that offer supporting technology but no underlying financial services solutions, is anticipated to reach $7 trillion in value by 2030 as per Finastra’s report.

According to the Finstra estimates, 85% of senior executives have already implemented or plan to deploy BaaS solutions in the next 12 to 18 months. SME lending and corporate treasury/FX services are anticipated to experience the most growth and demand over the next three years, particularly in the banking and healthcare industries, even though Point of Sale (PoS) financing is anticipated to increase by 104% in the banking industry. According to a recent analysis, enablers, which are made up of big techs and fintech, will have the greatest growth over the next three years, outpacing growth providers and distributors have reported. Additionally, new monetization techniques are likely to emerge from the lens of distributors, suppliers, and enablers for the success of BaaS.

Differences Baas and Open Banking

How incumbents are fighting back? 

Incumbents are plagued with the underutilization of technical resources and higher costs associated with operating infrastructure. Several non-financial services companies have bounced back by digitalizing their organizational structures and methods of distribution to provide customers with innovative financial services at incredibly low prices. There are increasing instances of incumbents looking to modernize their legacy systems and offer modern-age financial services to maintain competitiveness in the market.

Incumbents risk losing revenue to competitors/fintech that use digital platforms to expand their product distribution/customer reach and leverage their partner ecosystem (such as online merchants, healthcare providers, and telecommunications businesses) to innovate new financial services. Furthermore, a surge of challenger banks is doing it at a fraction of the cost of incumbents and giving incumbents a run for the money. 


Banking as a Service Implementation Constraints

Some technology companies applied for banking licenses to offer their BaaS platforms to distributors that wish to sell financial products to their customers. For instance, one major digital bank in China has an annual cost per client of just $0.6, compared to an incumbent bank's usual cost of more than $20. The proliferation of business-to-business fintech firms is lowering costs as well. Market capitalization trends over the previous five years indicate platform providers outpacing established financial institutions significantly, illustrative of the emerging competitive issues facing financial institutions.

These actions together pose a potential threat to incumbents' competitive advantages which reduces acquiring a regulatory license, the ability to handle cash through branches, and a well-known, reputable finance brand. Some traditional financial institutions are investing billions of dollars to digitize their current business structures to fend off their competition. However, it can be more fruitful for businesses to launch new models, such as BaaS, by integrating their goods into other platforms. Unless companies can update their existing technology to attain similar, alluring unit economics, this involves establishing BaaS platforms from scratch. Some established institutions have already begun offering financial services, such as credit lines for customers purchasing certain goods, and have partnered with fintech companies to launch their own BaaS systems.

What’s in for the future?

As the BaaS model develops and reaches maturity, a rising number of stakeholders will evaluate the value proposition it has to provide. Players should conduct a competitive analysis to pinpoint the BaaS value chain's weak links, take action to address them, and work to bridge the gaps. We anticipate that the participants' operational models will alter as they choose to create, purchase, or collaborate to support the BaaS ecosystem, which will cause them to change their strategic stance. Players in the ecosystem must begin with a transformational thought process from the beginning to establish a BaaS attitude. The success of BaaS installations in the future will be evaluated by addressing key obstacles and establishing a roadmap and timeframe.

BaaS will combine financial resources with digital technology platforms to transform economies and the majority of sectors over the next few years. A BaaS firm is also scalable and nimble, making it ideal for entering new markets and then expanding. Distributors can use financial data to obtain a much deeper understanding of consumer behaviour and develop new revenue lines at attractive margins.

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