Why Brands, Bigtechs, Fintechs and Banks Are All Taking Notice of Banking as a Service

Why Brands, Bigtechs, Fintechs and Banks Are All Taking Notice of Banking as a Service

by April 18, 2022

The Asia Pacific region is leading the way in a revolution that is changing the way consumers interact with financial services.

Banking as a Service (BaaS) has been spreading rapidly over the last couple of years, enabling brands to offer their customers a range of financial services, from buy-now-pay-later financing to personalised and proactive lending offers.

In fact, new research from Finastra reveals that 88% of senior executives in a number of sectors (including banking, healthcare, retail and technology) said they are already implementing BaaS solutions or are planning to, compared with 80% in EMEA and 87% in the Americas.

BaaS is the provision of retail or wholesale banking products and services, in context, as a service using an existing licensed institution’s secure, regulated infrastructure with modern API-driven platforms.

It’s changing the game by creating totally new business models and revenue streams, with a value chain that consists of three key players besides the end-customer:

  • Distributors (also referred to as ‘embedders’): Organisations that embed banking services directly into their existing customer journeys for retail or corporate customers.
  • Enablers: Usually bigtechs and fintechs that help to embed financial services into third-party platforms and apps
  • Providers: Financial institutions holding a banking license and offering regulated and complaint financial products

For financial institutions, BaaS simultaneously creates the opportunity to reach more customers whilst lowering the acquisition cost per customer significantly; for distributors, BaaS provides the potential for new lines of revenue whilst building deeper relationships with their customers.

In short, BaaS makes it simple, fast and cost effective to integrate regulated products into the customer journey.

Although growth has been rapid, BaaS is still an evolving industry with huge potential to grow.

In fact, Finastra expects the BaaS market – including banks, wealth management and insurance companies as well as those providing the enabling technology without underlying FS solutions –to be worth US$7 trillion by 2030.

But for this potential to be reached, distributors, enablers and providers will need to overcome a number of challenges and invest time in creating streamlined customer experiences and sleek, engaging products.

Finastra’s latest research, Banking as a Service: Outlook 2022 | Paving the way for Embedded Finance, provides insight into the market maturity of BaaS solutions.

We interviewed 50 senior executives, surveyed a further 1,600, and calculated value pools and potential growth rates of BaaS for the next three years across a number of industries, including retail, e-commerce, technology, and healthcare among others.

Findings from the report include:

  • Over 46% of APAC distributors currently offer, or plan to offer, credit cards to their customers using Banking as a Service, with other popular offerings including savings accounts (41%) and payment cards (38%)
  • Distributors are spending US$10 – US$50 million per year on financial products and service partnerships across APAC – a high level of spending which is expected to be sustained throughout 2022
  • Globally, 70% distributors want to increase their spending on financial partnerships (including BaaS),
  • 50% enablers globally want to increase their number of partnerships with distributors and providers by more than 50% in the next five years

Whilst the BaaS market is currently more focused on the retail market, distributors indicated clearly to us that there will be a shift towards the small and medium-sized enterprise (SME) and corporate segment over the next three years.

SME lending and corporate treasury/FX services are poised to gain the highest traction and demand over the next three years, particularly in the banking and healthcare sectors.

Another segment poised for significant growth is Point of Sale (POS) financing, in which fixed-term loans are provided by, or on behalf of, a retailer.

This emerging area is expected to grow by 104% in the banking industry, with the market almost doubling in size by 2024.

BaaS enables POS financing to be expanded to debit card customers, which will translate into huge growth potential.

The market has spoken clearly and BaaS is sure to expand rapidly in the coming years.

The onus is now on companies, across all market segments, to assess the opportunities and plan a strategy that includes selecting the right use-cases, sectors, and customer segments for their business, as well as entering partnerships to accelerate market entry and penetration.

As we look to the immediate future, one thing is very clear; consumers—both retail and corporate—are changing where they source financial services and shifting to non-bank channels.

BaaS is paving the route towards truly embedded finance and a banking experience that adapts to this changed consumer behaviour.