Leverage the dynamics of Banking-as-a-Service

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Banking-as-a-Service (BaaS) presents an incredibly exciting opportunity for the entire financial services ecosystem.

Financial institutions can reach a larger number of customers at significantly lower costs, and merchants can create new revenue streams while building deeper relationships with their customers.

A recent study by Finastra, which surveyed 1,600 senior industry executives from distributors, enablers and providers, shows that 85 percent are already implementing BaaS solutions or planning to implement them within the next 12 to 18 months.

The study also highlights an acceleration in which consumers (retail and corporate) are switching where they source financial services, with many moving to non-bank channels.

More than 80 percent of regulated financial services firms expect the overall BaaS market to grow, and of those, 30 percent expect it to grow at over 50 percent each year through 2027.

In fact, 42 percent are already in advanced stages of BaaS implementation, with one in four planning to implement solutions in the next three years.

Providers expect that the majority of this growth will occur in three key segments: consumer, small and medium-sized business, and corporate banking. The point-of-sale financing market is expected to double in size by 2024.

In the SMB and Enterprise segments, providers aim to increase margins on select products – including working capital finance, cash and treasury management – by using BaaS solutions to reduce selling, operational and risk-related costs. In fact, more than 70 percent expect to focus on BaaS use cases in SMB and enterprise businesses.

Our research shows that BaaS is expected to drive 30 percent growth by 2024 to simplify SME lending. This is important as SME loans currently account for the largest share of bank turnover. In parallel, corporate lending is expected to grow 14 percent and treasury and foreign exchange services to grow 7 percent over the same period.

Vendors identified three preferred ways to monetize BaaS. This includes offering specialized solutions, white labeling front-to-back solutions and securing access to a marketplace. About 45 percent of financial institutions believe that a vendor marketplace will help increase revenue by helping small and medium-sized banks expand their distribution footprint, particularly for markets and products where customers don’t care about brand.

Financial services firms must adopt a tailored approach to BaaS adoption, with margins and monetization approaches differing by size, market segment, products, use cases, technology sophistication, and assets under management. For example, larger vendors typically take a dual approach, leveraging their existing relationships to work directly with distributors as well as specialized enablers. However, smaller banks have limited ability to work directly with large channel partners and are therefore more likely to rely on partnerships with enablers.

To be successful in retail banking, financial services providers need four key competencies to work with distributors and enablers to monetize BaaS. From a technology perspective, these include: an open application programming interface platform, an integrated data and analytics platform, and specialized digital solutions to seamlessly integrate customer journeys. From a product perspective, providers also need dynamic and compelling offers to attract customers.

In order to monetize BaaS in the SMB and enterprise segment, providers need to develop industry-specific products and services. For example, restaurant and small retail business loan requirements and terms are different and should be adjusted accordingly. You also need a data and analytics platform and specialized digital solutions.

It is clear that the BaaS monetization strategies of banks and retail brands are becoming increasingly similar. Both recognize the need to offer specialized products, white label customer journeys and access to a marketplace.

Finastra’s research also shows that while distributors and providers are ahead today in terms of their BaaS maturity, enablers are playing an increasingly important role in the ecosystem. They will continue to be central to facilitating the integration process, connecting providers with merchants and effectively bringing the different sides of the network together in an open financial ecosystem.

Financial institutions can accelerate their participation in BaaS by working with enablers to ease the integration process. The barriers to entry are falling and BaaS is gaining unstoppable momentum. The time to act is now.

Angus Ross is Chief Revenue Officer for Banking-as-a-Service at Finastra

This article was originally published in Technology Record’s Summer 2022 issue. Sign up for a free subscription to receive future issues straight to your inbox.


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