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Seizing the momentum of banking-as-a-service

Seizing the momentum of banking-as-a-service

Financial services providers must adapt to new approaches, or risk customers looking elsewhere

Angus Ross |

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

Financial institutions can reach a greater number of customers at a significantly lower cost, and distributors can open up new lines of revenue while building deeper relationships with their customers.  

Recent research conducted by Finastra – which involved surveying 1,600 senior industry executives from distributors, enablers and providers – shows that 85 per cent are already implementing, or planning to implement, BaaS solutions within the next 12 to 18 months.  

The research also highlights an acceleration in consumers (retail and corporate) changing where they source financial services, with many shifting to non-bank channels. 

More than 80 per cent of regulated financial services providers expect the overall BaaS market to grow, and of these, 30 per cent expect it to grow by over 50 per cent every year by 2027.  

In fact, 42 per cent are already in the advanced stages of implementing BaaS, with one in four looking to implement solutions in the next three years.    

Providers expect most of this growth to be in three key segments: retail, small and medium-sized enterprises, and corporate banking. The point-of-sale financing market is poised to double in size by 2024. 

In the SME and corporate segments, providers want to increase their margins on select products – including working capital finance, cash and treasury management – by using BaaS solutions to reduce distribution, operational and risk-related costs. In fact, more than 70 per cent expect to pivot to SME and corporate banking BaaS use cases.  

Our research found that simplifying SME lending through BaaS is expected to drive growth of 30 per cent by 2024. This is significant given that SME lending currently takes the largest proportion of banking turnover. In parallel, corporate lending is expected to grow by 14 per cent, and treasury and foreign exchange services by seven per cent over the same timescale. 

Providers indicated three preferred ways to monetise BaaS. These include offering specialised solutions, white-labelling front-to-back solutions, and securing access to a marketplace. Some 45 per cent of financial institutions believe that a marketplace of providers will help to boost revenues by helping small and medium-sized banks expand their distribution footprint, particularly for markets and products where customers are indifferent to the brand. 

Financial services organisations must take a tailored approach to adopting BaaS, with margins and monetisation approaches differing by size, market segment, products, use cases, technology sophistication and assets under management. For instance, larger providers typically adopt a dual approach in which they leverage their existing relationships to directly partner with distributors, as well as with specialised enablers. Smaller banks, however, have limited ability to partner with large distributors directly, so instead tend to rely on partnerships with enablers. 

In order to succeed in retail banking, financial services providers need four key capabilities to work with distributors and enablers to monetise BaaS. From a technology perspective, these include: an open application programming interface platform, an integrated data and analytics platform, and specialised digital solutions to seamlessly integrate customer journeys. From a product perspective, providers also need dynamic and compelling offerings to entice customers.   

To monetise BaaS in the SME and corporate segments, providers need to develop sector-specific products and services. For instance, working capital loan requirements and terms are different for restaurants and small retailers, and should be customised accordingly. They will also need a data and analytics platform and specialised digital solutions. 

It is clear that the BaaS monetisation strategies of banks and distributor brands are becoming increasingly aligned. Both recognise the need to offer specialised products, white-label customer journeys, and to provide access to a marketplace. 

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

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

Angus Ross is the chief revenue officer of banking-as-a-service at Finastra 

This article was originally published in the Summer 2022 issue of Technology Record. To get future issues delivered directly to your inbox, sign up for a free subscription.

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