Financial institutions

Financial institutions must seize the opportunity as BaaS momentum strengthens

There is no doubt that Banking as a Service (BaaS) is an incredibly exciting opportunity for the entire financial services ecosystem. Financial institutions can reach more customers at a significantly lower cost, and distributors can open up new revenue streams while building closer relationships with their customers.

A recent study by Finastra – which surveyed the opinions of 1,600 senior industry executives across distributors, enablers and suppliers – shows that 85% are already implementing or planning to implement BaaS solutions in next 12 to 18 months.

The research also highlights an accelerating shift in consumers (retail or business) where they source financial services. This is moving to non-bank channels.

Growth areas for financial service providers

More than 80% of regulated financial service providers expect the overall BaaS market to grow, and of these, 30% expect it to grow by more than 50% annually over the next five coming years.

Indeed, 42% are already in advanced stages of BaaS implementation, and one in four plans to implement solutions within the next three years.

Providers expect most of this growth to occur in three key segments: retail banking, SME and corporate banking. In retail banking, financial institutions have expressed interest in extending BaaS to a wider range of products and placing greater value on access to low-cost deposits (e.g., through customer accounts) rather than taking a small percentage of the value of the transaction. The point-of-sale (POS) financing market alone is expected to double in size by 2024.

In the SMB and enterprise segments, vendors want to increase their margins on certain products – including working capital financing, treasury and cash management – ​​by using BaaS solutions to reduce distribution costs, operational and risk-related. In fact, more than 70% expect to switch to SMB and enterprise banking BaaS use cases.

Our research found that simplifying SME lending via BaaS is expected to drive 30% growth by 2024. This is significant given that SME lending currently accounts for the largest proportion of bank revenue. At the same time, business loans are expected to grow by 14%, and treasury and foreign exchange services by 7% over the same period.

Monetize BaaS

Vendors indicated three preferred ways to monetize BaaS. These include: offering specialist solutions; front-to-back white label solutions; and securing access to a market. Some 45% of financial institutions believe that a vendor marketplace will help increase revenue by helping small and medium banks expand their distribution footprint, especially for markets and products where customers are brand agnostic from the supplier.

Vendors need to take a tailored approach to adopting BaaS, with different margins and monetization approaches depending on size, market segment, products, use cases, technology sophistication, and assets under management. For example, large suppliers typically take a dual approach in which they leverage their existing relationships to partner directly with distributors, as well as specialist facilitators. Smaller banks, however, have a limited ability to partner directly with large distributors, and therefore tend to rely on partnerships with facilitators instead.

To succeed in retail banking, financial service providers need four key capabilities to work with distributors and enablers to monetize BaaS. From a technology perspective, these include: an open API platform; an integrated data and analytics platform and specialized digital solutions to seamlessly integrate customer journeys. From a product perspective, vendors need dynamic and compelling offerings to attract customers.

To monetize BaaS in the SMB and enterprise segments, vendors need to develop industry-specific products and services. For example, working capital loan requirements and terms are different for restaurants and small retailers, and should be tailored accordingly. They will also need a data and analytics platform and specialized digital solutions.

Collaboration is crucial

It is clear that the BaaS monetization strategies of banks and private labels are increasingly aligned. Both recognize the need to offer specialized products, white label customer journeys and provide access to a marketplace.

As part of the research, we published a maturity index that analyzes a player’s maturity based on BaaS revenue; BaaS partnerships; the implementation phase; among other factors. BaaS pioneers have made significant gains and should extend their lead. While distributors and vendors are ahead in terms of BaaS maturity today, enablers play an increasingly important role in the ecosystem. They will play a key role in facilitating the onboarding process – connecting suppliers to distributors and effectively bringing different sides of the network together in an open financial ecosystem.

Financial institutions can accelerate their participation in BaaS by working with facilitators to facilitate the onboarding process. I think integrating regulated products into the customer journey will soon become as easy as creating a social media account. As barriers to entry fall and BaaS gains unstoppable momentum, it’s time to act.