Banking as a Service – Accessible Finance

Banking as a service (BaaS), often used interchangeably with the concept of embedded finance, represents the provision of financial tools and services by non-financial providers. After hitting US$22.5 billion in revenue in 2020, this model is expected to reach approximately US$230 billion by 2025, causing significant disruption in the traditional banking value chain and processes.

According to traditional models, purchasing high-end goods and services requires an additional step, usually related to obtaining financing either through loans, insurance, or investments. The BaaS model streamlines the operations and customer experience by eliminating the extra step and allowing companies in various sectors (e.g., real estate, retail, leisure, etc.) to integrate these financial services into their processes, offering customers the possibility to purchase goods and services without the need to acquire additional funds from other parties.

The process is based on an API (Application Programming Interface) integration between customers, companies, and banks, which facilitates the exchange of messages, funds, and data. Even though API is a technology that has existed for decades, Banking as a service offers an innovative way of employing it in the financial sector.

Benefits for customers and service providers

BaaS has multiple implications across all parties involved in a transaction. For customers, it provides a frictionless and convenient experience, which in turn increases their loyalty to the brand. Their need for customized and tailored services is met, along with their sense of process ownership.

For providers of products and services, the benefits are even greater. The system provides additional data about consumers (i.e., spending habits and needs) and increases the likelihood of purchase. Moreover, financial integration through APIs allows providers to expand their offerings, combining features from multiple partners that they would otherwise not be capable of offering.  

This model has also led to the rise of various fintech companies who are willing to facilitate and act as an intermediate in the relationships between banks and non-financial service providers, by developing the necessary technologies for communication, data exchange, and risk and compliance management. 

Disruptions in the banking industry

However, BaaS is also set to disrupt the operational model of the banking industry. Initially, banks built their own products and systems and disseminated them through proprietary distribution channels. At this point, their control over operations and relationships with customers was at its highest level.

Trends contributing to the rise of BaaS

However, technological advancements and market changes have led to a new reality: On one side, customer dissatisfaction with existing banking offerings and lower levels of trust in the banking industry became a more serious issue, pushing clients to consider switching banks or embrace alternative options. On the other hand, the rise of FinTech and open banking, together with global trends such as decentralization and hyper-personalization, dramatically changed the role of these institutions in the financial field and limited customers’ direct access to bank services.

In order to stay relevant, banks have to re-invent their strategy and integrate new business models such as B2B2C and B2B2B. The conservative approach, where they continue to provide specific banking products such as licenses, deposits, loans, and payments to their existing customer base, might not be enough to assure the survival of financial institutions in the long run. To keep up with the market and social changes, banks will need to expand their offerings and capabilities through partnerships with FinTech and target end customers as well as banking products distributors and service providers.  

Accelerated growth

Accelerated by the availability of technologies such as cloud computing and data storage, smartphones, and digital applications, the banking as a service trend is currently in a highly accelerated emergent phase. The number of startups developing the necessary technology is growing, while significant players in retail, real estate, leisure, travel, and other consumer services, etc. have already implemented it. Banks have also started to join the BaaS movement, either by stepping up their digital banking offerings or by facilitating the integration of banking products with non-financial companies.

For example, Walmart, one of the leaders in the US retail sector, has partnered with Ribbit Capital, a fintech investment firm based in Silicon Valley, to develop next-generation digital financial services for its customer base. Ingka Group, the parent company of Swedish furniture brand IKEA, is also looking into BaaS-based services through its partnership with Ikano Bank.

On the banking side, the BaaS model is taking root across multiple continents. At least five major banks in Australia are developing banking as a service systems, with Westpac leading the way. The Australian bank and financial service provider has already launched such a platform and established partnerships with various industry sectors.

Wells Fargo, one of the largest banks in the world, has built a BaaS platform together with MuleSoft aiming to deliver a more unified customer experience as well as services such as account servicing, foreign exchange, and payments. Under the motto “a world where financial services seamlessly sync with life,” the Berlin-based fully licensed Solarisbank has built a proprietary BaaS platform from scratch that enables non-financial providers to launch banking products.

The banking system is currently undergoing a significant transformation that will become even more acute in the near future. In order to “ride the wave” and stay relevant in the financial field, banks need to incorporate the BaaS model into their short and medium-term strategy, at the same time taking into consideration the talent and cost requirements that are necessary for this transformation.

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Catalina Sparleanu

Working with top experts to identify how the latest innovations and disruptive technologies will impact businesses, industries, and society. I have an academic background in social science (Ph.D. in Sociology), an MBA degree, and experience in private companies and NGOs.

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