Why BaaS is transforming the financial services space

Banking as a service (BaaS) is rising through the ranks in terms of significant developments in the world of digital banking and fintech. But what does it really mean, what are the implications and why is it such a transformative force? We spoke to a number of leading industry experts to find out more

Positioning in the BaaS market

The market for consumer financial services has changed considerably in recent months. A major disruptor is BaaS, which offers customers the ability to obtain good quality financial services through channels and brands they trust.

Angus Ross, Chief Revenue Officer, Banking as a Service, Finastraexplains, “Banking as a service (BaaS) has become one of the most important strategic points for CEOs in many industries, including banking, retail, construction and healthcare. BaaS enables any company to develop interesting new propositions with relevant financial services integrated into the customer experience.

Overall, it is expected to reach a value of $7 billion by 2030. Those who act quickly and secure the priority customer context will experience the greatest benefit. Those waiting may very well be left outside to look within.

“According recent research, we found that 85% of senior executives are already implementing BaaS solutions, or planning to do so, within the next 12-18 months. While point-of-sale (PoS) financing is expected to accelerate by 104% in the banking sector, SME lending and corporate treasury/FX services are poised to gain traction and demand over the past few months. next three years, particularly in the banking and healthcare sectors. ,” he keeps on.

Finastra’s latest research also found that while Suppliers and Distributors are more mature than Enablers, the latter – comprised of big tech and fintechs – have sensed the potential and will experience the strongest growth over the next three years. . Ross believes that the results point to a clear conclusion: consumers (individuals or businesses) are switching their source of financial services and are increasingly using non-bank channels.

BaaS and new regulatory solutions

With regulatory complications often plaguing the banking licensing process, banking as a service is also taking pressure from many companies looking to expand their finserve offerings. Andrea Ramoniodirector of strategy at Contissaid BaaS encapsulates organizations that provide regulated solutions through a banking license or EMI.

“While a banking license allows businesses to offer a full range of offerings such as credit, with this license comes some regulatory requirement. EMI licenses are equally powerful, as they allow businesses to provide a wide range of services such as cards, QR payments, payment rails and accounts. The strongest organizations can act as both provider and enabler of BaaS, providing an intrinsic link between the two,” he explains.

“BaaS was historically a buzzword in the industry, but what we’re seeing now is that the concept is reaching a level of maturity where organizations understand the true benefits that BaaS can deliver,” says Ramonia.

New opportunities in the BaaS sector

One of the sectors exploring the potential of BaaS is the automotive industry, where major automakers are even trying to examine ways in which BaaS solutions can complement the widespread adoption of electric cars. “The current market supply means that, generally, car charging times can be considerable, which could be seen as a window of opportunity for sales.

“This could open the door to new partnerships between automakers and retailers if integrated financing options are implemented, which could help entice people to grab a coffee or a bite to eat while their car charges, using their account card in the process. I expect integrated financing solutions to also become widely available in other industries such as travel.”

BaaS in the digital currency market

As cryptocurrencies enter the mainstream market and “buy now, pay later” options grow in popularity, BaaS is also proving its worth in the industry, as is embedded finance. “One of the big developments in the BaaS space over the past two years has undoubtedly been the explosion of ‘buy now, pay later’ programs, offering credit at the point of sale. Looking ahead, I see an evolution of services that will extend to digital assets, including e-wallets or stablecoins, with the ability to offer crypto-as-a-service, for example,” says Ramonia.

He continues, “Another possibility to consider is how integrated financial solutions could help organizations achieve the holy grail of better understanding their customers through richer data collection. Typically, consumer behavior patterns are established by monitoring that retailer’s website activity or online shopping activity.

“However, integrated financing solutions within retailers could mean that when a customer uses cards provided by that company, they can access where the card is used outside of that store and what products are purchased. , rather that this information is simply generally available between a consumer and a card provider.”

New BaaS trends serving fintech solutions

As the BaaS space expands and new innovations bring new solutions to businesses, new trends are also emerging. Adrian Canon, CEO of Omniobelieves that BaaS is driving three main market trends:

  • Cost reduction. The use of public cloud technology, lean regulatory structures — such as e-money institutions — and platforms reaching economic scale will drive down costs. Fully regulated banks offering BaaS will need to reconsider their business models and cost base in this environment.
  • Liberalization of financial services. As the cost base declines, the economics of non-bank financial services offering becomes more attractive, and we should expect to see greater choice for consumers as to where where they get their daily banking services. There will still be a regulated entity involved, of course, but it will be much smaller than the current BaaS solutions offered today.
  • More deeply integrated services. The boundaries between unregulated financial services ‒ such as loyalty and rewards ‒ and regulated financial services will become less clear and the exchange of value between them will become easier. This will free up large retailers with established loyalty programs to reinvigorate moribund loyalty programs, reduce balance sheet exposure and, ironically, increase customer insight.

The future of BaaS and integrated banking

According to Ross, BaaS winners will be pioneers and early adopters who integrate their products and services into other platforms, while partnering with technology enablers and distributors. “BaaS will give them the opportunity to reach more customers at a lower cost,” he says.

“Many pioneers are already experimenting with specific use cases – partnering with distributors and orchestrators – to see what works and what could be profitable at scale… But, like in any industry that is disrupted, there are still many players who are actively doing nothing. They are the ones who should expect to be disrupted in the years to come. There is no doubt that BaaS is an incredibly exciting opportunity for the entire industry. financial services ecosystem.

Cannon believes that BaaS, above all, offers a more flexible future for boat companies and financial services customers: “It [the future of BaaS] looks like a choice ‒ the choice of where we do our banking, the brands we would like to have for providing our banking services, and the freedom to choose small local banks and building societies that can partner with BaaS providers to complete their product line and the return from retailer to retail banking.

Stephen V. Lee