As Banking as a Service (BaaS) nears mainstream adoption, there is a significant opportunity for banks to join the BaaS ecosystem, develop new relationships with fintech firms and create new revenue streams for themselves at the same time.
The mobile industry is one sector where we will see BaaS flourish and become readily adopted by mobile providers, fintech firms and banks. Smartphones [and there are about 6.6 billion globally] have given people access to instant communication and the financial services industry is beginning to understand that by offering smartphone users BaaS, they can facilitate day to day living and help families and businesses financially plan for everything from long-term goals to unexpected emergencies.
Most of the mobile operators around the world only offer the ability to make payments via phones but they don’t offer people access to banking – that is about approximately 1.2 billion people worldwide who want access to savings accounts and insurance for example, both of which BaaS can enable.
BaaS and financial inclusion
If those that don’t currently have a bank account were to open one, they would be more likely to use other financial services such as credit and insurance. They might even start or expand their businesses, invest in education and health, manage risks and weather financial shocks, all of which are likely to improve the overall quality of their lives. So, if a bank offers BaaS services to mobile phone operators for example, it would encourage financial inclusion, which, according to the World Bank Group, has been identified as an enabler to reduce extreme poverty, boost shared prosperity, and to achieve 7 of the 17 Sustainable Development Goals. HM Queen Maxima of the Netherlands, the UN Special Advocate for financial inclusion worldwide, attended SIBOS 2022 to underline its importance in the world, explaining that “the rapid growth in mobile phone use and new customer data trails offer exciting new ways to deliver financial products by leveraging big data and AI – especially in emerging markets,” where many people are unbanked or underbanked. BaaS, while in its early stage of evolution, is fast becoming part of our day to day lives.
As consumers, we are used to using apps such as UBER to pay for things and once our payment methods are established the process is frictionless. We moved from cash to card and now to digital payments with relative ease and our spending has probably increased as a result. Overall, all the players in the BaaS system will benefit – the BaaS provider (the bank), the technology company with a banking licence and the charter or fintech in the middle as well as the end consumer.
The long-term benefits of BaaS far outweigh any short-term challenges
The business of banking is moving out of the exclusive realm of banks and into a comprehensive ecosystem to bring personalised, customer-centric offerings to market faster. This is what BaaS can achieve if banks are prepared to embrace it, and it can enable them to reach out to many more customers, bring up their economies of scale and bring down their costs. Accessing the data captured via BaaS leads to more personalised services and better customer relationship management and retention.
As BaaS becomes more mainstream, the regulators have noticed. Neobanks and fintech firms are providing a seamless digital banking experience and they need a bank to offer cards, lending, money transfers, and other banking services. Fintech firms also have limited experience with compliance processes. A BaaS model, therefore, becomes critical in a highly regulated and competitive market. Banks have responded by enabling fintech firms and neobanks to have a bank’s resources and infrastructure to expand their offerings while lowering operating costs.
Another challenge with offering banking services through APIs is that it increases the risk of cyberattacks and security breaches if not carefully managed. Technical and operational constraints, like legacy infrastructure can delay implementations and may require costly manual processes to overcome the limitations. In addition, banks must sustain the efforts to add new fintech partners to the portfolio. Banks can further align their business models and reduce the risks by partnering with an experienced fintech provider that offers a secure digital layer which can integrate seamlessly with multiple systems and offer end-to-end connection of business data.
Despite some challenges however, BaaS still brings many benefits to the financial services sector and it’s the customer who is rightly the biggest beneficiary of these advancements. With BaaS, they have more choices and are able to enjoy the full experience of, for example, buying their own house, rather than simply getting a mortgage from a bank. Overall, the whole ecosystem benefits because there is more value creation that is happening via BaaS.
BaaS is developing globally
BaaS is in its infancy, but adoption is growing. In the US lots of BaaS providers are emerging because it’s so much harder to get a banking licence there than it is in Europe. The UK granted the maximum number of licences in the world in the last ten years but, if you can’t get a licence, and want to consume banking services, for example making payments or securing loans, you must rely on someone who does have a licence. That company can ‘squeeze the juice’ fully out of the charter and take full advantage of it.
In Asia, there are very interesting cases emerging for example in Indonesia. An enterprise software supplier which provides software for managing gyms has to allow the management of memberships, heavy machinery or equipment and payment processing. The gym chain along with a bank (with a licence) becomes a BaaS provider.
Without a doubt, customer expectations have changed. They want contextual, hyper-personalised, integrated banking experiences and on-demand access to banking services. They want to access banking products and services when they need them, so BaaS presents a new opportunity for financial institutions to acquire customers at lower cost, reach new customer demographics, grow revenues and deliver customer satisfaction.
Amit Dua is President, SunTec