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Why Banking as a Service is Rapidly Gaining Momentum

The banking value chain is evolving. To customers, that evolution manifests itself in different ways. Retail shoppers have probably noticed the ability to pay with their digital wallet almost anywhere. Small business owners might now encounter third-party loan offers embedded into their accounting software. And when checking out, digital shoppers will usually find the option to buy now, pay later (BNPL).

To name just a few examples.

Of course, there’s a lot that goes into orchestrating these experiences. In particular, more and more banks, wealth management firms, and insurance companies are investing in Banking as a Service to level the playing field, engage their customers, and create new opportunities for monetization.

What follows is a closer look at Banking as a Service, including some insights as to why the market for Banking as a Service is expected to surpass $7 trillion in value by 2030.


So, What is Banking as a Service (BaaS)?

According to a report from Finastra, 85% of the senior executives “are already implementing BaaS solutions, or plan to do so within the next 12‑18 months.” As to the nature of those investments in practice, it helps to understand what BaaS really is.

In practice, BaaS is a means for financial institutions to insert a variety of product offerings and services right into their customer journeys. As the Finastra report duly notes, these deployments typically use “an existing licensed institution’s secure, regulated infrastructure with modern API-driven platforms.”

Translation: BaaS means “the seamless integration of financial services and products into other kinds of customer activities, typically on non-financial digital platforms,” as OliverWyman characterizes it.

Examples of High-Value BaaS Products

With BaaS, a company can infuse a financial product or service—from a bank and backed by that bank’s resources, tools, tech, and people—into their own unique, branded experiences. Here are some of the more prominent examples of BaaS, some noted in the aforementioned report from Finastra:

  • Embedded lending/financing for small and medium-sized enterprises
  • Embedded corporate lending, driven by banks, tech players, and Fintechs
  • Point of Sale (POS) financing (BNPL, POS loans, etc.)
  • Treasury and foreign exchange services, driven mainly by manufacturing and healthcare
  • Bank accounts and payments
  • Product insurance

An interesting real-world application for BaaS is the advent of cashierless stores. In an environment like Amazon Go, customers pay using a digital wallet, credit card, or app, through which funds are directly withdrawn from their bank account—but without the need for a cashier. It all happens automatically.

It’s not hard to imagine the interest that tech companies, banks, and Fintechs might have in being part of this newfangled experience.


The Benefits of BaaS

As one financial expert recently pointed out, the potential for BaaS is vast, to include integrated payments, digital wallets, branded debit and credit cards, and lending. A report from Deloitte suggests that banks focused on BaaS offerings enjoy 2x return on average assets. We already mentioned the tremendous growth expected in this space over the next decade.

Which makes sense. Already, the overwhelming majority of people are comfortable with logging into online bank accounts from the third-party apps and services they use—some of them non-financial in nature. According to a report from Mastercard, 81% of consumers currently link bank accounts directly to their financial tools.

Here are some of the objectives that people have or would connect bank accounts with an app to realize:

  • “Automate financial tasks” (74%)
  • “Seamlessly send money to someone” (68%)
  • “Get a better holistic picture of my finances” (61%)
  • “Simplify loan application process” (60%)

Beyond the opportunity to enrich customer journeys and create new value streams, BaaS can level the playing field significantly. The smaller retailer doesn’t need to build its own infrastructure to embed financial products in its experiences; it can rely on that of the bank or financial institution—a decidedly more scalable solution.


The BaaS Playbook: Why Finding the Right Tech is So Important

As for bringing embedded BaaS solutions to the market, finding the right digital banking partners is crucial.  This must be why thirty three percent of “large distributors” plan to increase spending on BaaS partnerships by 15% plus in the coming years (Finastra).

Where will those dollars go? Into the technologies and solutions that can make possible, and quickly monetize, that next embedded experience. Stackable digital finance capabilities in one location, namely. At AppTech, that means a couple of things:

  • Enable features that create value and support endless data transfers
  • Automate and optimize funding and balance management
  • Build scheduled or transactional “round up” savings plans
  • Dynamically handle multi-currency accounts linked to a single payment card
  • Provision cards for secure online spending and managing subscriptions

Looking forward, we agree with the prognosticators and believe in the data: BaaS may very well be transformational. Transformational for banking. For financial institutions up and down the pecking order. And for customers, most importantly.

After all, what other milestone in the evolution of digital banking has the power to expand access to financial services and create new low-cost lines of revenue?

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