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PERSPECTIVES

The future of BaaS—Part 2


It is no surprise that Banking-as-a-Service (BaaS) is going mainstream. It is one of the few innovative processes that provides significant growth and income to every part of its stack—the regulated bank, the fintech that provides the API overlay, and the end-user non-bank entity that is able to provide banking services to its customers. Despite the shock waves crashing through the fintech industry after SVB’s implosion, there is no doubt that partnerships between banks and non-banks to supply banking services will continue. The revenue potential is simply too great to ignore.

 

QUICK TAKES

  • 25% of bankers view Banking-as-a-Service (BaaS) technology solutions as a crucial opportunity to grow revenue. (pymnts.com)

  • 11% of banks provide BaaS services, while an additional 8% are in the process of implementing a BaaS strategy. (Cornerstone Advisors)

  • Banks that were early entrants in this space are reporting ROEs that are 2x or 3x above the market. (Andreessen Horowitz)

 

Banking-as-a-Service (BaaS) has emerged as a game-changer in the financial industry. It refers to a business model where banks and financial institutions offer their banking services and infrastructure to third-party providers, enabling them to build and distribute their own financial products and services.


This model allows fintech startups, retailers, and other non-bank players to enter the financial services space without the need for heavy investment in technology and infrastructure. Instead, they can leverage the existing infrastructure of banks and financial institutions and focus on building their own customer-facing applications.


The BaaS market is expected to grow at a CAGR of 15.6% from 2022 to 2028, reaching a market size of $51.2 billion by 2028. This growth is driven by several factors, including the increasing demand for digital banking services, the rise of fintech startups, and the need for cost-efficient solutions for financial institutions.


So, what does the future hold for Banking-as-a-Service? Here are some trends and predictions:


Increased collaboration between banks and fintech startups

As the BaaS market continues to grow, we can expect to see more collaboration between banks and fintech startups. Banks have the infrastructure and regulatory expertise, while fintech startups have the agility and innovation to create new and exciting products. By working together, they can create a more diverse range of products and services that cater to a broader range of customers.


Rise of embedded finance

Embedded finance refers to the integration of financial services into non-financial products and services. For example, a retailer may offer financing options to customers at the point of sale. This trend is expected to grow as more businesses look to offer financial services as part of their offerings. BaaS providers can play a significant role in enabling this trend by offering their infrastructure to non-financial companies.


Expansion of BaaS offerings

As the BaaS market grows, we can expect to see more players offering BaaS solutions. This expansion will lead to increased competition, which will benefit customers by driving innovation and reducing costs. We may also see more specialized BaaS providers catering to specific niches, such as small businesses or specific industries.


Greater emphasis on security and compliance

As more companies enter the financial services space, there will be a greater emphasis on security and compliance. BaaS providers will need to ensure that their infrastructure meets the highest standards of security and compliance to avoid any potential breaches or regulatory issues.


Growing importance of data

Data will play an increasingly important role in the BaaS market. BaaS providers will need to leverage data analytics to provide insights into customer behavior and preferences. They will also need to ensure that they are collecting and managing data in compliance with regulations and best practices.


While the benefits of BaaS seem obvious, implementing a strategy isn’t easy. Banks must consider fees, fraud management, account verification, and KYB/KYC requirements when selecting a third-party BaaS technology partner. Banks also must take on new functionalities, such as the use of application programming interfaces (APIs), payment gateways and a host of other technical capabilities that fall far outside their core competencies. On the other hand, the third-party needs to verify the bank’s stability and ability to meet the needs of non-bank financing, something that is not always evident, as we saw last week with SVB.


Given the complexities of implementing a BaaS strategy, it is no surprise that only 11% of banks currently have a BaaS strategy up and running. But also given the attraction of new revenues, there is no doubt that more will soon follow. BaaS is here to stay.

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