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 become readily adopted by mobile providers, fintech firms and banks. Smartphones — 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 mobile operators around the world offer the ability to make payments via phones but they don’t offer access to banking. Nearly 1.2 billion people worldwide want access to savings accounts and insurance, for example, both of which BaaS can enable.
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 for frictionless transactions. 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 banking provider, the technology company with a banking license, the charter or fintech, and the end consumer.
BaaS benefits far outweigh short-term challenges
The business of banking is moving out of the exclusive realm of banks and into a comprehensive ecosystem to bring personalized, customer-centric offerings to market faster. BaaS can enable banks to reach more customers, bring up their economies of scale and drive down costs. Accessing the data captured via BaaS leads to more personalized services and better customer relationship management and retention.
As BaaS becomes more mainstream, 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. Fintechs 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.
In addition, banking services offered through APIs increase 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. Banks can align their business models and reduce risks by partnering with an experienced fintech that offers a secure digital layer that integrates seamlessly with multiple systems and offers end-to-end connection of business data.
BaaS is developing globally
BaaS is in its infancy, but adoption is growing. In the U.S. — where it is more challenging to receive a banking license than it is in Europe — BaaS providers are emerging.
Meanwhile, in Indonesia, an enterprise software supplier that provides software for managing gyms must also allow the management of memberships, heavy machinery or equipment, and payment processing. The gym chain, along with a licensed bank, becomes a BaaS provider — another example of BaaS being employed by commercial enterprises.
Customer expectations have changed: they want contextual, hyper-personalized, integrated banking experiences and on-demand access to banking. 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 the president of SunTec Business Solutions where he leads sales, business development, client engagement, alliances and industry solutions.