Following the global industry digitization trend, banks and financial institutions are also striving to adopt new digital technologies. One of the recent innovations is to develop BaaS (Banking-as-a-service) platforms that allow banks and financial organizations to make their closed-for-long legacy systems more accessible and transparent. This helps banks improve their customer services, swiftly putting the needed data right in their clients’ hands, as well as creating successful collaborations with diverse FinTech companies.
BaaS systems combined with financial software development solutions eliminate for customers the necessity to visit brick-and-mortar facilities to perform the most common financial operations. In 2020 the BaaS platforms faced significant growth in popularity due to the COVID-19 outbreak and more and more FinTech industries and banks started investing in the technology. Allied Market Research states that the global banking-as-a-service market size was estimated at $2.41bn in 2020 and it’s expected to reach $11.34bn by 2030, growing at a CAGR of 17.1% between 2021 and 2030.
Here’s the current state of BaaS and what to expect from this technology in the future.
What Is Banking-As-A-Service?
In short, banking-as-a-service is a type of service when banks and financial institutions allow third parties to connect to their ecosystem and use their services. Third-party providers (TPP) usually are FinTech companies, digital banks, or non-banking organizations like e-commerce businesses, loan and credit facilities, insurance firms, and others. To provide their services successfully, e.g. formalization of the loan or checkout, third parties need access to some banking data and services which they can obtain through BaaS also known as an online digital banking platform.
Many TPPs companies actively incorporate BaaS in their digital solutions. Meanwhile, more and more banks and financial institutions show interest in building their own BaaS platforms. Here are the reasons why:
banks and financial institutions can attract a greater number of customers at much lower costs by offering their financial products through TPP platforms; moreover, they can earn additional profit as they charge fees from third parties for providing access to their services;
TPP and FinTech companies can increase customer acquisition and retention as with BaaS they provide a smooth customer experience on their platforms;
customers – receive outstanding services and customer experience as they don’t have to visit physical banking facilities to make a purchase; moreover, they get more convenient payment options when buying goods online.
How Does Banking-As-A-Service Work?
BaaS access starts when a FinTech company, a non-banking organization, or any other TPP pays a fee for using BaaS services. As the bank or financial institution receives the payment, they provide TPP with their APIs in return. APIs are used for smooth access to a bank’s ecosystem and retrieving the necessary data from it.
Banks provide their services in the form of white-label banking. It means that TPP organizations can develop their own service offerings which will have the BaaS functionality in their core connected through API. By incorporating BaaS services into their customer touchpoints TPP can swiftly provide all the banking services on their platforms, improving their customer service, meanwhile generating for banks additional revenues.
Banking-As-A-Service Industry Outlook
The COVID-19 pandemic has significantly influenced the changes in the banking sphere. Social distancing norms, massive lockdowns, rapid shifts to remote work have triggered the adoption of digital solutions in banking as well as BaaS platforms around the world.
According to Statista, the use of online and mobile banking in the Asian market is expected to steadily grow between 2020 and 2024. China already reached the number of 800 mln online banking users in 2020 and is projected to reach almost 1bn by 2024. In France, the online bank Boursorama Banque reached 2.5mln users in 2021. In Mexico, there were over 2,200 financial entities that used open bank APIs in 2021. The US is only doing the first steps in introducing BaaS, though the demand for mobile-first fintech services is rather strong.
Meanwhile, the European open banking market continues to be the largest in the world. It had approximately 12.2mln people in 2020 and the figure is projected to reach 63.8mln users by 2024. The European part of the world started widely implementing BaaS platforms in 2018 after adopting the Payment Services Directive Two (PSD2). The directive aims at forcing payment service providers to strengthen customer authentication and regulating the involvement of TTP in the payment process. This resulted in the massive development of FinTech startups in Europe that began competing with conventional banking and financial systems.
According to an Allied Market Research survey, banks and financial organizations are expected to show more interest in BaaS systems in the post-pandemic times. The main factors mentioned that will promote BaaS across financial sectors are:
further expansion of digitization in banking and finance – banks are experiencing an increasing need in providing enhanced services to their buyers, making it impossible to return back to old models; more and more banks and financial organizations embed the technology in their workflow to stay competitive in the market; as a result, digital technologies deeply penetrate in the banking and finance sphere, turning into a core technology for performing financial and customer service operations;
the need to streamline financial services – with BaaS access, TTP companies can offer their buyers customer-embedded financial services when customers access banking services through TTP’s technology platforms; this makes bank operations much smoother, more customized, and simpler to use for TTP and customers.
Banking-as-a-service is becoming more common in the financial sphere. There are more and more banks and FinTech companies interested in developing and using BaaS technology. It helps non-financial organizations to provide their customers with smooth payment options, ensuring an outstanding customer experience. Meanwhile, banks and financial organizations can gain extra profit from offering their BaaS to third parties as well as attracting more clients by selling their financial products.
BaaS technology became especially popular during the pandemic outbreak. Though, experts predict that its market will grow even bigger in the post-pandemic times. This growth is caused by increasing demand for utilizing digital technologies in the banking and financial sphere and the necessity to streamline financial services. Therefore, those companies that operate in finance and banking should consider the creation of their own BaaS platforms to stay afloat in the market. Whereas non-financial businesses that sell their products online should think of incorporating the BaaS payment option in their digital solutions.