Banking as a Service (BaaS): The missing fuel to supercharge growth  

To the uninitiated eye, traditional financial institutions such as banks appear to be locked in a perpetual state of tension with the fintech revolution. If we asked the average man on the street what is the latest trend in financial services, things like super apps and virtual banks immediately come to mind, with traditional banks often existing as a mere afterthought.  This comes as no surprise, as the Asia-Pacific (Apac) region has often been a leader when it comes to pioneering new and innovative financial services models. 

However, a new technological revolution is currently underway in the digital financial services ecosystem – one that bears the significant ability to redefine the way we consume goods and services where super apps are more than just a ride hailing or payment service.  Enter Banking as a Service (BaaS): a scenario where core financial services such as loans and insurance are readily available through multiple B2B/B2C touchpoints, sparing customers and businesses the hassle of having to go directly to banks. 

With 9 in 10 senior executives surveyed saying their organisation is already implementing it or planning to in Apac according to our latest report, it is clear that BaaS will open the next frontier for banking by creating new business models and revenue streams not just for banks, but also develop a whole value chain for fintechs, and consumer-centric businesses as well. So, what can we expect to see from BaaS?

Keeping pace with change

The arrival of BaaS has come at a good time for incumbent banks, whose very business model is under threat from digital challengers. A lot has changed in financial services since the advent of digital banking, and Bill Gates’ conceptual statement in 1994 that “banking is necessary, banks are not” has now become a fact. This can be seen in the steady movement of value away from incumbent banks towards digital challengers in the form of digital banks, fintechs, bigtechs and startups, whose numbers proliferate rapidly. 

These challengers often tend to focus on one or two core services and differentiate on price and customer experience, which is luring customers away from the big banks. The incumbents still benefit from trust built over many decades, but a relationship predicated on trust alone will come under pressure gradually as customers become more familiar with digital apps that are often slick, reliable and increasingly sticky.

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Apart from losing market share, incumbents are battling non-bank digital entrants forcing prices down in several areas, net loan margins being squeezed by persistently lower interest rates and competition, and loss provisions shooting up due to the pandemic. This is on top of their high costs from dealing with increasing regulation, expensive legacy IT infrastructure, and investment in vital (and often overdue) digital transformation.

New channels for growth

In the face of all these challenges, incumbent banks need a new channel for growth. By providing the potential for innovative new business models and collaboration between banks, tech companies and customer-facing companies such as retailers, BaaS can be the catalyst for growth by ensuring that banks remain both prominent and relevant in the never-ending race to develop the next generation of financial services. 

From a retail perspective, services such as buy-now-pay-later (BNPL) can be easily embedded into an e-commerce platform, where a fintech or big tech has provided the technology to integrate the underlying financial product –provided by a licensed financial institution – into the retailer’s website or app. According to an industry report, 34 per cent of Apac consumers say they would abandon a purchase if it takes more than two minutes to check out, and this is often attributed to factors such as the platform not supporting their preferred payment methods. When we consider that the BNPL market in APAC is expected to be the fastest growing region between 2020 to 2027, BaaS can help create that “stickiness” which in turn reduces online basket abandonment rates and increases volume of sales. 

From a corporate perspective, BaaS can greatly help in embedding financial solutions into existing platforms customers such as SMEs use. For example, we recently collaborated with Microsoft to enable SMEs using Microsoft Dynamics 365 to access and unlock vital financing offers without leaving their business management platform. The introduction of new lending options by embedding a finance solution on a key cloud-based platform for business will provide a much needed, more convenient path to the capital SMEs need to thrive.

This is where BaaS can provide a major boost for incumbent banks, as they no longer need customers to come to them. Instead, BaaS embeds financial services directly into the customer journey, whether that’s in online retail or services for SMEs, giving banks access to an entirely new market of customers whilst lowering the acquisition cost per customer significantly. Apart from boosting squeezed margins, this new model enables banks to leverage the technology and innovation of fintechs and distributors such as retailers, allowing those that have fallen behind in the digital transformation race to catch up without major investment.

Revving up the BaaS engine in Apac for banks

Our survey made it clear that players right across the value chain are bullish on BaaS. Around 80 per cent of financial services providers told us they expect the BaaS market to grow by more than 50 per cent in the next 5 years and we expect the global market to be worth US$7 trillion by 2030.

As a region, Apac stands to benefit the most from adopting BaaS. First, given that 5 out of the top 10 countries with the highest smartphone penetration rate are located in Asia, the foundations for a mobile-first approach are already established. These are conditions which are conducive for the growth of API-based banking, providing a higher quality mobile experience to a wider spectrum of customers, both unbanked and banked alike. 

Second, BaaS can help create multiple touch points for APAC’s conglomerates with their customers. The likes of Indonesia’s Lippo Group and Malaysia’s Sunway Group – these are businesses with vast portfolios ranging from retail to financial services. If they are to value add and integrate it with their existing set of digital services, BaaS can play the crucial role of creating their own unique digital ecosystem. 

If banks are to take advantage of these fertile conditions and sow the seeds of success, a few things come to mind. Banks must understand and decide what use cases will deliver the most value in the role and segment they operate in, and be clear on the monetisation models for their selected use cases and what capabilities are required. Then, banks need to consider how they will take their BaaS products to market and select partners with the right capabilities, as this will accelerate their journey to market and new customers.

Why BaaS is the future of banking

BaaS makes it simple, fast and cost effective to integrate regulated products into the customer journey. Eventually, the lines between retail brands, financial institutions and technology providers will blur. But whilst APAC’s early adopters are setting the pace for success, BaaS is still an emerging trend and banks will need to overcome myriad challenges before its potential can be realised. Ignoring the opportunity will prove costly, but taking action now will help banks to access the right technology and innovation, as well as secure faster access to new customers. BaaS will fundamentally change the way financial services are sold and consumed in the future and it’s not too late for anybody to catch up and capitalise on this quickly growing market. 

The writer is regional head (APAC), Banking as a Service, at Finastra.