How Banking-as-a-Service is shaking up the fintech ecosystem
Today, consumers are faced with more choice than ever when it comes to their financial affairs. From contemporary offerings like Buy Now, Pay Later (BNPL) and embedded finance platforms, to more traditional products like credit and debit cards, institutions and retailers alike are being called upon to deliver more seamless, quick and flexible solutions to their customers.
Crucially, businesses launching new financial products often require the complex underlying infrastructure of a bank to bring their offerings to market -- this is, of course, with the obvious exception of certain BNPL products like Klarna, which can operate without full regulation. Likewise, incumbent banks themselves, who already have the full regulatory permissions required to operate, may need to adopt core banking platforms to modernize their legacy systems in order to develop truly competitive offerings to meet the needs of their customers. This is where Banking-as-a-Service (BaaS) and Platform-as-a-Service come in to disrupt the fintech landscape.
Explaining the BaaS proposition
The growth of Platform-as-a-Service (PaaS) is enabling pre-existing financial institutions with the opportunity to upgrade their core platforms and apps, without the need to completely overhaul their entire system architecture. Meanwhile, non-financial retailers and merchants can also get in on the action with Banking-as-a-Service, as BaaS equips these firms with the technical tools and regulatory infrastructure required to bring their own financial products to market.
Beyond the scope of nimble fintechs, the PaaS model services legacy banks, allowing incumbents to harness the core-banking functionalities of next gen core banking platforms to layer new technologies on top of their pre-existing systems. Where BaaS is concerned, this term describes a business model in which technology firms provide access to modular banking services, typically via Application Programming Interfaces (APIs). Meanwhile, legacy and challenger banking institutions offer the balance sheet and regulatory permissions required to support the development of practically any financial product.
The end-result is that all institutions, no matter their industry, are able to bring more competitive financial products to market. Better still, some may even choose to white label these products to 'de-risk' their main brand, creating new revenue streams for businesses that decide to sell their solutions to other players in the market.
The BaaS market so far
Particularly for smaller firms, a key advantage of BaaS is that it radically eases the route to market, making it easier than ever for businesses that might otherwise struggle to fund their ideas for bespoke financial offerings. Vitally, true BaaS propositions allow companies to run on their balance sheet and develop products without needing to jump through certain regulatory hoops, or the hassle of applying for their own banking license. With this in mind, perhaps the most exciting development attached to BaaS is its ability to democratize the financial services (FS) industry.
To date, BNPL and payments solutions have played a starring role in the retail sector, but BaaS capabilities stretch far beyond what current BNPL products can offer. Organizations can take advantage of a vast array of options and APIs when devising their own product, and better still, they can do so without costly in-house expertise. This is another essential factor, which significantly reduces the price of entry into the marketplace, making it much easier for new players to enter the industry with niche solutions.
Right now, demand for such offerings is booming. According to a recent survey from Yobota, 72 percent of businesses said they have worked with technology vendors to launch new products or services in the past 12 months. An even greater number (79 percent) said that their business has experienced a greater demand for more personalized financial services.
Who benefits from BaaS?
Clearly, the banking industry is ripe for further innovation. With more firms throwing their hat into the financial services ring and harnessing the power of BaaS, there are a number of beneficiaries involved.
As I have already noted, for sectors like eCommerce and travel that face tough competition, businesses can reap the advantages of BaaS when it comes to finding a niche in the market, stamping out their competitors and building revenue. In this environment, the ability to understand customers’ spending behavior and patterns is crucial, and as such, the delivery of tailored offerings that resonate with clientele offers a win-win to retailers.
Moreover, as the BaaS model increasingly moves towards embedded finance, companies without a banking license can boost their name-power with branded financial offerings. This ensures that their product -- be it a branded BNPL platform or a digital wallet -- is targeted specifically at their customers and deeply enmeshed within their organization's ecosystem. From here, merchants are less likely to lose their customers at the check-out, as is often the case when consumers are re-directed to third-party providers. Here, consumers benefit from a frictionless online experience and the reassurance of banking with a familiar brand name.
Similarly, the implications are huge for legacy banks. With a flurry of new providers entering the industry, the rise of BaaS will mean greater competition -- and this is not necessarily a negative thing. Quite the contrary, the emergence of BaaS provides established institutions with the impetus needed to adapt their traditional stack to incorporate the changing needs of their consumers by putting the core-banking functionalities of PaaS to good use, particularly within a digital context. Generally speaking, a competitive market means good news for consumer choice, where the mantra ‘the more, the merrier’ rings true. The more options there are to choose from, the more consumers stand to gain from lower costs, an improved customer journey, and greater overall financial empowerment from the brands they trust the most.
Ultimately, the arrival of Banking-as-a-Service demonstrates that the possibilities are endless in the fintech ecosystem. This isn’t necessarily a case of 'out with the old and in with the new', and I look forward to seeing how consumers and brands can benefit from the bold new partnerships that emerge from these new banking trends.
Ion Fratiloiu is Head of Commercial, Yobota. From launching his financial career at Deutsche Bank, Ion spent a number of years consulting in the equity capital markets space and leading sales growth for FTSE500 company Fiserv and core banking provider Thought Machine. He joined Yobota in 2021 to launch its commercial operation, leading GTM strategy and building a diverse and multi-faceted team to take the company to the next stage of growth.