The digital age continues to catalyse democratisation in the financial services (FS) industry, writes Ion Fratiloiu, Head of Commercial at Yobota. As a result, the fintech landscape, having only recently been sown, looks set to bloom.
With access to new technologies and capabilities, there has been an influx of financial products and services offered by non-FS companies in recent years. According to a recent survey commissioned by Yobota, which surveyed 251 industry leaders in the banking and financial services space, 64% had observed more unregulated businesses starting to offer financial products or services as a result of Banking-as-a-Service (BaaS) and embedded finance infrastructure.
This recent surge in BaaS offerings is, in part, being driven by a demand for embedded finance. Both incumbent banks and non-financial companies alike are increasingly looking for fresh solutions that integrate financial products seamlessly into their pre-existing applications and services. In the past, such products were solely the reserve of banking and fintech institutions that have the regulatory permissions and banking licenses required to operate.
The opening of such services into the mass market is already changing this. Indeed, the FS industry will be subject to a new level of competition as the number of eCommerce platforms and retailers entering the space grows.
Already, demand is strong for Buy Now, Pay Later (BNPL) products, which are worth £9.6 billion annually to retailers and are now the fastest-growing payment method in the UK. Crucially, it is not the only novel product enabled by the BaaS model, which raises some important questions about its current use-cases, and how BaaS functionality will power the next phase of financial innovation.
How does BaaS work?
BaaS is a model that allows banking services to be delivered by non-FS businesses, utilising the technological capabilities of fintech services and the existing banking licence and regulatory permissions of legacy or challenger banking institutions. Although many providers make big claims about their capabilities, the key to true BaaS lies in the ‘B’ – true BaaS offerings will grant clients access to the banking license and the balance sheet to ease the route to market.
The key technologies at play here are APIs (Application Programming Interfaces) – developed and provided by fintechs/core banking providers. While some organisations may opt for a static BaaS offering that comes straight out of the box, so to speak, others may look to modular BaaS solutions that offer the capabilities needed to develop niche products that they can adapt as customer needs change.
Crucially, the latter approach enables clients to choose the financial products and services they would like to build from an array of APIs to provide a tailored experience, ensuring that the package blends seamlessly into their existing ecosystem. Moreover, companies can assemble their tech stack without needing to invest in their costly infrastructure or by navigating their own partnerships with banking institutions, which lowers the time to market significantly.
As things stand, the demand for such offerings is clear. In the same Yobota survey, 72% of the businesses surveyed said they have worked with technology vendors to launch new products or services in the past 12 months. An even greater number (79%) said that their business has experienced a greater demand for more personalised financial services.
How did we get here? The rise of BaaS
Although incumbent banks are crucial to the banking ecosystem, the truth is that working with them today can be far from optimal, particularly from a consumer perspective. Compared to their nimbler, and more product-led fintech counterparts, traditional banks are slower to innovate and lack the flexibility that modern customers demand.
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As such, there is an urgent need for traditional institutions to develop new and more powerful solutions to hold onto their customers. This is where BaaS comes in, allowing legacy banks to layer new technologies on top of their pre-existing systems in order to bring contemporary products to market and keep pace with their competition.
Elsewhere, many non-FS businesses such as retailers, eCommerce sites, and travel agencies have already recognised the potential of embedded finance to achieve greater market share and brand identity. However, without BaaS, they lack the banking license and infrastructure to create bespoke products and services tailored to their clientele. At a minimum, businesses require bank accounts to hold customer funds, as well as the infrastructure required for payments, settlements and clearing, to deliver financial services to their clients.
With these structures in place, businesses can bring even their most niche ideas to life. Moreover, some may even choose to white label their products to ‘de-risk’ their main brand and sell their solutions to other players in the market as an added revenue-builder.
What’s next?
Powered by BaaS, the continued proliferation of banking and FS products into new markets will propel the FS industry to new levels of competition. As non-financial businesses begin to enter the fold, legacy banks will be forced to level up, creating more flexibility and choice for consumers than ever before. Likewise, non-financial institutions must become consumers’ banks – but better, if they are to achieve solid customer retention. Understanding the specific spending and shopping patterns of their customers will be essential to developing the most innovative solutions.
Above all, the BaaS age will benefit the end-user. As the number of financial services on offer booms, consumers will be able to purchase from the brands and banks whose offer best aligns with their personal preferences. As brands compete for customer loyalty, these developments will ultimately result in lower costs and an enhanced user experience (UX) for consumers, while BaaS will also provide greater revenues and an innovation culture in both FS and third-party businesses.
Ultimately, the possibilities unlocked by BaaS have endless potential. As the BaaS proposition continues to achieve mass-market appeal, I look forward to seeing the development of more powerful and specialised financial solutions available to all.
