Traditional banking, as we know it, has seen a massive transformation with the rise in digital services. Moreover, with the Covid-19 pandemic entering the picture, the revolution has been colossal. New FinTech firms are entering the market and customer preferences are changing dramatically over the past years. As a result, banks have to adapt to new ways to serve their customers.

Over the years, banks have spent a lot of resources in building up their infrastructure and regulatory systems. However, traditional banks are losing out to digital competitors like Fintech and Neo banks. These new tech innovators are disrupting the market. Most importantly, they are making bank transactions as easy as clicking a few buttons from a smart device.

Therefore, if banks want to deliver exceptional customer service, they need to think of ways to collaborate with these new entrants and create a new marketplace. Moreover, they need to participate in the biggest trend in banking called Banking-as-a-Service (BaaS).

What is Banking As A Service (BaaS)?

Banking-as-a-Service is an end-to-end process that allows Fintech and other non-financial third parties to connect with bank systems. It also facilitates banking options like accessing loans, insurance, cards, payments, etc. 

The efficient integration of financial products and services into non-financial digital channels enables BaaS. However, non-financial platforms like Fintech are allowed to access the banking infrastructure via APIs. These APIs and the data banks provide access to can be utilized by Fintech and other third-party digital platforms to offer innovative financial solutions for their customers.

Some of the Indian banks that have adopted BaaS are:

  • Partnership between State Bank of India with Uber to offer vehicle finance to drivers.
  • Collaboration between RBL Bank and Razorpay for digital merchant onboarding and payment solutions
  • Partnerships of Snapdeal and Freecharge with Yes Bank to enable instant refunds

As big an opportunity as Banking as a service (BaaS) presents, it can be a threat to banks if they don’t act fast to this inevitable change.

Therefore, by identifying the products and services they can open up for partnerships with non-financial businesses. Incumbent banks need to structure their budgets and sales targets accordingly. If banks act fast, they can take advantage of this growing business to increase their revenues and remain competitive.

The Opportunity

Here are some of the benefits of adopting BaaS that makes it one of the biggest waves in banking:

banking as a service fintech

1. Low Cost To Acquire Customers

According to Oliver Wyman’s analysis, the cost of acquiring a customer for a bank ranges from $100 to $200. With a BaaS technology stack, this cost can range between $5 and $35. More importantly, this presents an opportunity to save up to 95 percent of the cost of acquiring customers. BaaS can therefore enable banks and their non-financial partners to increase their revenues at a fraction of their current costs and also they can capitalize on cross-selling opportunities!

2. Higher Customer Trust

The 2008 financial crisis led to a loss of customer trust from traditional financial institutions. In contrast, customers, especially the younger generation, have much higher trust for tech companies. The reason behind this is that they offer convenience and real-time benefits. With Fintech making big inroads into the marketplace, banks can win back the trust of their customers and leverage from BaaS partnerships.

3. Access To Innovative Technology

Incumbent banks may struggle with low performance as they need to deepen their understanding of technology. Meanwhile, by leveraging BaaS, they can take advantage of the innovative technology created by new non-financial tech players. So, instead of investing billions of dollars to digitize their existing business models, banks can leverage BaaS technology and embed their products onto other platforms.

Moving Ahead With Banking As A Service (BaaS)

The Banking-as-a-Service (BaaS) market was valued at USD 356.26 Billion in 2020 and is expected to reach USD 2,299.26 Billion by 2028, increasing at a CAGR of 26.33 percent between 2021 and 2028. Banks will presumably enable more transactions, handle more loans, and manage more payments. All this is a result of the upcoming developments through BaaS.

Regulated banking partners will remain crucial for securing loans and settling transactions. What will change is the way banks face their customers, as more and more collaborations with non-financial companies take place. The disruption by Fintech and other digital-native companies has already begun. Therefore, banks that start forming strategic partnerships with embedded finance service providers can start to reap benefits as this wave gets bigger and better.

SaaS firms that include FinTech features such as payments, cards, lending, benefits, and payroll stand a chance to increase their revenue per customer by 5 times or more. These new providers need banks to provide the security and compliance that can be passed on to the customers. For example, Zimyo, a SaaS-based HR Tech platform, has forayed into embedded finance and partnered with PNB MetLife to offer insurance directly to employees.

In conclusion, as BaaS expands, there is a tremendous opportunity for regional and mid-size banks to force profitable partnerships with non-financial players. With a scalable and agile business like BaaS, new revenue opportunities can be generated. Above all, the financial data can also be used to get a much deeper understanding of consumer behavior.

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