Technological progress is constantly transforming the financial industry, with finance software development making the process of cooperation between banks, fintech providers, and customers more smooth and comfortable.
One of the facets of this progress is the development of Banking-as-a-Service, of Baas solutions. In this article, we’re going to take a look at the BaaS model and the main trends it created within the fintech industry.
- 1 BaaS, or Banking-as-a-Service: what is it?
- 2 Top trends in BaaS and fintech
- 3 Conclusion
BaaS, or Banking-as-a-Service: what is it?
A good way to show the nature of BaaS is via an example. Let’s assume you’re an owner of a restaurant network. The market is harsh, you have to deal with a lot of competition, and you drastically need a way to enhance the loyalty of your clients. If you can issue a debit card for your clients to use, it would create an additional connection between them and your network. You can then introduce a system of awarding points to card owners each time they make a payment with your card.
This way you both create stronger bonds between your brand and clients and get a way to understand and analyze their spending habits. This understanding would create numerous possibilities to change your services to better suit your clients and increase your customer engagement.
As you’ve probably realized by now, BaaS is all about banks getting their services to merge with services and products provided by other enterprises, such as the restaurant network in the example above. It provides such enterprises with the possibility to provide a range of banking services without a banking license. The exact list of services may vary, but usually, it consists of managing mobile bank accounts, dealing with payments and loans, and issuing debit cards.
When using BaaS principles, special APIs are used to connect the bank’s processes and solutions used by the partner enterprise. The enterprise’s solution acts as an interface of sorts so that customers deal directly with the bank. This way the enterprise doesn’t operate with customers’ money at all and therefore requires no adhering to strict regulations.
The BaaS model boasts several advantages for all participating enterprises. Banks can expect decent increases in sources that generate revenue, a better understanding of their customers, and save costs for solution development, as banks usually connect to an already established solution.
Fintech industry players, for their part, enjoy access to a wide customer base. The BaaS system also allows them to bypass the troublesome stage of licensing, and still enjoy the banking capabilities.
So, what are the most important trends in the modern banking-as-a-service area? Let’s find out.
Top trends in BaaS and fintech
The environment of BaaS-powered applications and fintech solutions is continuously changing, but we can highlight six distinctive trends that make the biggest impact. Understanding them can immensely help in navigating the world of embedded finances.
Transparency is on the rise.
One of the most influential factors that shape the development of the BaaS fintech sphere is regulatory conditions. Principles of open banking create an environment of increased transparency, bringing the availability of information to the rising levels of customer expectations. This, in turn, creates new requests for software development with new and improved features.
Changing trust levels in financial services.
Recent research by McKinsey & Company has shown that the traditional advantage of the trust that banks had is not relevant anymore, and fintech enterprises are gaining more ground in that direction. Numerous global financial crises made the population distrustful of banks, and now other brands can gain much more loyalty due to this state of affairs. These brands can subsequently provide the loyalty of their customers to banks that cooperate with them.
Need for new models of profitability.
The prospects for profits of banks all over the world are a bit dim right now, with declines looking quite possible. Due to this, it is vital for companies that provide financial services to seek other sources of revenue. In this regard, scalable distribution and business models seem especially attractive to market participants.
Customer demand for integrated experiences.
It seems that bank clients request a better experience all the time. To stay competitive, financial institutions need to adapt to better provide the kind of services customers expect.
Right now, the most important trend in customer expectations seems to be that customers are drawn toward so-called ecosystems. They want multiple products and services under the same brand, that is why embedded financial services and the BaaS model completely fit this trend.
Technological progress driving adoption
The banking activity gets more and more digitized with each passing year. This progress covers the development of APIs and automation of most banking processes. The enterprises that seek to enrich the experience of their customers find it increasingly easier with modular solutions by Banking-as-a-Service providers. If someone wants to add a payment system, or deposit and check accounts to their services, all they need to do is to purchase access to a pre-created solution.
Increased demand from non-banking establishments
The more the financial world becomes interconnected with our digital activity, the more various non-banking organizations require access to providing payments and access to bank accounts. Of course, such organizations can create even a very complex system of financial services, but they could never become banking institutions completely, for it would require an immense amount of regulations to comply with.
Therefore, banking-as-a-service for now stays the only way to provide embedded financial services software to customers. It is easy to predict that the demand for them will only rise in the near future.
The interest that banks show towards the BaaS model keeps growing. Enterprises that want to stay relevant in the financial services sector don’t have any choice but to react accordingly, adopting BaaS platforms at increasing rates. Both clients and traders value the advantages of BaaS, and any bank must at least consider it as an option for development.