Financial services are undergoing a transformation as changing customer expectations and disruption from FinTechs force traditional banks to rethink their value propositions. Increasingly, financial institutions are exploring new avenues through which to provide value and thrive in an ever-shifting business environment.
One growing business model is banking as a service (BaaS) — a partnership in which financial institutions leverage their banking charter and enable non-banking institutions to offer financial services directly to their customers. The sector is growing rapidly: BaaS is expected to reach $7 trillion in value by 2030, according to Finastra's Banking as a Service: Outlook 2022 Study, and 85% of senior executives surveyed said they had either already implemented BaaS solutions or plan to do so in the next 12 to 18 months.
Embracing BaaS can help banks unlock new business opportunities and add value for end users and corporate customers. But turning this “trend” into a meaningful business venture requires focus and strategy. Read on to learn more about how BaaS is helping financial institutions meet customer needs, which industry leaders are doing it well, and why BaaS has the potential to transform financial services.
What is Banking as a Service?
At its core, BaaS is simple: it involves a non-bank organization partnering with a bank to offer financial services via the bank’s APIs. These partnerships allow both parties new opportunities to benefit from each others' strengths: as banks bring compliance and regulatory expertise — plus the ability to offer compliant financial products — to the table, while non-banks bring deep insight into which products and solutions would serve their customers best.
In practice, BaaS can encompass several financial services, explains John Epperson, managing principal of financial services at Crowe. BaaS allows Uber to process user payments, for example, and provides Apple the capability to offer financing to its shoppers.
Although BaaS is still relatively new, several organizations have emerged as innovators in this space. Amazon, for instance, offers Amazon Pay and Amazon Cash, while Ikea has announced plans to offer financial services to its customers through its partnership with Ikano Bank. Several financial institutions already focus on BaaS as an offering — Epperson points to GreenDot, The Bancorp, and Pathward (formerly MetaBank) as leaders in the field.
Meeting customer needs via BaaS
BaaS has grown in prominence due to several factors, from the advances in technology that have made embedded banking possible to the rise in FinTechs requiring support from chartered banks. But, ultimately, the rising demand for BaaS is driven by customers’ evolving preferences.
Today’s consumers increasingly crave integrated, multiproduct experiences — what McKinsey dubs “ecosystems” — to meet their needs. By integrating relevant financial services into a brand’s existing offerings, organizations can create the seamless experience today’s customers want.
BaaS also introduces new touchpoints along the customers’ journey, allowing financial institutions and non-bank organizations to play a more meaningful role in their customers’ lives. “There's an explosion of these non-bank providers who are trying to solve very specific problems for their customers,” explains Epperson. “Being able to build technology solutions and integrate them with banks can really provide a lot of value to the end user.”
Done well, BaaS can benefit financial institutions, too
Meeting customer needs helps banks stay relevant in an increasingly competitive field, and offering financial services via BaaS can generate new sources of revenue, as well.
“Banks have continued to see their net interest margins shrink, and many forms of non-interest income, like late fees and overdraft fees, have taken a hit, as well,” says Epperson. At the same time, incumbent banks, who once held a trust advantage over FinTech disruptors, have seen trust in the financial services industry erode over time, he explains. “There’s an increasing need to rethink and reimagine the business models of banking, and banking as a service is one of these new models,” he says.
Innovators in the field will look beyond their charters and APIs for novel ways to add value, Epperson says. “We’re seeing BaaS providers offer consulting, along with additional services to help non-banks operationalize compliance activities to ensure these organizations are complying with laws and regulations. They’re not only providing a link to the financial services system that can be leveraged as BaaS, but they’re thinking about what else they’re good at, and incorporating those strengths into their offerings.”
Like any new venture, though, expanding into BaaS comes with risk. Financial institutions should carefully consider their strategy to set themselves up to succeed.
Security should be top of mind, Epperson says. Providers should have plans in place to monitor consumer protection issues that come along with providing access to their banking system, as well as fraud, money laundering, and sanction screening. “Some of the banks who are now getting into BaaS may underestimate the level of infrastructure and oversight required, particularly on the risk and compliance side” he cautions. “Banks who do this well will have operationalized all the added levels of services needed to manage the risks associated with BaaS.”
Newcomers must also be aggressive and have a solid plan to scale in order to cover their upfront investment, he says. “If you're dabbling in BaaS with just one or two partners, you're likely not seeing the economies of scale that you need to be efficient and profitable in this space.”
Looking to the future with BaaS
The move toward BaaS is part of a larger reimagining of the role of banks in consumers’ lives. “The business of banking is transforming rapidly,” says Epperson. “Customers now expect accelerated innovation from their banks, and organizations looking within their four walls to solve customer problems are at risk of being left behind.”
Meeting the needs of tomorrow’s customers likely requires a multi-pronged approach, says Epperson, which may include expanding other digital-first offerings or specializing to serve niche industries, such as healthcare or automotive. But, for those who do it well, BaaS can help forge a path forward. “We'll continue to see an environment where banks are providing services and offerings that you might not have historically thought a bank would provide,” he says. “Banking as a service is one way to tap into that broadening ecosystem, and it’s a unique business model that seeks to leverage those banking capabilities in new and ingenious ways.”
