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The BaaS market has garnered a lot of attention in recent times. According to a fresh study, it is set to expand to $11.4 billion in the next seven years at a 16.9% CAGR.
Another report projects the sector to grow to $66 billion during the same period.
While the projections vary greatly, one thing is certain we can’t underestimate the potential of this breakthrough technology for the modern financial industry.
As a win-win solution for all involved participants banks, fintechs and consumers BaaS has the potential to become a crucial building block of a diverse financial system that facilitates financial inclusion across the globe.
Banking-as-a-Service takes center stage in transforming financial services
To put it simply, BaaS integrates the services of regulated banks with fintech providers to create better financial products for consumers.
In exchange for a fee, fintech firms connect to financial institutions’ infrastructure and core systems through APIs (application programming interfaces) to provide banking services to their customers.
For fintechs this offers access to financial services like payment card issuance and deposit management.
Whereas for banks, BaaS provides the perfect opportunity to embrace the ongoing digital revolution by not competing but instead collaborating with fintech firms.
In addition to the growth estimates we have reviewed earlier, 85% of 1,600 senior executives in banking, fintech, retail and other industries are already implementing BaaS solutions or planning to do so within the next 12-18 months.
This is a clear signal of a rapid adoption rate for the technology among both large enterprises ($1-10 billion) and SMBs.
Why is a partnership between banking and fintech necessary
The overarching goal of BaaS is to democratize access to financial services and promote innovation in the banking industry.
But there are a number of reasons why banks by themselves struggle to deliver on what BaaS promises.
The first aspect that needs to be highlighted here are the legacy systems and processes on which most banks operate.
These systems are often outdated and slow-moving, which makes it difficult for banks to adapt quickly to changing market conditions or customer needs.
In contrast, fintech companies have been built from the ground up with modern technology and agile development practices specifically targeted at enabling them to rapidly develop or alter their products and services in accordance to what their clients need.
Another factor is that fintechs tend to be more focused on specific niches or customer segments, whereas banking institutions traditionally cater to a broad range of customers with varying needs.
This can make it challenging for banks to create tailored solutions for every customer segment they serve.
That said, the need for collaboration is not entirely one-sided.
As long-established financial institutions, banks have a wealth of experience in areas such as risk management, compliance, security and regulatory expertise.
All of these are crucial aspects of providing financial services and are things that newer fintech companies can stand to benefit from.
By partnering with banks, fintechs can leverage their pre-established relationships, licenses and distribution networks to offer financial products and services at scale.
This collaboration allows fintechs to bring their products to market faster and reach a wider customer base without having to build their own banking infrastructure from scratch.
What benefits does BaaS bring to financial providers and consumers
BaaS (Banking-as-a-Service) allows banks to remain competitive and relevant in a market currently in the stage of a major digital transformation.
This is a huge benefit for them, as for the last several years neobanks have been continuously taking over the financial services market by offering a more user-friendly, cost-efficient and feature-rich experience for consumers.
But BaaS is not just about remaining relevant as a bank, as the service offers new revenue streams for financial institutions via recurring payments, set-up charges and revenue-sharing agreements.
As it stands, BaaS has the most advantages for consumers.
With the ability for non-banks be it a fintech provider, an e-Commerce store or an ISP to tap into the existing infrastructure of regulated institutions for a fee, financial services will become more accessible.
This is an important point to address, especially considering that around 17.5% of the world population still remains unbanked.
And by enabling mobile operators to offer banking services to their customers, more people will be able to access essential financial services, leading to increased customer satisfaction, as over 86% of the world’s population owns a smartphone.
Implementation challenges must be addressed, but long-term benefits outweigh them
BaaS has many potential benefits for every participant in the financial industry.
However, as with all new technologies, it also has its own challenges that still need to be solved by market players.
The most important challenge BaaS providers must address in the near future is the growing issue of potential security threats.
Cloud misconfigurations and insufficient API management can increase the chance of cyber attacks, such as data breaches and SSL exploits.
Market participants should also take social engineering into account, which can cost $130,000 on average for companies.
That said, despite the existing complications, I believe that BaaS is an avenue worth pursuing for both fintechs and traditional financial institutions.
And it is very likely that the adoption of this technology will further accelerate in the next few years, as more banks are starting to realize its true potential.
Petr Kozyakov is the co-founder and CEO of the global payments infrastructure platform Mercuryo. He is an accomplished entrepreneur and business leader with deep roots in the financial market. He has more than 20 years experience in establishing and developing projects in the payments and digital banking industry.
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