By Ion Fratiloiu, Head of Commercial, Yobota
The Financial Services (FS) industry continues to undergo rapid change. Recently, there has been an influx of new financial products into the market. As consumers are faced with more choice than ever before, the rise of Buy Now, Pay Later (BNPL) products provides a shining example of an ever more flexible financial landscape. With an estimated retail value of £9.6 billion, BNPL is the fastest-growing payment method in the UK. Crucially, it is representative of a wider race for embedded finance products and services, many of which are made possible by Banking-as-a-Service (BaaS).
Of course, the scope of BaaS by far exceeds what BNPL solutions can offer alone. Against an increasingly competitive backdrop, both FS and non-FS companies are looking at novel ways to incorporate financial products into their existing offerings, from traditional products like credit and debit cards, to innovative digital wallets and lending solutions. Such demand has been observed among industry experts, with a recent survey commissioned by Yobota uncovering that 64% have observed more unregulated businesses starting to offer financial products or services as a result of Banking-as-a-Service (BaaS) and embedded finance infrastructure.
Previously, most institutions bringing new financial products to market had the regulatory permissions or banking licenses necessary to do so, with the obvious exception of BNPL products like Klarna that largely operate without a full license. Part of the great innovation born from the BaaS model is that it allows both regulated banks and non-FS companies alike to launch financial products to market. The eventual reach of such products to the mass-market will mark a new frontier for the FS industry, where the possibilities for consumers are endless.
In simple terms, the BaaS model allows banking services to be delivered by non-FS businesses by utilising the technological capabilities of fintech services while using the existing banking license and regulatory permissions of a legacy or challenger banking institution. Meanwhile, legacy banks that already hold their own banking licenses can harness the core banking capabilities of BaaS providers to upgrade their offering and introduce new products, without overhauling their entire system architecture.
Vitally, the BaaS model works by utilising APIs (Application Programming interfaces), which can come in many shapes and sizes, to create and launch novel offerings on the existing banking licence. While some organisations may opt for a static, ready-to-go BaaS solution with little scope for customisation, others may seek modular BaaS solutions with the capabilities to develop unique and adaptable products. With this in mind, many BaaS providers make lofty claims about their capabilities, but firms would do well to remember that the key to true BaaS lies in the ‘B’. The best BaaS offerings on the market will grant clients access to the banking license and the balance sheet to ease the route to market.
For the businesses that select BaaS providers with a more flexible approach, they will be able to cherry-pick the technical elements and financial products and services they would like to offer by choosing from a unique array of APIs. The benefit of this is that these firms can avoid the need to seek individual partnerships with regulated banking institutions or invest in costly in-house expertise, rapidly advancing the launch schedule.
Currently, the future looks bright for BaaS – the same Yobota survey found that 72% of businesses have worked with technology vendors to launch new products or services in the past 12 months. An even larger number (79%) said that their business has experienced a greater demand for more personalised financial services.
BaaS means brand power for retailers
For many non-FS organisations, like retailers or eCommerce platforms, seeking to achieve greater market share and carve out a niche in the market, BaaS offers some promising opportunities with embedded finance. With the power of BaaS, and the banking license and infrastructure that comes along with it, businesses can launch unique financial solutions to market that boost their brand power. Beyond this, seamless integration of embedded finance functionality means that brands are less likely to lose their customers at the check-out than if they were to re-direct consumers to an unfamiliar, third-party payment provider. In this context, BaaS creates trust and a frictionless user experience (UX) – both of which are invaluable traits to stand out from the crowd in an oversaturated market.
Meanwhile, the development of new solutions from non-FS companies creates an urgent need for traditional banking institutions to keep pace with the competition and develop powerful solutions for their customers. Although such institutions are integral to the wider financial system, relatively slow innovation and rigid solutions can impact customer loyalty. As such, BaaS provides an important modernising opportunity for legacy banks – adopting a more product-led approach, similar to that of their competitors in the fintech market and creating a better experience for their loyal customers.
Who benefits from BaaS?
With the power of BaaS, the number of financial products and services available on the market is set to boom, exposing the FS industry to heightened levels of competition. With the emergence of new non-FS businesses as players, legacy banks must prove their worth in the digital age by creating more flexible and streamlined services for their customers. Non-FS businesses offering flexible services are likely to be welcomed by both businesses and consumers, but UX, as well as first-class regulatory and compliance standards, must be at the heart of their models if they wish to achieve long-term customer loyalty. Integral to this will be understanding the spending and shopping behaviours of their consumers.
Overall, BaaS will provide huge revenue-building opportunity for both FS and third-party businesses, fostering an innovation culture in the process. However, it is indeed consumers who stand to benefit most of all. With more financial services on offer, people will be able to select the brands and banks whose offer best caters to their needs, benefiting from lower costs and an improved UX as added bonuses.
As the BaaS revolution continues to expand into the mass market, I look forward to seeing further innovation in the next wave of financial products.
From launching his financial career at Deutsche Bank, Ion spent a number of years consulting in the equity capital markets space and leading sales growth for FTSE500 company Fiserv and core banking provider Thought Machine. He joined Yobota in 2021 to launch its commercial operation, leading GTM strategy and building a diverse and multi-faceted team to take the company to the next stage of growth.
Global Banking & Finance Review
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