What Is the Outlook for BaaS in 2023?

By Nikhil Sengupta, Global Sales Director at Vodeno

Banking-as-a-Service (BaaS) has empowered companies to embed financial products and services into their ecosystems – in turn, this has also enabled them to improve their customer experience and grow their business.

According to a recent McKinsey report, the Total Addressable Market (TAM) of Banking-as-a-Service (BaaS) providers in the European Economic Area and the UK is estimated to reach between $90 billion and $105 billion by 2030, with mainstream BaaS adoption predicted to come within the next two years.

Here are five key trends set to dominate the BaaS market in 2023.

1. True embedded finance will be seamless to customer journeys

In 2023, BaaS-enabled solutions that improve the customer journey will be transformative, with the right banking products offered to consumers at the point of need.

Vodeno’s own survey of over 1,000 European businesses has revealed that almost a quarter (24%) of decision-makers want their BaaS partner to show a greater understanding of their customer journey.

The ability to achieve true embedded finance will require BaaS providers to fully understand specific customer needs and challenges across various sectors – minimising friction and creating an experience that drives conversion and repeat visits will be the North Star for brands, and this means offering the right mix of banking products at the right time.

2. Fast implementation will be a priority

According to 35% of embedded finance adopters surveyed by Vodeno, rapid implementation and a swift time to market are priorities in the BaaS journey, suggesting that speedy implementation will be another key trend in 2023. Fully API-based BaaS technology already has cut speed-to-market from years to months – now, it is the providers that can offer a comprehensive solution via a single integration that will be most attractive to brands.

3. The cost-of-living crisis will spur BaaS adoption

Just as the pandemic was a catalyst for the acceleration of online retail and eCommerce, the cost-of-living crisis is likely to boost the uptake of embedded finance among businesses – 56% of those surveyed predicted that the cost-of-living crisis would drive increased BaaS adoption. Brands will be under pressure to provide true value for customers, such as flexible credit products and payment solutions, while looking to implement business strategies that are cost-effective. BaaS providers with API-based technology and access to the necessary licence to offer compliance-in-a-box will be sought after by companies who want to quickly launch solutions, but minimise costs.

4. Platform banking will reach new heights

Another area that is likely to see considerable change in the near future is how consumers bank. While there will always be a need for legacy banks and traditional banking, BaaS is democratising access to better banking products through the brands people use everyday.

As more and more companies offer financial services powered by BaaS, the predicted shift is that consumers will rely less and less on traditional branch-based banking, turning instead to financial products embedded within their favourite consumer brands.

59% of the businesses surveyed expect that the lines between eCommerce platforms and traditional banking services will blur in 2023 as a direct result of BaaS adoption, with a further 60% of respondents predicting a further decline in branch-based banking.

5. BaaS providers with a bank licence will be in demand

58% of respondents said that BaaS providers who offer a licence alongside their tech solutions would be the ones to shape the BaaS market in years to come, while 28% said their BaaS partner having access to a banking licence was a priority and 27% cited compliance and security concerns as a key barrier to adoption. Without access to the right banking licence, BaaS providers may not be able to deliver a full scope of products, including lending and accounts across multiple countries. For instance, access to an Electronic Money Institution (EMI) licence enables a relatively narrow range of payments-focused products, while the European Central Bank (ECB) licence enables providers to deliver a far more comprehensive range of solutions.

What 2023 holds for BaaS

Embedded Finance is set to make its mark in 2023 and will help brands innovate their customer journey while offering quality banking products via their platforms. Ultimately, brands powered by BaaS are destined to define how we shop and bank in the future.