Banking-as-a-Service (BaaS) is becoming a predominant trend in banking

The rise of open banking and the adoption of APIs as standard have led to the emergence of a diverse financial ecosystem. Banks, neobanks, fintechs, payment disruptors, and e-commerce and technology giants are all looking to assert themselves in different parts of the banking value chain.

Banking-as-a-Service (BaaS) has become a predominant trend in banking, It provides complete banking processes – deposits, loans, payments – as a service from specialist cloud-based, API platforms that use a licensed bank’s secure and regulated infrastructure to deliver financial services at the point of customer need.

This trend came out of the payments industry, and we are now seeing accounts as well as lending introduced into embedded finance. Buy now, pay later (BNPL) offerings are an example of embedded consumer finance. Other examples of this in practice include micro or gig business owners, such as Deliveroo drivers or Uber drivers, having payments made instantly into their bank accounts. Small businesses also benefit from banking products embedded into their standard ERP systems such as QuickBooks.

Fintechs and challenger banks partner with incumbent banks. Challenger banks and fintechs were popular pre-Covid-19, pre-recession, and pre-inflation for offering superior customer experience and attracting customers. However, they are now being scrutinized on whether they are a safe place to deposit funds and lend responsibly. Many challengers are now finding it hard to attract funding and/or turn a profit. Incumbent banks are also under examination, but they have generally retained ownership of the current account and are now more digital and customer-oriented than before. To that end, it makes sense that fintech and challengers partner with incumbents.

ESG is coming to the fore within all segments of the financial services industry. Values-driven customers and regulators are driving banks to embed ESG throughout their entire value chain. Banks are offering ESG offerings, such as reducing the carbon footprint of a business, investing using ESG metrics, green financing, responsible lending, and sustainable business operations. Financial inclusion and wellness are also essential topics. For example, HSBC has introduced a no-fixed address bank account for the homeless, while Santander has an in-app charity marketplace and debit card for carers.

Digital transformation continues to act as a force for disruption. The technologies that banks are grappling with – AI, the cloud, and APIs – all act as a force for change within banks. Embedded finance is one answer. It offers the means to transform and extend the service offering and reach new segments without having the hassle of actually owning the customer. Cloud architecture is a good investment for a cleaner, more cost-effective, flexible, and secure business model that can scale.

The case for the public cloud is becoming more and more apparent. Post-pandemic, there have been record levels of cyber-attacks, so security is now front of mind. Hyper-scaled public clouds are the safest place to house data, and using a multi-cloud approach spreads the risk further. SaaS further enables a modular approach, which means it can be easily and continuously maintained and updated.

In conclusion, BaaS and embedded finance are promoting innovation and opening up new segments for banks and fintechs. Banks need to embed ESG throughout their entire value chain to address the values-driven customers and regulatory pressures. The use of cloud architecture and SaaS are essential for cost-effective, flexible, and secure business models.

Source: Fintechfutures

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