Banking as a Service in 2022: Scaling Possibilities for Digital Financial Solutions

Digitalization is democratizing data across industries, allowing for wider transparency and enhanced customer experiences. Innovative digital financial solutions are allowing emerging businesses and third parties access to legacy systems, and in several instances, placing data straight in the hands of customers. Banking as a Service (BaaS) platforms have now emerged as the fundamental aspect of?open banking ?in financial ecosystems, where corporations provide additional financial transparency alternatives for bank customers by opening their?Application Programming Interfaces (APIs) ?to third-parties for the development of innovative solutions.

From 2021 to 2028, the BaaS market is expected to increase at a CAGR of 26.33%, from USD 356.26 billion in 2020 to?USD 2,299.26 billion ?in 2028. Many countries have already started to implement open banking regulations, signaling that the financial industry is headed to a period in which sharing data and infrastructure will be mainstream. Legacy banks developing their respective BaaS systems presently will not only be at the forefront of open banking but will also be able to generate excess funds by leveraging their systems.

Fintech companies and digital banks are advancing established financial institutions and disrupting conventional business models, but tech-savvy traditional banks may convert this growing challenge into an opportunity by getting into the BaaS industry.

BaaS and The Pandemic Effect

BaaS is a progressive way for banks to augment their core services. It provides a more convenient and cost-effective way of introducing innovative services to consumers and expanding footprints into new markets. The COVID-19 pandemic was a defining moment for progressive change because financial institutions that invested monetarily and intentionally in the digital financial solutions previously were better prepared to capitalize on BaaS and manage the market crisis.

People have increasingly utilized e-commerce platform solutions amid the pandemic crisis, contributing to the growth of digital financial solutions. Financial institutions will have to demonstrate a strong enthusiasm towards adopting banking as a service model to improve business processes and deliver secured digital banking services amid pandemic challenges. This way social distancing and remote working will allow banks to acquire a massive customer base through?mobile banking services . However, the pandemic crisis has coincided at a time when the industry is undergoing significant change where innovative digital financial solutions are disrupting established banking systems. Though it would have been challenging for non-finance businesses to deliver many of the digital financial solutions provided by banks previously, the rise of Banking as a Service (BaaS) in 2022 will help emerging players to start offering a variety of banking services.

The Possibilities with BaaS

Banks are conscious that delivering their services through intermediaries might compromise their customer relationships. However, if customers decide to adopt embedded finance in large proportions, banks may have no alternative but to introduce BaaS service offerings. Allowing partners to market financial services is often a low-margin, high-volume business for banks. Banking institutions have cost structures built on antiquated systems managed through manual processes and operations. They must therefore go through technological transitions to provide BaaS and many of them are already doing so.

Another scenario is that banking as a service and?API banking ?will become just as prevalent as mobile banking solutions or any other digital financial solution, which banks must deliver and manage to survive the industry challenges. A continuous competition with BaaS will be tough to handle, thus banks will have to differentiate their businesses based on services, pricing, accessibility, and other considerations.

Flexibility in Regulations

PSD2 and open banking are examples of regulatory trends that are encouraging the growth of banking APIs and universal accessibility. To recuperate expenditures and to stay ahead of tech advancements, several banks are considering comprehensive or new BaaS business models to cope with the regulatory imperatives through technology transformation. Aside from regulation, aggregators are redefining customer expectations for data and account information accessibility, which is pushing IT advancements and BaaS projects.

Shifting Trust Levels Among Customers

Many traditional banks have lost their trustworthiness and superiority over fintech companies. Several other fintech companies, on the other hand, enjoy greater customer loyalty, which they can harness to deliver financial services. Banks that use the BaaS model to deliver financial services through fintech partners will be able to capitalize on the growing trust in their business. Banks don't have to white-label everything across all services and locations, instead, they'll look for markets or services where they can strategically utilize the increasing trust in fintech players.

The Future of BaaS is Bank-Fintech Partnership

Banks are the backbone of any nation's financial ecosystem. They have a monopoly of banking service licenses, which allows them to control the conditions of their partnerships with fintech businesses. Banks also have the authority to terminate fintech partnership agreements if they believe the connection is too unsafe or unproductive. None of this is likely to change very soon.

Stronger fintech companies are making inroads and they add significant value to their bank partnerships by accelerating new account openings. Fintech-bank collaboration has vastly increased in recent years, and BaaS model is now being utilized to help fintech companies scale more quickly.?Customer-centric digital banking ecosystems , extensive regulatory modifications, and growth of customer adoption are the key benefits of fintech-bank collaboration. In 2022, the role of BaaS businesses in connecting fintech companies to different banks and compliance services will only expand.

Finally, banks, fintech companies, and BaaS businesses are most effective when they collaborate to mitigate that risk, ensure adherence to compliances, and deliver modern digital financial solutions that customers demand.

Make the Most Out of Panamax’s Customizable and Next-Gen Digital Financial Solutions

In 2022, BaaS will integrate digital financial solutions and?banking systems ?to transform the financial industry landscape. Financial institutions have a clear opportunity to generate new revenue streams at reduced costs by using BaaS. A BaaS business is scalable, adaptable, and offers an ideal platform to penetrate new markets.

Panamax's?Digital Financial Solutions ?use advanced technology to provide exceptional services that help lower costs while opening new business prospects for financial institutions, banks, telecom operators, carriers, service providers, and so on. Our fintech portfolio comprises next-gen digital financial services to streamline online transactions and enable the unbanked and underbanked to get access to cutting-edge financial services.

This article is originally published Panamax Inc.