How Any Brand Can Capture the BaaS Opportunity in 2023

But the existing applications of BaaS have in many ways just scratched the surface of its potential to transform financial services–and commerce at large–by breaking down long-standing barriers separating banks from the other brands and platforms that consumers and businesses interact with on a daily basis.

For financial institutions, embedding banking services into these non-bank channels–an integration made possible by Application Programming Interfaces (APIs)–drives several key benefits, including new revenue streams, enhanced customer acquisition and retention and continued relevance–all of which are detailed in Part 1 of our BaaS guide.?

Now, we’ll turn our attention to the other side of the BaaS equation to explore what’s in it for those FIs’ non-bank partners–a category ranging from “bank-like” platforms like neobanks and other financial management providers, to brands completely outside the financial realm, such as consumer goods makers and retailers, software companies, communications and media providers, and even car manufacturers.?

Click here to learn more about what BaaS is and how it benefits banks

For those non-bank providers, adopting BaaS presents the opportunity to reap powerful rewards in the form of new lines of revenue, increased customer engagement, loyalty and lifetime value, and the opportunity to augment–and even transform–their entire customer value proposition by providing complementary, contextual financial services within the customer journeys already taking place across their own platforms.?

What’s more, customer interest in accessing these services through third-party brands is high and growing fast, providing the demand driver as the final crucial element powering the coming BaaS boom.

Rising demand for embedded finance.

Because the Banking as a Service model plays a key role in powering embedded finance experiences, the development of the BaaS market will closely track that of embedded finance–which is widely predicted to be among the highest-growth areas of financial services over the near future.

Consumers already are clamoring for embedded finance services from brands across a spectrum of industries. A recent survey of more than 2,500 U.S. adults from Cornerstone Advisors found that embedded services already have made significant inroads among customers of technology/electronics, home improvement, video gaming and fashion/luxury goods, in particular:

• 35 percent of respondents interested in technology/electronics had already obtained a financial product from a brand in that category
• 25 percent of home improvement customers already had done so
• 23 percent of video game fans had done so
• 20 percent of fashion/luxury goods-interested consumers had done so

While the majority of those financial services took the form of a credit card or extended warranty obtained through the non-financial brand, the study also showed high interest in expanding embedded finance use-cases into a bevy of potential applications:

• Three-quarters of video gamers were interested in an in-game account where they could deposit money and use it to buy and sell virtual in-game items and collect rewards for game achievements and progress.
• Two-thirds of home fitness fans expressed interest in getting health insurance from home fitness providers with rates based on their personal fitness habits.
• Nearly two-thirds of fashion aficionados would consider getting an investment account from a luxury brand that allowed them to easily invest in that company’s stock.
• Six in 10 car buffs would investigate auto insurance—with rates based on their personal driving history and behavior—directly from a car manufacturer.
• Half of home improvement do-it-yourselfers are interested in a savings account that automatically sets aside money to save for large home improvement projects from Home Depot or Lowe’s.

Along with robust consumer demand, the small and midsize business (SMB) sector also has shown a high degree of interest in BaaS-powered embedded finance tools.?

In a recent study by Boston Consulting Group, 64 percent of the more than 2,000 SMBs surveyed expressed interest in receiving financial services through a non-financial platform used to run their business. The report tabbed cash advances, bank accounts and card issuing as the highest-potential embedded financial services for SMBs, estimating an addressable market of $110 billion for those services in the U.S. and Europe alone

Learn what’s driving SMB demand for embedded finance.?

How BaaS benefits brands across a spectrum of industries.?

For non-bank brands, offering banking and financial services such as those described above offers significant potential to broaden revenue streams. These new inflows can take the form of transaction fees including interchange and payment processing fees, as well as income from end-users, such as loan interest or other fees–all of which can be shared with bank partners and BaaS platform enablers (see below), depending on the financial arrangements between the various parties.?

But the full value of leveraging BaaS-powered services extends beyond direct revenue derived from those offerings. By becoming a central part of customers’ day-to-day financial lives, non-bank platforms can significantly increase stickiness, satisfaction and loyalty and greatly reduce costly churn.?

What’s more, data has shown that this enhanced engagement can also actually boost income from non-bank platforms’ core products and services.

According to the Cornerstone study, among consumers who had obtained a financial product from a non-financial brand:

• 32 percent said financial products caused them to spend more money with the brand
• 30 percent said they now choose the brand over its competitors more often
• 27 percent said they feel more loyal to the brand

In this way, BaaS-powered financial services create a flywheel effect–not only generating revenue in and of themselves, but also driving consumers to engage and spend more on the brand’s core products and services than they had before obtaining the financial product.

Additionally, the data derived for customers’ use of financial products can be leveraged to enhance cross-sell, pre-qualification and risk reduction activities.?

As an example of this symbiosis on the SMB side, a provider of merchant point-of-sale systems can use sales and revenue data derived from that core offering to better inform financing offers it may extend to that merchant.?

How BaaS enablers connect banks with brands.

Along with financial institutions and brands, there is another key player in BaaS arrangements: the enablers that bridge the gap between banks and brands by providing platform and API technology that connects the two other parties’ systems.?

While it is technically possible for a brand to partner directly with a bank to provide financial services through the former’s platform, establishing and managing a direct connection can be a tremendously difficult, time-consuming and expensive process–provided the brand can even find a willing bank partner, which could itself be a major hurdle.

BaaS enablers offer brands a path around these challenges, making it far easier, faster and less costly to provide embedded financial tools that are mutually beneficial for customers and brands.?

Compared to direct banking partnerships, the BaaS enabler model offers key advantages, including:

• Speed. Directly integrating with a bank can take a tremendous amount of time, largely because many banks still operate on outdated, inflexible technology systems that aren’t easily compatible with the more modern, flexible parameters used by non-bank brands and fintechs. In contrast, BaaS enablers already have done the heavy lifting of integrating with their bank partners, so brands can simply plug and play, getting up and running much faster.?
• Flexibility. A brand that integrates with a single bank directly is limited to offering its customers the capabilities of that bank only. Being able to access a broader network of bank partners through a BaaS enabler offers brands a wider array of services to choose from–making it easier for a brand to craft the bespoke suite of financial service offerings that’s right for its unique audience.
• Scalability. Similarly, working with a BaaS enabler that provides access to multiple banks simplifies the process of scaling technically, operationally and economically. When a brand wants to add new or different financial products, it can do so quickly and easily within the enabler’s platform and APIs instead of having to build out a completely separate integration from scratch with a new partner.
• Compliance. Offering banking and financial services products give rise to compliance requirements, such as Know Your Customer processes. Traditional banks tend to have slower, more onerous compliance frameworks involving multiple departments, paper documents and long application times. Working with a BaaS enabler can simplify the process of adhering to these guidelines and enable a brand to tailor the KYC and other processes to mitigate risk while preserving a smooth and positive customer experience.?

Ready to make 2023 the year your brand gets in on the BaaS boom? Contact us to learn how Galileo can help.

• In this way, BaaS-powered financial services create a flywheel effect–not only generating revenue in and of themselves, but also driving consumers to engage and spend more on the brand’s core products and services than they had before obtaining the financial product.Additionally, the data derived for customers’ use of financial products can be leveraged to enhance cross-sell, pre-qualification and risk reduction activities.?As an example of this symbiosis on the SMB side, a provider of merchant point-of-sale systems can use sales and revenue data derived from that core offering to better inform financing offers it may extend to that merchant.?

How BaaS enablers connect banks with brands.

Along with financial institutions and brands, there is another key player in BaaS arrangements: the enablers that bridge the gap between banks and brands by providing platform and API technology that connects the two other parties’ systems.?

While it is technically possible for a brand to partner directly with a bank to provide financial services through the former’s platform, establishing and managing a direct connection can be a tremendously difficult, time-consuming and expensive process–provided the brand can even find a willing bank partner, which could itself be a major hurdle.

BaaS enablers offer brands a path around these challenges, making it far easier, faster and less costly to provide embedded financial tools that are mutually beneficial for customers and brands.?

Compared to direct banking partnerships, the BaaS enabler model offers key advantages, including:

• Speed. Directly integrating with a bank can take a tremendous amount of time, largely because many banks still operate on outdated, inflexible technology systems that aren’t easily compatible with the more modern, flexible parameters used by non-bank brands and fintechs. In contrast, BaaS enablers already have done the heavy lifting of integrating with their bank partners, so brands can simply plug and play, getting up and running much faster.?
• Flexibility. A brand that integrates with a single bank directly is limited to offering its customers the capabilities of that bank only. Being able to access a broader network of bank partners through a BaaS enabler offers brands a wider array of services to choose from–making it easier for a brand to craft the bespoke suite of financial service offerings that’s right for its unique audience.
• Scalability. Similarly, working with a BaaS enabler that provides access to multiple banks simplifies the process of scaling technically, operationally and economically. When a brand wants to add new or different financial products, it can do so quickly and easily within the enabler’s platform and APIs instead of having to build out a completely separate integration from scratch with a new partner.
• Compliance. Offering banking and financial services products give rise to compliance requirements, such as Know Your Customer processes. Traditional banks tend to have slower, more onerous compliance frameworks involving multiple departments, paper documents and long application times. Working with a BaaS enabler can simplify the process of adhering to these guidelines and enable a brand to tailor the KYC and other processes to mitigate risk while preserving a smooth and positive customer experience.?

Ready to make 2023 the year your brand gets in on the BaaS boom? Contact us to learn how Galileo can help.