Future bright for BaaS as demand explodes
Banking-as-a-Service is growing rapidly as it becomes the go-to solution for any company wanting to offer financial services and banking products on their platform
Banking-as-a-Service is growing rapidly as it becomes the go-to solution for any company wanting to offer financial services and banking products on their platform
In the “clearest indication yet” that Banking-as-a-Service (BaaS) is set to proliferate dramatically over the next few years, a survey by financial IT group Finastra has found an overwhelming majority of senior executives are implementing BaaS solutions or plan to do so within the next 12-18 months.
The BaaS model allows banking services to be delivered by non-financial services businesses. The model allows customisable retail or wholesale banking services to be delivered by both incumbent banks and non-financial services businesses, leveraging APIs and the technological capabilities of fintech services to do so.
Interviews with 50 senior business executives and a survey of 1,600 more by Finastra reveals that 85% are already implementing banking-as-a-service capabilities or planning to do so in the next 18 months. Surveyed executives ranged industries that include retail, technology, banking and healthcare.
More than 80% of regulated financial service providers expect the overall BaaS market to grow, with 30% of these expecting it to grow by more than 50% a year over the next five years. Meanwhile analysis by Stellar Market Research suggests BaaS market will reach $1.2trn by 2027, up nearly 19% from $356bn in 2020.
The majority of “enablers” – typically bigtechs and fintechs that help to embed financial services into third-party platforms and apps – expect the overall BaaS market to grow by more than 50% over the next five years.
According to Finastra, a major driver for BaaS is consumers moving to non-bank channels for their financial services needs.
Angus Ross, chief revenue officer, Banking-as-a-Service at Finastra, says this trend will only accelerate as integrating regulated products into customer journeys becomes “as simple as creating a social media account”.
“We are at an inflection point as the BaaS market leads a revolution in financial services. Our findings point to one clear conclusion: consumers, whether retail or corporate, are changing where they source financial services, and increasingly utilising non‑bank channels.”
The Finastra study, Banking as a Service: Outlook 2022, indicates that while retail offerings currently dominate the BaaS space, the future will be much more balanced between retail and corporate growth. SME lending, corporate lending, and corporate treasury/FX services are poised to gain the highest traction.
SME lending offers a “very attractive” BaaS potential for several reasons, it says. Securing loans from traditional banks, for instance, can be very cumbersome for SMEs, with long processes, exhaustive documentation requirements and limited credit options. There are also less established players in SME lending than other products. Finastra says SME lending also offers a large revenue potential for BaaS, having generated $252bn in overall market revenue in 2020.
“SME Lending currently drives more market revenue than point-of-sale financing, payments, or corporate lending, and is expected to grow 30% by 2024. There is significant potential for a BaaS SME lending offering, driven by an API-enabled marketplace,” according to Finastra. It believes that SMEs will increasingly turn to BaaS and other technology trends to support their funding needs as “traditional banking has historically not met their needs, offering low optionality and unfavourable terms”.
Lending to larger corporates already accounts for a high market share in the banking industry but the BaaS market for them is still expected to grow by around 14% by 2024. Finastra anticipates some corporates will avoid BaaS in the near-term due to their focus on existing banking relationships.