The Banking-as-a-Service (BaaS) landscape has undergone considerable changes and growth in recent years, marked by transformative trends shaping financial services. Looking further into 2024, we note how the convergence of technology, evolving customer expectations and regulatory advancements propel BaaS providers to the forefront of fintech innovations.
What is Banking-as-a-Service?
Banking-as-a-Service (BaaS) is a model that allows third-party companies to provide financial services by leveraging the infrastructure and capabilities of Electronic Money Institutions (EMIs) to mitigate complex and elongated processes. It enables non-banking entities to access and use the technologies through APIs (Application Programming Interfaces) and other software integrations. In doing so, businesses can streamline operations, develop interfaces, and enhance user experience. The BaaS market was valued at USD 15.9 billion in 2023 and is expected to register a compound annual growth rate (CAGR) of more than 17% before 2032.
Why is BaaS Useful for Growing Businesses?
As a fintech innovation designed to solve business problems, it offers a fast and straightforward avenue to financial services. Typically, businesses seeking financial services face challenges from traditional institutions, such as regulations, lengthy timeframes, and hidden costs. Additionally, implementing multiple services would have required numerous partnerships and integrations, which would be costly and time-consuming. However, with a BaaS provider, businesses can manage numerous services through one integration that offers a simplified backend process. Businesses use BaaS to optimise operations and reduce manual overhead costs whilst linearising payment functions and increasing payment options to better engage with customers.
End consumers significantly benefit from banking-as-a-service solutions. From financial inclusion to personalised shopping experiences, customers benefit from continually improving services and experiences. According to the World Bank, in 2023, there were 1.4 billion people who remained unbanked – more commonly those who live on a lower income, are rurally located, and are women. However, businesses using BaaS products enable users to access different banking products and services through alternative platforms and applications, providing them with a means to make purchases without needing a traditional bank account. Additionally, with greater levels of transparency and data availability from fintechs, businesses can tailor product and service offerings to customers to build brand loyalty and optimise shopping experiences.
How Did Banking-as-a-Service Evolve in 2023?
Partnerships between traditional banks and fintech companies were on the rise, and this trend was no different in the BaaS space. Financial institutions and fintech companies adopted BaaS products for already-built solutions, reducing coding complexities and removing the need to manually create bespoke backend infrastructures. This saves businesses time and accelerates their launch time-to-market as they focus on business development whilst leveraging a scalable BaaS solution. The year was filled with collaborations between regulatory expertise and technological innovations, enhancing the financial service ecosystem for businesses and their customers’ experience.
In 2023, conversations were rife around banks facing stiff competition from BaaS providers and tech giants such as Apple and Meta, who entered the digital payments space. The driving implication for traditional financial services was that their customer base was affected, as they turned to alternative providers. However, the evolution of conversation shifted as Banking-as-a-Service was recognised as an opportunity for banks. Collaboration with BaaS providers enables banks to broaden their service offerings and tap into broader customer pools.
Outlook for 2024
This year will continue to position BaaS as a driving force to deliver an enhanced customer experience. Banking-as-a-service solutions give businesses a competitive edge and satisfy the customer-centric approach needed to build a satisfactory experience.
Managing Director of Unlimit BaaS, Jovi Overo, commented “Our divergent economic landscape is bringing challenges to the financial and banking industries this year. End users and businesses face high interest rates, stringent regulations, higher threats of fraud and reduced disposable income. Nevertheless, the impact of innovations such as embedded finance, open banking and artificial intelligence (AI) will grow in the fintech space. Adopting new technologies will offer businesses the space to pursue new markets and opportunities for capital. Additionally, they will bring better tools for risk mitigation, customer engagement and secure purchasing.”
The road ahead holds space to thrive despite economic complexities, and here are some of the trends we see in the BaaS industry this year:
1. Open Banking Evolution
The momentum behind open banking initiatives continues to build, fostering collaboration between financial institutions and third-party developers. In 2024, we expect further expansion and maturity of open banking ecosystems, creating a more interconnected and dynamic financial landscape.
2. Fortifying Security Measures
The regulatory landscape plays a crucial role in shaping the BaaS environment. Stay tuned for developments in regulations that may impact how financial services are delivered and accessed through BaaS platforms. Adapting to these changes will be essential for industry players.
With the increasing digitisation of financial services, the importance of robust cybersecurity measures cannot be overstated. Advancements in biometrics, artificial intelligence, and blockchain will bolster security in BaaS platforms, ensuring a secure environment for users.
3. Personalisation and Seamless Experiences
Technological advancements are enabling BaaS providers to offer more personalised and seamless experiences for customers. Data analytics and artificial intelligence are being leveraged to better understand customer needs and preferences, resulting in tailored financial solutions. The BaaS era will help businesses understand the evolving preferences of consumers to tailor their offerings effectively.
4. Cross-Border BaaS Solutions
With cross-border facilitation a key driver In an era of globalisation, BaaS is likely to extend its reach to cross-border transactions and services. Expect solutions facilitating seamless access to financial services across different regions, promoting a more connected global financial ecosystem.
5. Artificial Intelligence
Artificial intelligence brings a wealth of advancements, from intelligent decision-making and risk analysis to customer engagement and predictive analytics. Advances in AI will improve processes and workflows whilst reducing overhead costs.
The year 2024 promises to be a dynamic period for Banking-as-a-Service, marked by innovation, collaboration, and a commitment to meeting the evolving needs of businesses and consumers. Keep a close eye on these trends as they unfold, shaping the future of finance in the digital age.