It appears complex, but as time passes every company or every brand could offer financial services through a concept called ‘Banking as a Service’:
London-based 11:FS, a consultancy working to build digital banks, believes that digital banking is only 1% finished. It has brought out a study on Banking as a Service (BaaS), arguing that the concept is paving the way for ‘embedded finance’. In the study, 11:FS defines BaaS as a service that offers “complete banking processes, such as payments or credit, as a service through modern API-driven platforms”.
What it is unique is that third-party brands are embedding financial services in context to create better end-to-end journeys for their customers. 11:FS predicts it will accelerate the growth of digital ecosystems.
11:FS clarifies that BaaS as envisaged by it is not the delivery of banking software as a service. “To use a banking software platform, one must either be a bank or have some level of lending or payments licence and a relationship with a bank. On the other hand, it is the provision of complete banking processes, such as loans, payments, or deposit accounts, as a service using an existing licensed bank’s secure and regulated infrastructure with modern API-driven platforms from a specialist provider. Any brand can partner with a BaaS provider to deliver bank-like services,” it elaborates.
BaaS, says 11:FS, offers speed, collaboration, and specialization, enabling companies to bring new propositions to customers far faster than they could alone. This could be a $3.6 trillion market by 2030.
With institutions adopting BaaS, 11:FS says competitive advantage will shift to providing and configuring financial services for customer contexts and providing brands with the tools to manage many providers.
THE BAAS STACK
The BaaS stack envisaged by 11:FS comprises brands, providers, and licence holders. It allows any brand to embed financial services into its customer experience by picking and choosing capabilities offered by providers and licence holders in a modular fashion. Actually, it is the brand that manages the customer experience by creating the user interface the customer interacts with and embeds finance in the customer experience. It illustrates the example of Canadian eCommerce company Shopify, which allows a merchant to finance their stock, store it in a warehouse, ship it and accept payment all through one experience. The finance is one part of a broader experience.
CAPABILITIES TO BRANDS
11:FS also says BaaS providers offer capabilities to brands. As-a-service providers offer one or more banking capabilities as a service through API-driven platforms. Brands can choose multiple providers to bring best-in-class capabilities to the end customer. And brands can ‘pick and mix’.
Similarly, a bank that provides the licence for the financial services enables partner brands to provide financial services by renting their licence out as a service, often through partnerships with an as-a-service provider. This ensures that the brands embed compliant financial services into their customer experience.
BRANDS BRING SERVICES
11:FS says BaaS enables collaboration from multiple providers. Banking is actually brought to the customer by his or her favourite brands. It enables companies to design and build new propositions far faster than they could on their own. And it also enables services to be delivered by an ecosystem of specialized providers rather than one, single vertically integrated entity, which means the best providers bring best-in-class capabilities.
CONTEXT IS KING
11:FS contents that in BaaS context is everything. Brands increasingly win by providing services closest to the context where it solves a customer problem in real time. “A customer context is the combination of events or circumstances and the touchpoint best placed to do the job they’re aiming to do. Not all brands will play in all contexts. Understanding the power of context is key to evolving your BaaS strategy,” it says.
11:FS predicts that the technologies, businesses, and operating models that created the big tech wave are coming to finance. “The market opportunity for embedded finance is massive. As brands like Shopify (ecosystems) partner with providers like Affirm (an embedded lending platform), entirely new value will be unlocked. This could be worth $3.6 trillion by 2030 – more than the value of the US big tech platforms today and roughly equal to the market cap of the top 30 banks globally. Based on current adoption trends continuing, and assuming that 40% of payments volume, 20% of lending volume and 20% of insurance volume moves to an embedded finance model by 2030,” says the report.
It also points out that there are certain core issues and challenges that brands face while adopting BaaS. “Brands often get locked into a payment provider, especially if their internal tech is not designed to manage many BaaS endpoints. Most (not all) BaaS providers are limited by geographic coverage. This means brands have additional cost and cannot launch globally. Brands have to trade off speed to market for flexibility. Underlying BaaS providers with more flexibility are more expensive and require more work. Brands are ultimately limited by what the underlying partner bank can offer to the BaaS provider. You can have anything so long as it is a card. And BaaS is not ‘one provider fits all’,” it concludes.
