Everything You Should Know About the Opportunities of Banking-As-A-Service

By Paddy Vishani, Strategic Partnerships Manager, Yobota 

 

 

 

 

The world of banking and financial services has changed vastly in recent years. Even before the pandemic, the space had been increasingly catalysed by a wave of rapid digitalisation that has served to expand the number and variety of products available across the market.

As ‘open banking’ became a watchword for customers and providers alike, people gradually realised the benefits of sharing their banking data with chosen third parties, and the positive impact this would have on their ability to manage their finances. Customer demands have evolved in line with this shift, with a new appreciation for offerings beyond the scope of traditional financial services. Banking products were no longer inflexible entities, permanently tied to a high street bank – they had become varied, customisable and built-for-purpose, and more and more of them were being offered by new players.

This increased variety has been fuelled by the rise of the fintechs, startups and neobanks that are looking to play in the space usually reserved for the biggest, most established names in banking. This new class of banking products coming from smaller companies, many of whom are unregulated or even non-financial in nature, were made possible by another important new player – the Banking-as-a-Service (BaaS) provider.

BaaS has been critical in the development of this new era of opportunity, as there are many regulatory challenges and technical pitfalls that these emerging companies face when entering the world of banking. The recent wave of innovative solutions may be improving customer experience and reshaping how people engage with financial products, but at its core, BaaS is what is making these opportunities possible.

The technology behind financial services is inherently complex – this has been a major reason for the dominance of well-established providers. When dealing with lending, credit and peoples’ personal finances in general, there can be little room for error and smaller players can struggle with the weight of that responsibility when venturing into uncharted territory.

Another major stumbling block for these small companies can be the challenging process of obtaining a banking license, the absence of which can mean potentially ground-breaking products never leave the starting gate. Indeed, the most important stakeholders that businesses will need to convince of the promise of a new product are the regulators – a process which is naturally rigorous and time-consuming.

This is where BaaS providers can step in and make the difference. By empowering any business – financial or otherwise – to create their own financial product from the ground up, they can propel these companies forward. A BaaS provider with the right partnerships can connect these companies with a bank that can take care of the necessary balance sheets and regulatory requirements.

The impact that such partnerships will have on the financial services ecosystem is massive, making banking services more engaging and appealing to consumers by allowing companies to offer products that reflect both their offering and the interests of their userbases. A retailer that has already built a strong connection with a loyal customer base will no longer need to outsource its split payment financing options to a third party, diluting its purchase journey and decreasing its user engagement. With the help of the right BaaS provider, they will be able to offer their own product that matches their branding and gives the customer exactly what they want.

This is why offering white-label BaaS solutions is so important – having control over every step of their users’ customer experience and maintaining consistent branding is of vital importance in every industry, not just eCommerce and retailing. BaaS solutions need to be white-label, customisable and scalable so that they deliver exactly what companies need, now and in the future.

Being able to offer these kinds of products has never been more important, as the high levels of demand for embedded finance in today’s marketplace shows. Buy Now, Pay Later (BNPL) products are perhaps the most popular form of embedded finance today, with the sector growing at a rate of 39% per year, and offering them as a form of payment is becoming essential for businesses to stay competitive. 

A recent survey showed that almost 10 million shoppers in the UK won’t consider buying from a retailer that doesn’t offer some form of split payment option at checkout – that’s too large a proportion of the market for businesses to ignore, and the sector grows that proportion is liable to grow with it. This shows just how fast both the nature of financial products and people’s attitudes towards them are changing, and why BaaS providers are so critical to maximising the opportunities at hand.

It is an obvious and fair question to ask why banks would agree to partner with these smaller companies in providing regulatory and compliance assistance if in doing so they are only decreasing their grip on the financial services market. What is in it for them to propagate the dissemination of exciting products that are perhaps too niche for them to offer by themselves. 

The truth is, the traditional tier-one bank was not built to adapt quickly to new demands like embedded finance: often, they err on the side of caution and are held back by an over-reliance on legacy systems. Acting through BaaS providers allows them to benefit from a larger, more diverse financial service ecosystem, operating symbiotically with the new players in the space. Ultimately, these new products do not exist to try and supplant the role of the major banks, but to carve out a new space in the market that caters to more specific demographics with previously unfulfilled needs.

This is why collaboration and partnership are so important to BaaS providers like Yobota – ultimately, the providers, banks and fintechs are working together to create new avenues and fulfil unmet needs.

How partnerships are shaping the future

In the formation of novel financial services, BaaS providers act as a conduit between the constituent parts of the development pipeline. They supply new businesses with modular architecture that is malleable and adapts seamlessly to fit the exact specifications of the product they have in mind – and all white-label, so they can pass it off as their own. At the same time, they are connecting banks with a brave new world of products, fuelling growth and innovation in the process.

This is why picking the right BaaS provider for your business is so important. Positioned as the nexus between the key elements of a successful new product, the core banking provider is responsible for protecting the interests of banks, users and companies. With this in mind, they must be secure in the way they package, store and process private data.

Positioned as they are between so many different companies of different descriptions and purposes, they must be able to able to offer easy access between the Primary (banks) and the Secondary (smaller companies). For many, the point of entry will be APIs (Application Programming Interfaces), so the provider must ensure theirs are optimally designed so as not to hinder the functionality of the finished product. 

Partnerships are all about striking a balance – with a new unregulated company interested in offering a novel financial product, BaaS providers want to give them as much freedom as possible to realise their vision, but at the same time constraints need to be in place to protect the Primary from undue risk. This is why Yobota’s team is made up of both tech experts and ex-Bankers – it’s essential to have the expertise to determine how best to help a company succeed, safely. 

With the number of promising entrants to the market, the level of variety and possibility within financial services seems limitless. End users stand to benefit from a more diverse range of products more likely to suit their own unique needs and interests, banks will benefit from the increased activity, and even the suppliers themselves stand to benefit from increased reporting on their customer’s behaviours and how they engage with their offerings.

The opportunities associated with BaaS are immeasurable, and with the right provider, any business can enter the market today and start offering something special. What the industry needs are more smart, scalable solutions that can keep pace with the current rate of creativity, and BaaS providers are the invisible partner that can make these new ideas a reality.

 

Everything You Should Know About the Opportunities of Banking-As-A-Service