Banking-as-a-Service: Breaking the banking models

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  Quantumrun Foresight
• November 12, 2024

Insight summary

Banking-as-a-service (BaaS) is changing how businesses offer financial services by allowing non-financial companies to integrate banking functions without a needing a banking license. This trend is creating more convenient financial tools for consumers but also raises concerns about data privacy and financial literacy. Additionally, governments may need to implement stricter regulations to manage the increasing overlap between tech companies and traditional banking institutions.

Banking-as-a-Service context

BaaS allows non-financial companies to offer banking services without owning the banking infrastructure. Through application programming interfaces (APIs), third-party businesses can integrate various banking functions, such as account creation, payments, and loans, into their products. This setup eliminates the need for businesses to go through the regulatory complexities of becoming a licensed bank. For example, companies like Stripe and Solaris provide backend banking services that startups can use to create branded financial products. As a result, BaaS has gained significant attention as a flexible way for businesses to embed financial services directly into their customer offerings.

BaaS relies on the collaboration between licensed financial institutions and technology companies, with the financial institution managing compliance and risk. These banks and fintechs provide a digital infrastructure that allows businesses to select the services they want to incorporate, creating a customizable financial solution. For example, a fintech company can launch financial products like savings accounts or credit cards without investing in the core banking systems themselves. This modularity has enabled companies like Monzo and Revolut to scale quickly, reaching new markets while avoiding the lengthy process of securing banking licenses. 

The growing popularity of BaaS has spurred notable developments. According to Forbes, the market is projected to reach USD $7 trillion by 2030, reflecting the increasing demand for these services. In Europe, BaaS is undergoing a "transformational phase," with banks and non-bank companies leveraging the model to serve small and medium-sized enterprises (SMEs) and underbanked populations. Additionally, industries like telecommunications, healthcare, and retail are actively exploring how BaaS can enhance their product offerings. 

Disruptive impact

As more companies embed banking functions into everyday platforms, people will likely experience increased convenience in managing their finances. For example, gig workers might handle payments and loans directly within their work apps, saving time and effort. However, this ease of access could lead to concerns around financial literacy, as consumers may not fully understand the implications of using services integrated into non-financial platforms. Additionally, there is a risk of data privacy issues, as individuals will be sharing more financial information across multiple apps and services.

Companies may adopt BaaS to expand their services, offering financial products like loans or payment systems to increase customer retention. For example, retailers could integrate payment plans into their e-commerce sites to give customers more flexible options. However, businesses may face difficulties managing compliance and security requirements since they are dealing with sensitive financial data. Additionally, companies that rely too heavily on third-party banking services risk losing control over their customer relationships as the financial institution retains much of the regulatory responsibility.

Meanwhile, governments may need to adapt their policies to regulate the growing BaaS ecosystem, ensuring it operates fairly and securely. As more non-financial companies offer banking products, governments will likely consider introducing stricter regulations to protect consumers and provide proper financial oversight. For example, tax policies might need updating to address the increasingly complex financial products that tech companies offer. Additionally, governments may invest in digital infrastructure to support the rise of these platforms, ensuring that financial services remain accessible across different regions. 

Implications of Banking-as-a-Service

Wider implications of BaaS may include: 

• Increased financial inclusion for underbanked populations, particularly in rural areas, by providing easier access to basic banking services.
• Small businesses relying more on BaaS platforms to offer tailored financial services, improving customer loyalty and expanding revenue streams.
• Governments increasing regulations around data security and cross-border transactions, ensuring that non-financial companies handling banking services follow strict standards.
• The banking industry witnessing a shift in labor demand, with more jobs emerging in tech support, API development, and cybersecurity rather than traditional banking roles.
• More partnerships between fintech companies and traditional banks, transforming how both industries approach product development and customer service.
• Consumers expecting faster, more flexible banking solutions within apps they already use, putting pressure on traditional banks to adopt similar digital strategies.
• Environmental impacts being minimized as BaaS-enabled digital services reduce the need for physical branches and paper-based processes..
• Political debates around the influence of tech companies in financial markets, leading to discussions about the power dynamics between tech giants and established financial institutions.
• Demographic shifts with younger generations embracing app-based financial services, creating a divide between digital-native users and older consumers who prefer traditional banking.
• Increased economic competition among fintech startups, which may drive innovation but could also lead to market saturation.

Questions to consider

• How might the integration of banking services into everyday apps change the way you manage your personal finances?
• What opportunities could small businesses in your community gain by offering financial services through BaaS platforms?