Realising the digital vision: Why BaaS is leading the digital transformation in financial services

By Nirav Choksi

Over the past decade, digital transformation has democratised data to enable impressive customer experiences and greater transparency across industries.The digital financial space, in particular, is currently in the midst of a profound transformation. In today’s competitive environment with rising cost pressures—banks and FinTechs are looking to expand the digitisation of the front and back ends of their businesses to stay in the race. As the financial ecosystem undergoes a swift and relentless digital transformation, Banking as a Service (BaaS) has paved the path for a surge in innovation. Given how BaaS presents a significant potential to generate revenue, it can no longer be overlooked by banks and other players in the financial services sector.

With the accelerated shift to digital channels and the heightened marketplace demand for embedded financial services—BaaS is gaining significance among the C-suite and senior executives. The multimillion-dollar BaaS opportunity has got 78% of bank leaders prioritising the integration of BaaS capabilities. Executives in the financial services industry are tasked with modernising their platforms and ramping up technology innovation. As a result, BaaS has become one of the most important items on their agenda to make banks ‘future-fit’.

Thriving in the Digital world of BaaS

Globally, BaaS is nearing mainstream adoption. Moreover, it is worth mentioning that businesses and ecosystems are increasingly embedding financial services in their offerings. Reports confirm that 94% of businesses that are embedded financial services into their business offerings have witnessed a rise in their revenue since implementation.

Consumers too are getting used to making frictionless payments on apps such as Uber. There has been an evident switch from cash to card to digital payments among end users. With all this in the backdrop, one thing is certain—embedded finance is the future of banking services. Owing to the rising demand for embedded financial products, financial institutions are now strengthening their efforts in building a modern digital architecture. 

To remain competitive in the world of BaaS, financial institutions are more open to providing bundled offerings as white labelled or co-branded services. This will enable non-financial companies to integrate financial solutions into their offerings and provide customised credit products on the digital platforms frequented by their users.

Why BaaS is a winning formula for digital transformation

With customer-centricity at the forefront, financial institutions are now transitioning into a comprehensive digital ecosystem to bring personalised, on-demand services to market faster. BaaS is the primary driver of this transformation, facilitating the modernisation of technological platforms and capabilities and enabling banks to: 

●       Increase their economies of scale

●       Venture into untapped customer segments

●       Lower their costs

●       Generate additional revenue

BaaS has the potential to facilitate the effortless expansion of digital finance. For instance, the pay-as-you-go and plug-and-play service model that BaaS offers makes it imperative to have a microservices-based architecture that enables independently deployable services to be launched faster. Additionally, to develop personalised propositions, financial institutions must analyse massive volumes of open banking data in real time. The hyper-scalability of the cloud offers the flexibility and resilience that are needed for this. All this makes digital transformation a growing imperative for banks.

The long-term benefits of BaaS

In recent years, there has been a considerable uptick in the demand for a broader array of financial services. For customers, the appeal has always been ease of use. FinTechs have risen to the occasion to meet the customers where they are with next-gen financial products. That said, certain capabilities such as issuing payment cards require the involvement of licensed banks.

For this reason, financial institutions are embracing BaaS as a means to collaborate with new players and secure a strong foothold in the digital banking revolution. Here’s a look at how BaaS is beneficial to all the players in the ecosystem—the financial institution (the BaaS provider), the FinTech company in between, and the non-financial company as well as the end user.

●     For financial institutions: By enabling API-based access to core banking products and services, BaaS opens up avenues for creating new revenue streams. With BaaS, banks can redefine their value proposition and ensure their relevance in the rapidly-evolving financial landscape. Additionally, by collaborating with non-financial companies, banks can acquire new customers at a lower cost. By leveraging the data captured through BaaS, banks can provide more contextualised services to customers and retain them for the long run.

●       For FinTechs: In partnering with licensed banks through BaaS, FinTechs can easily integrate banking functionalities into digital platforms without the need to develop core banking products and systems from scratch.

●       For non-financial companies: They can offer superior customer experiences by embedding one-click payments and other financial solutions into their own interface.

● For customers: Apart from enhanced customer service, BaaS also improves financial inclusion by providing easy access to financial services to underserved segments of society.

The race to stay relevant is on

With the acceleration of digitisation and the growing demand for contextual, hyper-personalised, and integrated customer experiences, BaaS presents a potential breakthrough for financial institutions to reach new customers and strengthen their position in the financial services ecosystem.

In the coming months, we will witness a liberation of financial services where customers have greater choices in accessing everyday banking services.As banks are looking to develop their BaaS strategies and build partnerships in the FinTech space, it is crucial to work with experienced partners who understand the unique needs and challenges of the industry.

The author is CEO , co-founder , CredAble

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