The Rise of Banking As A Service (BaaS)

2nd June, 2023

Author: Mayank Mishra, Managing Partner, DhanConsulting

Category: Industries



From the barter system prevalent in the ancient eras to the emerging Banking as a Service (BaaS) of today, the banking industry sure has come a long way. Banking channels have now become easily accessible with the advent of technology.

Now, despite all the progress made, some challenges still remain.

A World Bank report of 2022 cited that only 69% of the world’s adults had a bank account in 2017. As per World Bank again, while Covid boosted the adoption of digital financial services to improve upon the global economy, some 1.4 billion adults still remain unbanked globally as of 2022.

How has the global banking industry responded to the calls for improved financial inclusion? Let’s explore.

Globalization and Cross-Border Transfers

In the post-pandemic era, the digital economy has come so far that the global cross-border transfers market is expected to grow at a CAGR of over 5% to reach a size of $238.9 billion by 2027. The large volume of cross-border transfers is majorly contributed to expats sending money abroad or multinational companies involved in cross-border trade.

While the International Monetary Fund has published reports on the need for responsible cross-border transfers, the banking industry has stepped up as a responsible contributor to increasing financial inclusion throughout the world.

  • The banking industry was transformed with the introduction of neo-banks and other financial technology companies, which offer banking as a service (BaaS) securely and conveniently, and that too through just your smartphone!
  • Many platforms across industries have introduced innovative financial services and products for their users’ convenience, such as Buy Now Pay Later. The banking industry has facilitated such products by partnering with said corporations.
  • Further, the banking sector has considered partnering up with up and coming technologies like blockchain and DLT (distributed ledger technology).
  • Covid drove the growth of digital banking, since the growing number of remote companies required newer banking services to engage in seamless cross-border transfers for clients and vendors, among other stakeholders.
  • Innovation in technology, convenience for users, and partnerships with multiple brands has also been responsible for the positive evolution of the global banking industry.

 

Cross-Border Transfers For Particular Regions

Here is a  snapshot of the cross-border transfers from around the world:

Latin America: With the emergence of several fast developing economies, Latin America has become a hotspot for cross-border transfers. Though it faces problems such as limited financial inclusion in certain regions, it scores high on the transfers front. E-commerce in Latin America is expected to touch a volume of $700 billion by 2025,

Middle East: Being a popular destination for expats and international businesses, coupled with its booming oil trade, the Middle East has always been a cross-border transfer hub. The UAE and Saudi Arabia alone saw $78 billion worth of transfer in 2020. In the next five years, consolidation in the banking industry in the region could contribute to further growth in cross-border transfers.

Africa: Africa has also been catching up on cross-border transfers with several positive initiatives. In 2020, e-transfers in Africa accounted for $24 billion in revenue, whereas $15 billion was under domestic e-transfers. The Pan-African Payment and Settlement System (PAPSS) being developed in Africa is expected to boost cross-border transfers.

Asia: In 2021, Asia was found to hold over 40% share in the global cross-border transfers’ volume of $200 billion. While the market is expected to grow between 6 to 8 percent in the next five years, Asian emerging economies could occupy an even larger part of this share.

Rise of Banking As a Service

Embedded financial services occupy a huge role in businesses increasing their revenue streams and users, and by 2026, such services embedded in platforms like e-commerce will account for over $7 trillion. It will likely be led by services like value transfers and lending, supported by other verticals like insurance and tax.

The modern consumer requires personalized, convenient, and affordable banking services without the hassle of going through traditional banking channels. This is where Banking as a Service has emerged as a solution. BaaS, of course, is a new model through which non-banking companies can provide financial services to their users using APIs connected to a bank’s infrastructure.

As online banking gained traction following the advent of the internet, fintech companies like PayPal were amongst the first to foray into online cross-border payments. This was followed by other fintechs like Adyen and Stripe, who started offering Banking as a Service products to their users.

With the benefits of Banking as a Service becoming so evident, major corporations like Amazon, IKEA, and Samsung have started offering BaaS services and products to their users.

A few benefits of Banking as a Service include:

  • Right from paying bills to taking small amounts of credit, BaaS service providers have become the alternate go-to option for users in place of traditional banks.
  • For businesses, BaaS services are an innovative method to reach a wider audience. It increases their income streams and helps to reduce churn.
  • BaaS regulatory frameworks are distinct in every country; hence, service providers have to follow certain rules before offering the services to their users, ensuring higher security and reducing cases of fraud.
  • Businesses have increasingly started adopting embedded finance experiences to fulfill their consumers’ expectations of convenience and customization. As embedded finance becomes even more mainstream, businesses, especially those with a large user base, have started offering it to compete with others. By enabling companies to reach more consumers and improve their customer service, embedded banking helps companies to have better distribution capabilities, leading to higher customer retention.
  • Embedded finance helps businesses offer the most appropriate financial products efficiently and smoothly for their customers when they would usually have to redirect them to other financial institutions or websites.

 

Emulating the footsteps of high-value brands, integrating Banking as a Service into your business presents a formidable opportunity to attract a larger user base, while simultaneously retaining loyal customers through the unparalleled convenience it provides.

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Prepay Nation, a leading global B2B marketplace, stands as a proven expert in user retention and pioneering new revenue streams. With a vast network of over 600 partners across 150+ countries, we bring extensive experience to the table.

Unleash boundless possibilities for your business users with Prepay Nation’s expansive portfolio of over 10,000 prepaid products. Seamlessly facilitate cross-border transfers and  deliver unmatched convenience. Embark on a journey towards accelerated success – Contact us today!

On embedded banking – As embedded banking continues to become centerstage, consumers have come to expect a different level of convenience and customization from their financial services providers. As a result, embedded finance has become the norm for business, and those with a large user base are forced to offer embedded experience to avoid falling behind. Embedded banking help companies improve their distribution capabilities by reaching more consumers, improving their customer service resulting in higher customer retention. Embedded finance allows businesses to understand their customers’ journey and offer financial products to their customers where it makes most sense, seamlessly and efficiently without redirecting them to a separate financial institution or website.