The rapid wave of digital transformation set forth the transition of banks from rigorous to responsive, conventional to digitally savvy, and more receptive to change than ever before. Besides just being digitally established, they are moving fast-forward towards innovation and bringing a change in the industry practices.

Over the last few years, the banking sector has gone through an inevitable transformation as more and more fintech businesses come into the market. Financial services are evolving to the point where new products, channels, partnerships, and opportunities are being created. At the heart of this digital storm, lies the concept of Banking as a Service (BaaS).

So, what is Banking as a Service (BaaS)?

In simple words, Banking as a Service (BaaS) is the provision of banking products and services through third-party distributors. It is an end-to-end approach that uses APIs to connect fintech companies and other third-party organizations to a bank’s system. This helps such third-party Fintech organizations build innovative financial services upon the provider bank’s regulated infrastructure while enabling open banking services.

Banking as a Service (BaaS), disaggregating the traditional banking value chain.

The typical structural functions of a bank as we all know are accepting deposits, lending deposits to businesses, remittance, and payment processing. To facilitate these, banks require huge investments and other physical assets like property, infrastructure, etc. All these processes create  gridlocks.

BaaS is bringing revolutionary changes in the finance industry by reconfiguring the value chain and promoting new sources of growth. FinTech companies & Non-banking Financial Services providers are working with traditional banks to create BaaS that enables innovative, specialized offers to get to market faster by combining the strengths of both institutions. With increasing problems of customers with existing banking barriers of regulation, security, and technology, Baas is delivering fast, agile and seamless offerings. The winning factor of BaaS is the ability to capitalize on technology investments and create value.

According to Finextra, the top companies that are actively pioneering BaaS strategies and have already experienced all the advantages first-hand are solarisBank, Bankable, Starling Bank, Pi1, Green Dot, and BBVA.

The future of banking is driven by next-generation technologies, enabling customers to make seamless, safe, and rapid payments in order to meet their changing needs. Let’s look into some of the key trends that are disrupting the banking industry in 2022 and opening new doors of growth for banking.

Embedded Finance or embedded banking: According to Juniper Research, the value of the embedded finance market will exceed $138 billion in 2026, from just $43 billion in 2021. Embedded finance is the seamless integration of financial services into a typically non-financial platform, enabling customers to use apps to avail banking services. Apart from the easy-to-use user experience, embedded finance is having a great deal of success because of its already existing broad customer base.  In addition to embedded payments, there are also emerging trends for embedded credit which allows customers to take credit within the non-financial platforms. For example, Amazon offers EMI options which purchasing any product. Moreover, embedded investments and insurance are integrated within the non-financial apps for a smooth customer experience. In fact, embedded insurance has the potential to increase the purchase of insurance for high-value products among eCommerce customers. Research reveals embedded insurance premiums to grow to over $10 billion in 2026, from just $3.8 billion in 2021.  

Emerging technologies in financial services: Advanced technologies like AI (Artificial Intelligence), Machine Learning, Blockchain, Internet of things (IoT) are rapidly transforming customer experiences by increased responsiveness, security, transparency, and time efficiency. Today, customers are exploring the benefits of open banking where they are thoroughly aware of their financial condition, they can plan investments, compare the alternatives and make better financial decisions.

Increase in Mobile Banking: According to 2020 mobile banking survey, approximately 58% of respondents indicated that they were visiting branches less frequently due to the pandemic; among them, over 61% indicated they were also using mobile apps more frequently. This trend is likely to continue as users are more comfortable than ever in availing mobile banking. Mobile banking enables users to have account information access, transaction access, investments, support services, and news and offers alerts. One of the biggest reasons for the rapid growth of this trend is because users can conduct almost all sorts of banking activities anywhere, anytime. This has further helped the bank to cut down on its operational costs by maintaining customer satisfaction.

To conclude, both banks and fintechs are imbibed in a symbiotic relationship. The difference between the structure and functions of the two is even making the relationship more valuable. Along with the provisions of banking infrastructure, regulatory legitimacy, and the existing customers who still rely on banks; fintech brings the freedom to create, design, and experiment, offering user-friendly and tailor-made solutions for the customers. Finally, it would not be wrong to say that banks, fintechs, and BaaS firms are most effective when they collaborate to reduce risk, maintain compliance, and provide the modern financial solutions that customers demand.