BaaS Effect

Photo Source: Pickawood

Banking-as-a-Service (BaaS) is an end-to-end process that allows for executing banking and other financial services via a third-party provider (TPP).  These TPPs can include digital banks, fintech companies or even non-banks.  TPPs connect with a legacy financial institution (FI) through API, which gives the TPP the ability to “white label” the FI’s products. Here is a simplified illustration of how it all comes together:

Image Source: Infinitus

The technological revolution in financial services has been in progress for some time now, but the rate of consumer adoption of digital banking has increased dramatically over the last few years.  Both individuals and businesses realize the benefits of digitizing their banking and other services to increase efficiency and control in their financial operations.  Meanwhile, the abundance of competition has also decreased the cost of most financial services.  Not only has this demand led to a surge in new digital banks and fintechs, but it has also opened the doors for more non-banks to offer banking products to supplement their existing offering.  This strategy isn’t new, as airlines and big box stores have been white-labelling credit cards and other products for years.  What has changed is that SMEs have now entered the fray, and it is becoming more common across a broader range of industries.

While the rise of fintech and digital banking has been a significant source of disruption for legacy FI’s, many of these firms have turned these challenges into opportunities by embracing BaaS.  The most agile legacy FI’s with the best grasp of technology, data, and infrastructure are poised to pull away from the pack and take significant market share of this new banking landscape.  Many global banking leaders such as JP Morgan have capitalized on the movement by embracing new BaaS and open banking revenue streams to pad their wholesale numbers.  This has allowed them to focus their direct channels on larger, more profitable customers.  So, while consumers, fintechs, and non-bank SMEs are all apparent benefactors of this digital shift in financial services, it’s not necessarily at the expense of all banks – only those that were too late to the party.