The market opportunity for Banking as a Service (BaaS) and contextual finance is undeniably huge. The transition of traditional financial services transactions to embedded channels has been valued by Bain at $3.6 trillion by 2030. But that’s just counting ‘cannibalization’ of payments, lending and insurance from traditional channels. It doesn’t account for the transition of wholesale banking to embedded finance – delivered as a service – in areas like cash and treasury management, trade finance and FX. When you add in net new market opportunities and the emergence of new finance offerings that BaaS enables (BNPL alone has become a $100 billion industry), Finastra estimates the total market opportunity will exceed $7 trillion by the end of the decade.
For financial institutions, BaaS also provides an opportunity to reach a greater number of customers at a lower cost. Oliver Wyman estimates that the cost of acquiring a new customer can fall from $100-$200 to between $5-$35 using a BaaS model. With digital challengers today often running at a fraction of the cost of incumbents, it is imperative banks take action now and look at the value to be gained by embedding their products into other platforms.
To explore the opportunities (and threats) ahead, Finastra hosted a BaaS panel at Sibos. Experts from HSBC, Visa, SAP and Finastra each brought a compelling perspective.
Mark Williamson from HSBC, responsible for HSBC's FX Everywhere initiative, noted the importance of embedding finance into clients’ journeys, and into the tools and distribution channels they use today. Whether it's an ERP system, a treasury management platform, or a client’s mobile phone, HSBC is looking to embed finance in the right place, at the right time, for customers.
His comments resonated strongly with Andy Hirst from SAP Financial Services. As a distribution channel, SAP has phenomenal reach. Its customers generate 87% of total global commerce, making it a great point of context in which to embed financial services. SAP has no desire to be in banking. Instead, it wants to empower partners in areas such as banking, logistics and insurance to support the customer journey; and making it as frictionless as possible, providing financing, FX or cash management at the point of need.
The importance of collaboration between ecosystem players through open platforms and APIs has become essential in the race to service customer needs. Coming together is vital to accelerate the pace of innovation so that the right services can be made available to customers exactly when and where they need them. Valli Ardalan, responsible for Visa Direct's global network expansion, highlighted Metcalfe's Law: as you add a node to a network, the multiplier effect becomes infinitely larger each time. It means a change in the way that each participant in the ecosystem operates, but one that can benefit all.
Monetizing the opportunity
While BaaS presents huge potential, monetizing it is a lot harder than embedding it. Driving the adoption of new services happens best when the proposition becomes a natural part of the customer journey. Prompting customers to take action that benefits them is key to promoting user uptake. For example, alerting corporate treasurers within their ERP system about when they need to top up their cash position or hedge against FX risk, and providing the capability for them to do so in a matter of clicks.
In essence, Banking as a Service provides a huge opportunity for different ecosystem members to come together and reimagine financial services. It involves building services around a customer’s needs and specific journey which leverage the strength of all market participants. Finastra can take the role of orchestrator – connecting different participants within an extended open finance network, enabling them to build and test uses cases fast and to reach and serve new customer audiences. This is vital in allowing participants to scale, monetize and grow business opportunities in new and creative ways.
There’s no doubt that we all have a fascinating journey ahead as the world of BaaS, as embedded and contextual finance continues to develop at pace over the next 18 months. I for one, am excited by the opportunity. Make sure you’re not left behind!
This article first appeared on Finextra.
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