embedded finance
Editor's Choice Embedded Finance World-Region-Country

How Do Emerging Trends For Banking-as-a-Service Differ Across the Globe?

This April, The Fintech Times is focusing on all things embedded finance, the integration of financial services into non-financial products and services. As the space rapidly develops, we look to highlight the latest developments, initiatives and challenges embedded finance has to offer and overcome across the globe. 

Having established what regulatory challenges banks and fintechs should be aware of when leveraging banking-as-a-service (BaaS), and how the technology is advancing financial inclusion across the globe, we now turn our attention to emerging trends and if they are region-dependent.

A focus on regulations or financial inclusion
Richard Kalas, client solutions director, GFT
Richard Kalas, client solutions director, GFT

Richard Kalas, client solutions director for retail banking, GFT, the digital transformation pioneer, notes the various different ways that embedded finance is impacting the financial sector.

“BaaS is experiencing a significant, and quite exciting, expansion of its ecosystem, with more banks, fintech startups and technology companies entering the market as service providers or consumers. This trend fosters greater collaboration and innovation.

“The ecosystem’s expansion is paving the way for groundbreaking products and solutions that have the potential to revolutionise the financial services sector, empowering consumers and businesses alike with seamless, tailored experiences.

“It is also great to see a surge in innovation, which can be witnessed by the number of neobanks entering the market and disrupting the financial services sector by challenging the status quo of traditional banking models. Neobanks are known for their strong focus on improving the overall customer experience. By leveraging BaaS solutions, neobanks gain the ability to offer cutting-edge and user-friendly financial services tailored to meet the evolving needs of their client base.

“The modularity, interoperability and seamless integration of BaaS have also proven to be powerful drivers of innovation in sectors beyond banking. For example, the retail and e-commerce sectors are taking advantage of BaaS by embedding financial products directly onto their platforms, making payments more accessible and efficient as well as enhancing the overall customer experience of shopping online.”

Emerging markets vs developed ones

Kalas concluded: “Whilst these trends are evident on a global scale, their implementation and impact may vary across different regions. For example, in mature markets like North America and Europe, there is a strong emphasis on regulatory compliance and data privacy, driving innovation in secure and compliant BaaS solutions. In contrast, in emerging markets in Asia and Africa, there is a greater focus on financial inclusion and leveraging mobile technology to reach unbanked populations.”

Regulation and socio-economic landscapes shape trends
Maz Karimian, Head of Strategy at ustwo
Maz Karimian, Head of Strategy at ustwo

Regulatory frameworks are shaping the emergence of embedded finance across the world explains Maz Karimian, head of strategy at ustwo, the digital products and services provider.

“The landscape of Banking-as-a-Service (BaaS) is undergoing significant transformation, driven by a blend of regulatory initiatives, technological advancements, and evolving consumer expectations.

“The advent of open banking, particularly in Europe with the implementation of the Payment Services Directive 2 (PSD2), has sparked a wave of innovation. By compelling banks to share customer data with third-party providers upon customer consent, it has democratised banking data, thus empowering fintechs like Revolut and Tink to craft more personalised financial offerings.

“Simultaneously, embedded finance is redefining financial adoption and engagement models in regions like Southeast Asia, with trusted homegrown companies like Grab, the Uber of Southeast Asia, incorporating financial services into their otherwise unrelated offerings through a mobile-first strategy that aims to circumvent Asia’s fragmented banking sector.

“In the US, the environment for embedded finance is starkly different. Faced with the sophistication and strength of the financial services industry; tech giants like Apple have taken a more partnerships-led approach to offering embedded services like Apple Pay and the Apple Card.

“Such initiatives have won market share on the basis of simplified, seamless user experiences. This tendency to prioritise convenience raises fascinating questions regarding the potential benefits and pitfalls of on-demand, AI-powered financial services.

“The bottom line is that BaaS innovation differs widely across regions, and trends in the space, more so than in other ‘blank-as-a-service’ domains, are shaped by specific regulatory frameworks, technological landscapes, and socio-cultural contexts.”

Emergence of lending-as-a-service
Aman Behzad, Managing Partner, Royal Park Partners
Aman Behzad, Managing Partner, Royal Park Partners

As more non-banking players look to enter the financial space, BaaS is becoming increasingly helpful. According to Aman Behzad, managing partner, Royal Park Partners, the fintech focused financial advisors, lending-as-a-service is once trend being seen across the globe.

“We will see BaaS break new ground over the next two years. Macroeconomic conditions are driving the need for client monetisation, presenting more opportunities to extend the reach of BaaS. Lending, for instance, has become increasingly appealing to various non-bank players seeking higher interest yields and new revenue streams, driving the growing of new lending-as-a-service (LaaS) solutions.

“The applications of BaaS will continue to grow, and it’s exciting to see it transcend the boundaries of finance. In an era where customer-centricity is paramount, businesses across all sectors will be looking to BaaS to give them a competitive edge.

“Sectors as far reaching as healthcare and travel are tapping into the potential of BaaS to generate ancillary revenue streams, and augment customer retention. In the travel sector, for instance, one growing use-case is the integration of banking functionalities into airline loyalty programmes. Passengers can now earn, manage and redeem rewards seamlessly, benefitting from a more enhanced and integrated experience.”

Partnerships can help modernise infrastructure

Consumers want easily accessible solutions. Karthik Sethuraman, chief delivery and risk officer at audax, a corporate venture backed by Standard Chartered Bank, notes that one way firms can ensure they meet this need is through partnerships.

“Consumers want to be able to make a series of transactions with one app – from booking transport, paying for groceries, getting a micro-loan, and purchasing travel insurance. We help to empower banks and financial institutions to accelerate their digital transformation to meet those needs.

“Southeast Asia’s population is increasingly digitally-native, which has seeded the growth of BaaS by increasing the demand for digital financial services and accelerating the adoption of innovative banking solutions. The digital natives are accustomed to digital interactions and prefer seamless, convenient, and personalised digital financial experiences that can be accessed via mobile or online banking services.

“More partnerships between BaaS providers and fintechs create more comprehensive offerings both for banks, FIs and end-users. An example is the audax partnership with Thought Machine, where audax’s scalable digital banking technology platform is integrated with Thought Machine’s configurable core banking technology, enabling institutions to swiftly modernise infrastructure and develop fully customisable financial products for end customers.”

Ensuring consumers are protected
Daniel Grunstein, CEO and co-founder at Crowded Banking
Daniel Grunstein, CEO and co-founder at Crowded Banking

Daniel Grunstein, CEO and co-founder at Crowded Banking, the digital banking platform notes that consumers can find themselves open to fraud if BaaS providers don’t play their roles properly.

He explains how they can: “BaaS providers have gotten a bad rap recently – with all of the reports of fraud and failed ventures. I want to draw attention to the companies in the BaaS industry that are thriving, as a founder in this space myself.

“Embedded finance platforms for established clients are being unfairly grouped with the neobanks that acquire customers through B2C ads or other unreliable methods that leave them vulnerable to fraud.

“There are embedded finance platforms that are growing, irregardless of the fraud and compliance complications that other neobanks are facing. Crowded, having tripled its customer base last year, works with nonprofit organisations that have been around for longer than most banks – fraternities, universities, Girl Scouts, etc. Fraud around KYC/KYB is harder to pull off with established clientele, as the BaaS provider can easily weed out fraud accounts by checking with the national office of these multi-chapter organisations.

“When providing BaaS to an established organisation, rather than to individuals, more accountability and checkpoints prevent some of the vulnerabilities to fraud. Also, unlike most fintechs, where compliance is a burden, Crowded has monetised it, allowing their non-profit clients to maintain their tax-exempt status, and turned it into a revenue driver and competitive advantage.”

Who can move money
Donald Chapman, head of North America at Pollinate
Donald Chapman, head of North America at Pollinate

Different regions have different rules on who can move money highlights Donald Chapman, head of North America at Pollinate, the digital tool provider.

“BaaS enables non-banks to provide financial services, so tech firms that can innovate to find ways to profitably serve underbanked people or businesses. They can now deliver financial services where banks previously weren’t able or willing.

“These companies are not banks so they need to work very closely with their bank compliance teams to ensure they adhere to all pertinent rules and regulations.

“BaaS definitely varies by region. For example Europe almost encourages the dissemination of banking capabilities, such as PSD and PSD2 allowing non-banks to move money whereas in the US it is more strictly a bank situation.

“There are e-money licenses in Europe and money services business (MSB) licenses in the US, but in the US a company needs to go state by state to properly conduct business nationally which is a regulatory nightmare yet to be solved.

“Banking is a staid and highly traditional industry, so as the capabilities open up to tech firms that innovate, we will see more sectors, more adoption, and more opportunities… as well as more missteps.”

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