In this article from Rise, Created by Barclays on Banking as a Service and the Role of Fintechs we explore how Banking as a Service (BaaS) supports new solutions in Embedded Finance. The latest edition of Rise FinTech Insights, our flagship thought leadership publication, explores this subject and the opportunities for fintechs in more depth.
Embedded Finance has emerged as an exciting development for brands, banks and forward-looking technology companies, including fintechs, who are now able to embed new services within the offerings of consumer brands, from supermarkets and telcos to healthcare providers and the music industry.
For fintechs, there’s not only the possibility of developing creative solutions within customer journeys but also taking a starring role in the new, modular technology that will underpin those solutions in the form of BaaS.
Put simply, BaaS is the infrastructure that supports Embedded Finance and that is also shaping the future of banking.
Opportunities for fintechs in BaaS
What does BaaS really mean, and what areas are ripe for innovation and collaboration?
One aspect is the continued development of the APIs that simplify connectivity to banks, their data and their services. These are central to BaaS. For a brand’s customers to experience seamless journeys that involve financial services, APIs must pierce the often opaque, legacy product structure within banks so that data access is highly efficient whichever services are needed in those journeys.
Another aspect is infrastructure. Fintechs are well aware of incumbents’ decades-old legacy systems, which require a massive maintenance effort. However, the tech stack within banks is also being adapted to new Embedded Finance propositions. There is much work to do here – not just by the banks, but also through collaboration between banks and fintechs to streamline and automate the many operational workloads traditionally handled by current banking infrastructure, from money movements and clearing to settlement and reconciliation. Satisfying customers and allowing a brand to work its magic means these and other financial processes must work in the background as efficiently as possible.
As Nigel Verdon, Co-Founder and CEO of Railsbank, says: “BaaS replaces traditionally very analogue banking practices with fully digital frictionless processes and great new products built on API infrastructure.”
B2B or B2C?
There are two main models in the market: B2B BaaS providers delivering a platform for their business customers, and B2C BaaS providers, also delivering a platform but with a retail banking operation too. The distinction is not one that’s discussed often, but it could be an important consideration in the business’ success. The fundamental difference between the two is that retail operation in the B2C model. “If that’s you, and one of your customers is a fintech building infrastructure, be aware that your BaaS team might well inadvertently be competing with your fintech customer – not a great position if they come to realise that their banking provider is also a competitor,” says Nigel. “My take on these two models is that B2C banks will be more successful if they continue to go ‘direct-to-customer’ and not build a platform, avoiding this potential conflict. For the same reason, B2B platforms should concentrate on their platform offering and never compete for customers.”
Innovations in BaaS
The biggest financial service to be ‘embedded’ to date is payments. Judging by its current trajectory, the trend to design better purchasing experiences is set to continue as financial services and brands increasingly collaborate to fully integrate that part of the brand experience into the overall customer journey.
BaaS providers not only offer brands a choice of financial institutions that process payments. They can also extend brand offerings with additional financial products and features through the use of APIs. For SaaS businesses that have historically only processed payments, that experience can now very easily be complemented with features for point-of-sale merchants such as business bank accounts or cash advances.
For consumers, targeted and proprietary credit opportunities can be offered, supercharged by underwriting data and direct access to payment flows that merchants previously never had.
Brands are demanding new and interesting solutions for their customers, such as a way of seamlessly moving direct deposit accounts to and from incumbent payroll providers as it’s become clear that direct-deposit accounts have higher long-term value than non-direct deposit ones. As other areas of fintech reach scale, there will surely be new areas of demand.
These developments mean that BaaS is finding a home right at the centre of the digital economy by providing not just innovative financial propositions but new infrastructure, freeing up budget for more important activities like brand product development and marketing. As Michael Gilroy, General Partner at Coatue Management puts it: “BaaS encapsulates not only the offering of a financial product, but also provides the infrastructure to manage the product from compliance through marketing and servicing.”
To read the report in full click here.