The financial sector is in the midst of a digital transformation. FinTech startups drive innovation and challenge traditional banks with new technologies and services. One of the most significant trends in the industry is the rise of Banking-as-a-Service (BaaS).
Today, we’ll talk more about Banking as a Service, FinTech, and how they impact the banking sector. We will also discuss how BAAS contributes to growth in the FinTech industry.
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What is Banking as a Service?
Banking-as-a-Service (BaaS) is a model that enables third-party providers to offer their financial services and products to customers through a partner bank or financial institution. In other words, BaaS allows non-bank companies to enter the banking sector and compete with traditional banks.
BaaS providers build, launch, and operate digital banking products and services on behalf of their partner banks. These products and services are often delivered through APIs, allowing seamless integration with the bank’s existing systems.
BaaS is similar to Software-as-a-Service (SaaS), enabling companies to outsource their banking needs to a third-party provider. The main difference between the two models is SaaS provides software applications, while BaaS provides access to banking products and services.
Why is Banking as a Service Growing in Popularity?
There are several reasons why BaaS is growing in popularity. They include:
First, traditional banks are under pressure to keep up with the pace of innovation. FinTech startups are introducing new technologies and services that change how people bank. To compete, banks need to offer similar products and services.
BaaS allows banks to quickly launch new digital products and services with lower costs and lower risks of building them from scratch. Banks can also use BaaS to test new ideas and enter new markets without committing to a long-term project. Then, if the product or service is successful, the bank can choose to build it in-house.
2. Customer expectations
Second, customer expectations are changing. Thanks to the ubiquity of mobile devices and the popularity of social media, customers now expect banks to offer a digital experience that is convenient, personalized, and engaging. Banks that don’t keep up with these changing expectations will lose customers to digital challengers.
BaaS provides the technology and expertise necessary to meet these expectations. By partnering with a BaaS provider, banks can deliver innovative products and services that satisfy their customers’ needs. These partnerships also enable banks to quickly launch new products and services, which is essential in today’s fast-paced digital world.
Undoubtedly, one of the main reasons BaaS is growing in popularity is also its cost-effectiveness. Building digital products and services from scratch can be costly and time-consuming. Conveniently, banks that partner with BaaS providers can launch new products and services quickly and without incurring the high costs of development.
In addition, BaaS providers often have access to discounts on technology and other resources, which they can pass on to their partner banks. This makes BaaS an attractive option for banks looking to reduce costs.
4. Regulatory pressure
Finally, banks are under increasing pressure from regulators to improve their risk management practices. In the wake of the financial crisis, regulators have introduced new rules and regulations that banks must comply with.
BaaS providers can help banks meet these regulatory requirements by providing access to cutting-edge technologies, such as data analytics and machine learning.
How is Banking as a Service Contributing to Growth in the FinTech Industry?
Unsurprisingly, Banking as a Service plays a significant role in the FinTech industry’s growth.
FinTech is an all-encompassing term that refers to using technology to deliver financial services. It includes everything from mobile payments and peer-to-peer lending to robo-advisors and blockchain.
The FinTech industry is proliferating—just consider these statistics:
“In the first half of 2021, investment in FinTech companies reached a then-record-breaking $98 billion – a $19.9 billion increase in the second half of 2020. By the end of 2021, FinTech investment reached $210 billion.”
BaaS is one of the main drivers of this growth. By partnering with BaaS providers, banks can quickly launch new digital products and services. These products and services contribute to the FinTech industry’s growth.
For example, one of the most popular applications of FinTech is mobile payments. Partnering with a BaaS provider, banks can offer mobile payment services to their customers without incurring the cost and risk of building their own mobile payment platform.
Banks are also using BaaS to launch other FinTech products and services, such as robo-advisors, peer-to-peer lending, and blockchain. These products and services all contribute to the FinTech industry’s growth.
The Future of Banking as a Service
As for the future of Banking as a Service, we can expect a few things. First, we can expect the BaaS market to continue to grow.
According to a recent report from Market Research Future, “the global Banking as a Service market is expected to register a CAGR of 25.4%, registering a market in 2020 during the forecast, 2021–2027.” This growth will be driven by the increasing demand for digital banking products and services.
Second, we can expect BaaS providers to continue to innovate. They will need to offer new products and services to keep up with the changing needs of banks and their customers.
Lastly, we can expect more partnerships between banks and BaaS providers. As banks look to launch new digital products and services, they will increasingly turn to BaaS providers for help.
Banking as a Service is clearly playing a major role in the FinTech industry’s growth. It is also clear that the future of BaaS is bright. Thanks to the growing demand for digital banking products and services, we can expect the BaaS market to continue to grow. We can also expect BaaS providers to continue to innovate and offer new products and services. And we can expect more partnerships between banks and BaaS providers. All of this will contribute to the continued growth of the FinTech industry.
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