Speakers: Dr. Martha Boeckenfeld, Simon Torrance, Ignacio Fonts, André Caçador, Sabrina Guzmán
Customers are where their life happens - this is usually not at a bank or their services. BaaS is enabled by the seamless integration of financial services and products into other kinds of customer activities, typically on non-financial digital platforms.
WAKE-UP CALL FOR BANKS
You’ve got to start with the customer experience and work backwards to the technology – not the other way around. Steve Jobs
Consumers increasingly use these platforms to access services such as e-commerce, travel, retail, health, and telcom. The financial service could be someone taking out a small loan when they pay for a holiday on a travel site; or the instant calculation and sale of micro-insurance for newly purchased jewelry.
BaaS enables competition in financial services by enabling non-banks to offer core banking services. As a result, innovation gets a push and customers get access to customer-friendly products. Moreover, it results in greater financial transparency. Third-party players focus on specific customer pain points.
Through integrating non-banking businesses with regulated financial infrastructure, BaaS offerings are enabling new, specialized propositions and bringing them to market faster.
As customer dissatisfaction with existing offerings grows, BaaS offerings are rapidly gaining ground—here are a few key stats on the state of the market according to Deloitte:
How does BaaS work?
Let’s take a look at some of the examples:
Amazon is one of the biggest examples for using BaaS- seeming-less integration of payment services and lending. As a consumer you do not worry about how to pay- your purchase can be paid with a number of payment options provided by fintechs and banks. In the Amazon ecosystem, merchants can take out a loan provided by Goldman Sachs or ING- fully integrated services at the point of sale.
60-70% of consumers in the US and Germany even say, that they would open a bank account with Amazon- even though they are not a bank.
The Uber debit card is offered to new drivers and delivery partners at the time of enrollment. With accounts held by Green Dot, cardholders can cash out their trip earnings instantly and receive cash back. Shopify Balance uses Stripe to seamlessly integrate small business bank accounts (held at Evolve) into the e-Commerce platform. Key features include a management dashboard focused on providing insights into the financial health of the business, physical and virtual debit cards, and relevant offers. Additionally, merchants using a Balance account are provided faster access to revenue processed by Stripe.
Square’s Cash App started as a peer-to-peer payments service, but has since expanded into adjacent product lines, including fee-free investments and bitcoin trading. Through Marqetaand their bank partner, Sutton Bank, customers are given a customized debit card to use at for in-store purchases and/or withdraw money from ATMs. Lincoln Savings Bank also provides account and routing numbers for incoming and outgoing ACH payments.
Apple, apart from Apple Pay, has recently announced the acquisition of Credit Kudos, demonstrating its move into financial services. Given their unique way of experiences and how they integrate their services with their entire ecosystem, another important player in the space.
What does that mean for Banks?
Banking-as-a-service, or BaaS, is a great opportunity for existing banks, insurers, and wealth managers to reach a greater number of customers at a lower cost by teaming up with non-financial businesses. But if they do not react in a rapid, strategic manner, BaaS could also pose a threat, as it opens up the financial services market to new challengers. Incumbent banks and other financial institutions need to make strategic decisions about how to enter this growing business – what products to offer and which partners to work with.
A non-financial business can thus distribute financial products under its own brand, so that the customer experience is buying a product from that brand – but the financial product is actually provided by a financial institution. A financial institution that wants to offer BaaS via a distributor can set up a platform for this purpose based on the latest low-cost, cloud-native, scalable technology, which will reduce its cost to serve customers.
For a financial institution, it is an opportunity to reach a greater number of customers at a lower cost. The cost of acquiring a customer is typically in the range of $100 to $200, according to Oliver Wyman analysis. With a new BaaS technology stack, the cost can range between $5 and $35. For the distributor, offering financial products opens up new revenue lines at attractive margins and can deepen its relationships with customers, and can then capitalize on cross-selling opportunities.
This opportunity comes as financial services incumbents struggle with low performance. One reason is that incumbent financial institutions are not using their technological assets as efficiently as they could and find it difficult to reduce the cost of technology.
Digital challenger banks are now running at a fraction of the cost of incumbents. Some technology companies have obtained banking licenses, enabling them to offer their BaaS platforms to distributors that want to provide financial products to their customers.
To fight back, some incumbent financial institutions are spending billions of dollars to digitize their existing business models. But it might be more effective for them to start up new models – that is, BaaS – by embedding their products in other platforms.
To be successful, they need to be where their customers spend their lives and solve the pain points - “contextual banking”. To define their role across the value proposition, the following questions should be raised:
Who are your end users and what do they need? Where is the latent market demand for new financial offerings?
What is the competitive opportunity? Where is the BaaS value chain weak, or under-explored?
What is my right to play in this space? What can I realistically be expected to deliver?
The important driver of success is the mindset starting from the leadership team: Turning threats into opportunities can be done but it requires the right mindset, willingness to take risks and a team passionate about delivering results.
Written by: Dr. Martha Boeckenfeld