Customers expect seamless experiences in 2024

A year ago, Finastra’s State of the Nation research identified BaaS and embedded finance as technological trends disrupting the financial services industry.  Our latest research shows these technologies continue to grow in significance, with financial services organizations adopting them in significant numbers. Compared to 2022, decision-makers are considerably more likely to have either deployed, or improved, BaaS and embedded finance technologies within their organizations during the past 12 months, with these numbers jumping by 37% and 24% year-on-year.

The growth in BaaS and embedded finance adoption shows that financial institutions understand the value of accessing new distribution channels for their products and offering third-party value-added services through their own channels. While recent economic headwinds have constrained technological investment, institutions are still prioritizing rolling out selective BaaS and embedded finance use cases. This reflects the industry’s move away from the ‘euphoria stage’ and towards use cases that drive client value and synergistic to their core businesses.

Globally, nearly half (48%) of financial institutions have either deployed BaaS or improved their capabilities in this area in the past 12 months, a sizeable increase from the 35% recorded in 2022. The US is leading the way in this area, with close to two thirds (64%) having improved or deployed BaaS, significantly more than in most other markets. The financial services sectors in Vietnam (55%) and Saudi Arabia (53%) have also seen particularly high levels of activity in this area over the last year.

Faced with the task of meeting increased customer expectations for much more seamless experiences in financial services, BaaS and embedded finance are timely enablers. They offer the means for financial institutions to integrate their services into the apps, websites and other platforms that their customers already use. This way, businesses can satisfy customers’ expectations by meeting them where they already are, not vice versa.

Moreover, as these models become increasingly advanced, and the functionalities they provide become simpler to integrate, organizations are now able to offer more all-encompassing tailored propositions. BaaS and embedded finance enable financial institutions to provide more personalized experiences, capable of more accurately tailoring services to end customers’ precise expectations, preferences and situations. Similarly, value-added fintech solutions also become easier to integrate such as sanctions screening and payment fraud detection.

Crucially, BaaS and embedded finance models offer a faster way of integrating new functionality than before. Over four in five (81%) decision-makers say that leveraging these technologies enables quicker time-to-market and eliminates the need to build banking products from scratch.

The BaaS and embedded finance use cases which are most advanced differ across markets. In France, consumer lending at the point of sale and embedded lending to SMEs are seen as the most popular use cases. The former is also the most advanced use case in the US, while the latter is in Saudi Arabia and Vietnam.

Decision-makers in the UK, Singapore and Hong Kong have made the most ground in embedded cross-border payments, whilst in Germany ‘buy now, pay later’ schemes are regarded as the most advanced, and in the UAE, embedded FX leads the pack.

The most popular use cases at a global level include purchase financing programs for consumers and SMEs, embedded cross-border payments and value-added solutions around payment risk management.

Whatever the use case, both BaaS and embedded finance are expected to remain high on the agenda for technology investment in 2024. This sustained focus highlights the pivotal role that financial decision-makers project these technologies to have.

No matter where they plan to invest, there is clear consensus among financial decision-makers on the path forward in one key regard: the vast majority see BaaS and embedded finance to grow their business and generate additional revenue (84%). Despite the economic conditions, there is widespread optimism that these business models, underpinned by technology, can help provide a path to growth.