Banking-as-a-Service (BaaS) has become one of the major trends rising within payments. Gartner predicts that BaaS will be mainstream before the end of 2024 and this trend has sat at the top of the Gartner Hype Cycle from September 2022.
This is an excerpt from Future of Payments 2023.
BaaS is when banks open their APIs to allow digital banks and other third parties to build their own bank offerings through the regulated offerings provided by banks. Platform-as-a-Service (PaaS) works in a similar way, with both ultimately working on the
cloud. This end-to-end model offers the global banking world a new window into innovation.
Why BaaS and PaaS?
Companies, both financial and non-financial, are looking towards BaaS and PaaS to improve their services. It is important to understand what the benefits are for these entities. Alexandre Maymat, head of GTPS at Sociéte Générale tells Finextra: “For financial
institutions, adopting managed services like BaaS or PaaS transforms the way they interact with fintechs, by offering rapid access to banking and payment services.”
Annelinda Koldewe, global head of wholesale banking payments, ING, points to the benefits this offers to smaller banks: “The decision to adopt these services heavily depends on the size of the banks. Smaller banks where integration is straight forward are
more likely to adopt BaaS or PaaS solutions.”
Maymat adds that one of the major benefits is the cost saving. BaaS and PaaS can cut costs by enhancing efficiency and reducing investments. It does this by lowering the time to market of solutions, and reducing the IT and maintenance costs which you might
have seen in a more traditional option.
Koldewe agrees with this sentiment, arguing that “smaller banks may be unable to afford the high investment in (payments related) applications, as regulatory requirements are increasing year by year.” Increased security is seen as another benefit. BaaS solutions
access data through a secured platform, which reduces the data loss and data theft risks.
In addition to these improvements to comparably older systems, BaaS solutions are inherently more scalable than previous iterations. They can scale up and down financial services as needed, adapting and changing to customer needs. One further for BaaS and
PaaS is that they allow smaller firms to specialise across the services they provide, which can work to increase their value in the market.
Koldewe agrees and adds that smaller banks are “then able to specialise on niche products like private banking or securities related business. In other words, other than core payment services which are delivered by the BaaS or PaaS provider and are not core
business of those banks.”
Overall, this adaptability and specialisation offers an improved customer experience. Services are more adaptable and efficient for customers. Furthermore, with the access to data offered in BaaS there is an increased accuracy of services provided. In Maymat's
view: “BaaS is an attractive option for companies that want to focus on their core business, save time and money, and scale their banking and financial services as needed.”
Issues with BaaS and PaaS
One question that continued to be debated is why larger banks might go for this technology, when many of the major benefits appear to be for the smaller banks. While some banks are becoming increasingly involved in this endeavour, there remains some apprehension.
The argument for larger banks to become involved in this movement is that through offering BaaS and PaaS, they would be able to keep up with their fintech competitors. For many, this can be seen as part of future proofing themselves.
However, Koldewe points to another issue which is that “for larger institutions with complex infrastructures, a PaaS service would be more difficult to implement. Where banks are systemically important, regulators will want to make sure local payment infrastructures
remain guaranteed.
Maymat alternatively argues that “the limits of embedded finance and BaaS mostly lay in marketing or branding concerns, as it could devalue banks’ brands in the market as it shifts customer’s loyalty to fintechs instead of banks, and with the fintechs taking
some risks to move their business to another bank or switching BaaS provider. At Société Générale, we are developing BaaS services ensuring platform integration facility, data integrity, and working on solutions to ensure our ability to scale.”
However, Cecabank seem to offer a positive outlook on their experience of BaaS and PaaS: “Fintech newcomers and incumbent entities are called to collaborate to provide better financial services for users. At Cecabank, as a wholesale bank specialised in offering
‘white-label services’ to the financial sector, we understood this from the beginning and created meeting points between different entities. Being a bank has also allowed us to provide reliability, as we are subject to all banking regulations and accountabilities
to all participants in the value chain.”
Despite these apprehensions, according to the Market Statsville Group, the BaaS market size is expected to grow from $541.62 million in 2022 to $5,423.59 million by 2033.