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The Rapid Emergence of Banking as a Service (BaaS) and Embedded Finance
The financial services industry has experienced a paradigm shift in recent years with the advent of Banking as a Service (BaaS), an innovative approach that is revolutionising how financial products and services are offered and consumed.
January 31, 2024

The financial services industry has experienced a paradigm shift in recent years with the advent of Banking as a Service (BaaS), an innovative approach that is revolutionising how financial products and services are offered and consumed. This article delves into the main drivers behind the rise of BaaS, its key benefits, and the countries leading the charge in its adoption.

Understanding Banking as a Service (BaaS)

Banking as a Service, commonly known as BaaS, is an emerging fintech-driven model that empowers non-bank entities such as technology companies and startups to provide banking and financial services to their customers. Essentially, BaaS enables businesses to embed financial services directly into their products or applications, known as “embedded finance”.

Main Drivers of BaaS

Several critical factors are fueling the rapid growth of BaaS:

1. Customer-Centric Solutions: By integrating financial services seamlessly into their products, businesses can create more customer-centric solutions that simplify user experiences.
2. Cost Efficiency: Startups and tech companies can leverage existing infrastructure and expertise by partnering with established regulated financial institutions such as Banks and Electronic Money Issuers (EMI’s), reducing costs while speeding up entry into the market.

3. Regulatory Frameworks: Evolving regulatory frameworks have started accommodating BaaS providers legally, making it easier for non-bank entities to partner with traditional institutions.

4. Technological Advancements: The advancements in secure API technology have made it significantly easier for institutions to offer Embedded Financial services to businesses to integrate banking and payment services quickly into their applications.

Key Benefits of BaaS

The adoption of BaaS offers various advantages for both regulated institutions and businesses alike:

1. Diverse Financial Services: With embedded finance capabilities, a business can now offer, for example, deposit accounts, payment processing, lending, or investment opportunities to their own customers.

2. Enhanced User Experience: Customers can now benefit from seamlessly integrated experiences, eliminating the need to create accounts and log into multiple apps and websites. Ease of use is essential to winning and retaining customers in this rapidly evolving digital economy.

3. Faster Market Entry: Partnerships between regulated financial institutions and agile, entrepreneurial businesses mean accelerated market entry and scaling opportunities for both entities, thus saving time and money and allowing the business to focus instead on core competencies such as customer acquisition and monetisation.

Global Adoption

Certain countries have emerged as leaders in this space, such as the UK and Europe, where a robust regulatory framework exists to support such activity.

Asian countries are beginning to adopt this model as regulators begin to explore and embrace open banking frameworks and craft appropriate governance frameworks for such models.

Technology Enablement

In order for regulated institutions to offer such service, means that their technology stack must support this activity. Most legacy core banking stacks lack the capability to provide fully secure, segmented, multi-tenant banking capabilities.

Upgrading legacy core systems can be a very costly and risky exercise for any regulated institution, and there is little appetite for such disruptive exercises. This means that institutions are turning to more agile banking and payments technology vendors like Geniusto International who provide a highly scaleable, cost-effective, multi-tenant platform that can be simply layered on top of existing core banking systems, opening up a wealth of new services for an institution to offer to downstream businesses wishing to enjoy the benefits of embedded finance.

Some excellent examples of this approach are UK-based Andaria Capital and European-based Walletto both of whom offer BaaS to their downstream customers, who, in turn, are able to offer a range of services to their customers that previously would have been reserved only for regulated institutions.

In conclusion, BaaS is here to stay, and more and more national regulators are embracing the concept and providing regulatory oversight for this activity. Overall, the future looks very bright for financial inclusion, powered by entrepreneurial businesses that possess the agility to access large customer bases that traditional institutions were previously unable to penetrate.