The embedded finance revolution is underway. The Banking as a Service (BaaS) sector is maturing quickly and is expected to reach a market value of $7 trillion by 2030.
As staggering as this valuation is, it is only limited by the number of partnerships forged over the coming decade. By its nature, BaaS leans heavily on collaboration between providers, distributors and enablers. Those collaborations drive new propositions for the end customer and alternative revenue streams for distributor brands. Choice, scalability and agility are all at the very core of successful BaaS offerings.
Our latest research, Banking as a Service: Outlook 2022 | Paving the way for Embedded Finance reveals the extent to which distributors – the consumer facing brands that offer BaaS solutions such as BNPL – plan to spend on leveraging partnerships over the coming years. More than one-third of distributors expect to increase their BaaS offerings by more than 15% per year over the next three years. And one-third of larger distributors (where annual revenue exceeds $1 bn) want to increase their spending on BaaS partnerships by more than 15% per annum over the next three to five years, showing their faith in the power of this emerging industry.
While cost, data security and ease of integration are key factors for distributors when selecting specific providers or enablers for collaboration, requirements differ industry by industry. For instance, telecommunications and technology distributors have a higher preference for ensuring brand reputation than other segments; while transport and automotive brands place emphasis on the breadth of service offered.
To cater for such a wide degree of priorities and preferences, a marketplace model is required. This allows distributor brands to select the provider that best suits their particular needs, in turn helping their customers get access to the right products, at the right time, for the right cost.
A buy-now-pay-later (BNPL) e-commerce platform marketplace model, for example, will allow merchants to significantly increase both customer conversion rates and average order value. Innovative merchants such as ASOS and Bed, Bath and Beyond are already offering such choice. UK-based fashion retailer ASOS offers customers the choice between Klarna, Afterpay and PayPal at checkout. The US’s Bed, Bath and Beyond also offers multiple providers. A competitive marketplace offers similar benefits to retail payments, POS financing, SME lending and more.
With decreased barriers to entry and an increasing number of players vying for product market share, the onus has shifted to enablers to show diversification of both their product offerings and capabilities. Enablers must also provide proven use cases and promising ROI during partnership discussions with distributors and providers to demonstrate that the full potential of BaaS will be met.
Simply put, collaborative and mutually beneficial partnerships, along with an open marketplace model, are required for an open and competitive BaaS ecosystem, and the success of a multi-trillion dollar industry.
Jeff Manghillis is Lead Client Partner, Banking as a Service, at Finastra, one of the world’s largest fintechs that is enabling the financial services world to deliver the future of banking.