By W.B. King
With banking as a service (BaaS) estimated to be a $7 trillion dollar industry by 2030, there is a “split consensus” among financial institutions with half seeing the value, and the balance viewing the proposition as a “looming threat,” said Finastra CEO Simon Paris.
For those executives seeing BaaS as a threat, Paris said this stance could eventually leave the financial institution as a “utility in the background.” He shared his thoughts during the hybrid 2022 Finastra Forum and then introduced a panel of experts on the subject of how to “play and win” in the BaaS space.
The London-based company, with offices in America, offers a portfolio of products and solutions to the retail banking, transaction banking, lending and treasury capital markets.
“BaaS is a trend that has erupted into financial services and really come to the fore over the last 12 months and (I) hear terms like ‘embedded finance’ and ‘contextual finance’ on a daily basis,” said panel moderator and Finastra President and Global Head of Customer Operations Eric Duffaut.
Duffaut added that since 2018 open banking has been an accepted imperative, so he asked: “Why is there so much fuss about embedded finance now?”
“Just last month Goldman Sacks stockholders approved the acquisition of GreenSky, a home-improving lending fintech for $2.2 billion,” Duffaut said. “Sterling Bank in the U.K. just confirmed global launch of their BaaS offering taking Sterling’s software to banks around the world. These are just a few of the headlines. But where is it headed and who will win the race?”
In an effort to better understand how financial institutions can monetize BaaS services and deliver “tangible benefits at pace,” Duffaut welcomed a panel of BaaS experts.
Chief Banking Officer and Head of Partnerships at Seattle Bank Josh Williams explained that current BaaS initiatives include a “backend to a fintech lender” project. Additionally, the bank is working on an embedded SMB digital account opening and payments solution for a vertical service provider in that space.
“BaaS is really leveraging technology to go access customers through a new channel,” Williams said, adding that the bank is a Finastra partner.
“In terms of the opportunity, clearly the market is seeing a lot of interest in this…the venture capital activity in this space is very high, but we are hearing directly from out commercial clients, from fintechs we work with, investors we work with — real-time day-to-day demand on how we can help them in these types of solutions," he continued. "We see a unique opportunity to build on the technology and grow in a new path.”
McKinsey and Company Partner Ritesh Agarwal, who advises financial institutions on digital technology and transformation, said BaaS has been a recent focus of many client questions.
The Chicago-based consulting firm advises on strategic management to corporations, governments and other organizations.
“When we speak with small and mid-sized banks, they are cautiously optimistic and sometimes skeptical. They are asking question like, will BaaS make their brand relevant?” Ritesh said. “On the other hand, when we talk to larger banks, they have crossed this hurdle and are asking questions like, what products they should offer in the market? What does a partnership model look like? Lending and cash management — these are the two spaces where I see a lot of growth coming from.”
Leveraging BaaS Technology
Finastra’s Senior Director, Solutions Management, BaaS and Orchestration Jeanette Kescenovitz said consumers today are looking for an embedded, integrated experience with real-time decisioning. Her team, she explained, is essentially a “start-up” charged with developing innovative BaaS solutions — everything from software to data analytics to sales to go-to market strategies.
“Traditional, software architecture and point-to-point integration are just going to fail when it comes to delivering banking as a service. We focus on not only modernizing our technology stack, but also designing for the future,” said Kescenovitz. “The open API’s we are designing right now will connect embedders to financial institutions, financial institutions to service providers all on the modern, secure scalable Finastra platform that fintechs trust.”
Since BaaS has been viewed as a “nascent” concept with limited use cases, Duffaut asked Finastra’s Chief Revenue Officer, Banking as a Service Angus Ross, how and when BaaS will be proven to be commercially viable.
“BaaS isn’t a nascent concept anymore — it understates the opportunity,” Ross said, adding that he no longer uses nascent when speaking about BaaS because banking executives can’t afford to think they can take a wait-and-see approach.
In Ross’ view, there are three archetypal approaches to BaaS: pioneers, early adopters and late followers.
“Pioneers take a platform approach on a bundled set of products…identifying a captive point of context and getting proper placement in that context,” he said, adding that Citibank, HSBC and Seattle Bank are examples of proactive players in this space.
“The early adopters are succeeding at pace focusing on their core products and services, not just a transaction account, credit card or lending product — they are looking at what is relevant to an end customer, bundling those products and getting them to point of context,” he said. “The late followers are chasing a shiny object like BNPL (buy now pay later) and dabble with it. But when you finally launch something to market, there are 100 other organizations in front of you.”
Williams said when it comes to BaaS, Seattle Bank doesn’t have all the answers, but the first step is always determining what new technologies could benefit the organization.
“As we looked at BaaS, we said, ‘Here is an opportunity to leverage our core strengths.’ I think the starting point has to be what makes sense for your company and what problems you are trying to solve,” Williams said. “And once you have that strategic picture, then it’s looking at what is the technology gap and how do we get there.”
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