How integrated finance and BaaS are influencing financial services

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A few years ago, the automotive industry underwent a transformation. Cars were no longer just sedans, hatchbacks, or station wagons, but evolved into new highly personalized, cross-segment, multipurpose vehicles. Similarly, the financial services industry has also been transformed.

Non-bank companies are increasingly offering financial services, such as digital wallets, accounts, payment methods, and financing options, making most companies fintech. The ultimate goal is customer retention and increasing customer lifetime value.

Today, companies in all industries are considering launching integrated financial services. The integrated finance market is forecast to top $138 billion in 2026, up from $43 billion in 2021, according to a new study from Juniper Research.

In response to demand, banks and financial institutions are increasingly offering banking as a service: integrated offerings of technology and services that enable other companies to offer banking solutions under their own brand names.

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What is BaaS?

Banking as a service is a term that describes the technology and services that allow other companies to offer banking solutions under their own brand names.

BaaS providers offer application programming interfaces, allowing third-party developers to access banking features and functions to build financial products and services on top of existing platforms. This allows companies to launch new financial products quickly without building everything from scratch.

SEE: Hiring Kit: Back-End Developer (TechRepublic Premium)

This white label platform allows companies to focus on their core competencies while offering valuable financial services to their customers. Banks and financial institutions benefit from BaaS by expanding their customer base and increasing revenue without incurring the costs of developing and marketing new products.

BaaS is fast becoming a win-win solution for fintechs and traditional banks as they adapt to the changing finance landscape. Companies no longer need to have a bank or a financial services company to offer financial services.

There are a number of common use cases for BaaS, including:

  • Allow businesses to offer branded payment cards to their customers
  • Provide financing options for businesses.
  • Offering loyalty and rewards programs.
  • Integration of payments on websites and mobile applications through API

What is integrated finance?

Integrated finance is a term that describes the integration of financial products and services with other non-financial products and services. For example, a customer could sign up for a subscription service and pay for it with a monthly payment that includes their mortgage, car loan, and other debts. Integrated finance is designed to make financial products and services more accessible and convenient for customers.

Common use cases for integrated finance include:

  • In-app payments
  • Pay bills through a chatbot
  • Make international money transfers through a social media platform
  • Buy now, pay later retail
  • Automatic discounts or cashback for transactions

Understanding and monitoring trends in embedded finance and BaaS can help banks and non-banks identify opportunities and make strategic decisions about product development, partnerships, and go-to-market plans.

The rise of the opening

The increase in openness in the financial services industry is being driven by a few factors:

  • Customers are demanding more transparency and control over their data and finances.
  • New technologies such as artificial intelligence and mobile banking have made it easier for consumers to compare products and services from different providers.
  • Regulatory changes, such as the European Union’s revised Payment Services Directive (PSD2), have put pressure on banks to open up their data to third-party providers.

In response to these trends, banks are increasingly adopting open banking technologies such as open APIs. Open APIs allow third-party developers to create applications that interface with a bank’s core systems, giving consumers more choice and flexibility in managing their money.

SEE: Open Banking: Reshaping Financial Services (PDF) (TechRepublic)

While open banking presents some challenges for banks, such as increased competition and the need for greater investment in security, it also presents many opportunities. For example, banks can attract new customers and drive growth by offering new and innovative products and services.

The rise of challenger banks

The rise of challenger banks has been one of the most significant trends affecting financial services in recent years. Challenger banks are digital-only banks that have seen rapid growth in Europe but less enthusiastic adoption in the United States.

However, the COVID-19 pandemic has precipitated rapid uptake in the US, with challenger banks being used for COVID-19 stimulus payments. As a result, seven of the top 20 challenger banks are now US companies.

Challenger Banks by countries pie chart in shades of red
Image source: Fintech Unicorns

These challenger banks are influencing financial services by offering an alternative to the traditional banking system. They are generally more agile and customer-focused, resonating with consumers looking for more personalized service.

Plus, they often offer features traditional banks don’t, like free foreign withdrawals or free overdrafts. They also offer better rates and fees than traditional banks, making them a more attractive option for many consumers.

As challenger banks continue to grow in popularity, they are likely to have an increasingly significant impact on the financial services landscape.

Demand for integrated experiences

There is a growing demand for integrated experiences in the financial services industry. This is driven by consumers looking for easier and more convenient ways to manage their money.

In response, banks and other financial service providers are increasingly offering products that are integrated with each other and with other non-financial products and services. For example, Walmart recently announced that it will launch a fintech startup with its partner Ribbit Capital to offer customers modern, innovative and affordable financial solutions.

IKEA also recently acquired a 49% stake in Ikano Bank, its banking partner. Ikano was part of the original company before it was spun off into an independent business in 1988. This tells us that IKEA has seen the value in having a financial services offering that is integrated with its core product offerings.

Ecosystem orchestrators that offer customers as much integration as possible will be better positioned to succeed in the future.

Changing confidence levels in financial services

One of the most interesting trends in financial services is the shift in trust levels between traditional banks and fintechs. For many years, banks have had a trust advantage over fintechs, but that is no longer the case.

In reality, many non-bank brands now have higher trust levels than banks, which they can leverage to offer financial products. This presents an opportunity for banks to white label or co-brand their products with partners who have high levels of trust. By doing so, banks can take advantage of the growing trust in other brands and distribute their products more effectively.

Of course, banks won’t necessarily have to white-label all of their products and services; rather, they can identify markets or products in which it would be more beneficial to leverage the trust of non-banks. Either way, it will be interesting to see how this trend plays out in the coming months and years.

Opportunities for banks and non-bank companies

There are many opportunities for both banks and non-banks in integrated finance.

Non-banks need to consider whether adding banking makes sense within the user experience or journey they offer, whether their integrated finance offering will be large enough to justify the expense, and whether they have the technical and operational capacity to work with a bank.

On the other hand, banks need to consider whether they can realistically transform to offer banking as a service, in which products and geographies they should offer BaaS, and what advantage they have over the integrated user experiences likely to emerge from retailers and large companies. technology companies. .

Integrated finance is a growing area with a lot of potential for both banks and non-banks. By considering these questions, both groups can make the most of the opportunities presented by this new landscape.

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