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BaaS adoption is critical to the future of banking
The fast rate of technological change in the finance industry brings many challenges and opportunities for banks and financial services providers.
One of these technological drivers that is providing a competitive edge is banking as a service (BaaS), which is increasingly seen as a way to complement core business offerings.
What is banking as a service?
BaaS is a secure method of allowing financial technology companies (fintechs) and other businesses access to financial data via an Application Programming Interface (API). The API connects and communicates with both businesses, giving the third-party access to core systems and functionality so that they can integrate digital banking and payment services into their own products and services.
BaaS isn’t a new concept, but in the wake of the COVID-19 pandemic, organizations have had to look at innovative ways to continue offering their products and services and the adoption of BaaS has accelerated in many industries.
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2020: A transformational year
A Equinix research report revealed that 2020 was a transformational year for BaaS. The pandemic forced companies to change their business models and investigate new ways of providing their products and services. Social distancing and lockdown requirements forced many financial services providers to expand their online service delivery, and this is a trend that has continued into 2021.
Those banks who have adopted BaaS and other innovative business opportunities have become more than the traditional financial institutions they were prior to the pandemic, who offered digital services to augment their in-house/face-to-face business offerings. These banks have become important digital brokers that enable many different benefits for consumers and business partners. This also expands their business opportunities, enhances innovation, makes it possible to reach new customers and creates new revenue sources.
With the ongoing impact of the pandemic and global regulatory changes, the global financial market has quickly evolved. Integrating BaaS into their processes helps banks be more agile, accelerate their entry into new markets and rapidly meet the needs and expectations of consumers, who are becoming increasingly digital savvy. Turning to BaaS and partnering with dedicated fintechs also allows organizations to access technology and solutions that they don’t have the capabilities or resources to develop in-house.
Open banking and BaaS are accelerating
The open banking movement has been gaining momentum, and several countries have already introduced open banking regulations. This global move toward shared data and infrastructure will only continue to accelerate.
As the open banking movement grows, BaaS is expected to become more mainstream. The BaaS industry is projected to grow to $4 trillion by 2030. Tech-savvy traditional banks that embrace BaaS and form lasting relationships with industry-leading fintechs will be better placed to meet the regulatory challenges and changing consumer habits that this technological shift brings to the industry.
Security and fraud risks are higher than ever
While 2020 was about adapting to the “new normal” brought about by the pandemic, there is hope that 2021 will return to something resembling the pre-pandemic state. Vaccine distribution will help with this, but the digital shift that has already occurred, and changes in consumer habits and expectations of digital experiences, is a long-term shift that will affect all banks and financial services providers. Consumers will continue to expect the ease and convenience of completing their banking and other financial activities online and via mobile. But as digital banking increases, and people undertake more of their financial activities online, the risk and potential for fraud, breaches and other security vulnerabilities also increases.
Collaboration with fintech firms and adopting BaaS helps financial services firms to address these security and fraud risks. For example, a bank could partner with a specific fintech firm that specializes in ACH payments fraud, thereby filling an operational gap that they didn’t have the resources or in-house experience to fill. Companies like Moov, Unit, and Synctera are already enabling banks to provide a range of services like ACH processing and transaction processing and these strategic partnerships and trends will continue.
Embracing digital opportunities
Today, traditional financial institutions that still operate with legacy business models and siloed systems, will not be able to satisfy changing consumer demands and will miss out on new revenue streams. To remain competitive, banks that adopt new business opportunities like BaaS, and continuously enhance their digital offerings will strengthen consumer trust and loyalty.
One critical business function for banks is onboarding. Enabling safe, secure and seamless remote digital onboarding, while also ensuring compliance with strict AML/KYC/anti-terrorism regulations is more important than ever. Providing effective identity verification has always been a key focus for businesses that need to comply with these regulations and mitigate the risk of identity fraud during customer onboarding.
Our comprehensive research examined attitudes to online security and highlighted current frustrations during the onboarding process, with 77% of respondents indicating that a poor account creation process can make or break their relationship with a financial services provider. These and other valuable insights are available in our Consumer Account Opening Report 2020. Learn how you can enhance customer loyalty and improve the customer experience through effective digital onboarding. Download the Consumer Account Opening Report 2020 now.