What's this all about?
‘As-a-service’ has revolutionised many industries – from music to transport – but we’re still waiting to see how it can take banking to the next level. In the following article, we look at the effect Banking-as-a-Service (BaaS) is having and will have on financial services and how it will enable more non-financial companies, such as supermarkets and telecom providers, to get in on the act.
Read on if you:
- Want to understand what Banking-as-a-Service (BaaS) is all about
- Your company is considering taking the leap into financial services
- Want to understand the benefits for non-banks of offering banking services
- Take an interest in the future of banking
Embedded finance, white-label banking, Banking-as-a-Service (BaaS) – whatever you want to call it, a new trend of non-financial companies taking a fast-track route into financial services is shaping the future of finance.
The process of major customer-facing firms taking the leap into financial services has been around for years. Think Tesco Bank in the UK or 7-Eleven in the US and Canada. However, in the past, these companies would spend years and millions of euros to form strategic partnerships with banks that would enable them to merely launch pre-paid cards or introduce money orders to their customers.
BaaS has changed all that. The difference now is that this service comes in one package and can get your company into the financial services space in a matter of weeks for a fraction of the cost. As a result, we believe that companies of almost every vertical can and will be able to move into financial services, and it’s going to fundamentally change banking as we know it.
What have non-financial companies to gain from offering financial services?
Venturing into financial services for non-financial companies is about much more than boasting a flashy card with your company’s branding on it. It creates many business opportunities to increase revenue, improve cost-efficiency, optimise data and enhance the customer experience. Here’s a glance at some of the benefits for both company and consumer:
For the Provider
Your company can cut out lengthy regulation and set-up requirements that you’d face if partnering with a bank. Using BaaS allows you to launch financial products in a matter of weeks as you are covered by the BaaS provider’s money licence.
New revenue streams
Offering financial services gives your company an enhanced opportunity to sell many additional services such as consumer credit, insurance and interchange fees.
Synching a new payment platform with your existing loyalty programme helps greatly enrich customer experience by streamlining the customer journey. This in turn leads to lower customer churn rates.
You no longer need to rely on a third-party’s payment card infrastructure and processors. You have full control over your financial services products because you are operating on one platform.
Having a single view of your customer enables you to understand customers’ purchasing habits and spending needs. It enables you to offer additional and targeted products and services on the fly.
For the end customer
Customers can avail of greater discounts, loyalty programme advantages and a reduction in payment and transaction fees.
The customer journey has much less friction when you’re making a payment and availing of financial services products from the same provider.
A strong authentication process obtained from a BaaS provider offers the customer better protection against theft.
Integrated financial services
Customers can avail of multiple value-adding services such as tying bank account information to the checkout process.
What kind of companies are making the move?
Aside from big tech (Apple Pay, Shopify, Amazon and Uber to name but a few), there are three key industries from which companies are identifying the opportunities posed by offering financial services. They are:
Integrating retail and financial services makes perfect sense as retailers possess a massively strong and loyal customer base. Additionally, in light of COVID-19, there has been a rapid increase in the adoption of mobile payments and decreased usage of cash among consumers. For example, the latest figures from the Banking and Payments Federation Ireland show that the value of contactless payments in Ireland hit a new high of €1.9 billion in the second quarter of 2020. This trend gives retailers the opportunity to completely redesign and customise their checkout processes to enhance customer experience.
Mobile phone companies possess powerful customer data. Imagine what they can do with that information when offering financial services? Product bundling is just one of a number of great opportunities to both acquire and retain customers. For example, a telco offering financial services could target a younger demographic of people who are purchasing their first mobile phone and opening their first bank account at the same time with an all-in-one bundle. O2 had some initial success with German digital bank Fidor but that contract has recently been terminated.
Like retailers, airlines possess a loyal customer base. Think of some of the financial products they could offer customers that would help diversify their business model – for example, airlines can provide instalment loans for high-value flights, allowing customers to start paying for a round-the-world ticket six or nine months in advance. For an industry that has been severely impacted by the global pandemic, airlines moving into another line of business such as financial services could provide the perfect stimulus to help them recover.
How we see it playing out
Commentators like Chris Skinner have been banging the drum for open sourcing of bank services to non-banks for years. While it’s been on the cards for some time, the fragmented nature of some of the white-label banking services on the market and a cautiousness by many of the major brands to cross the divide, pace of adoption, particularly in Europe, has been nowhere near as rapid as many forecasted.
To provide some context on the opportunity that BaaS presents to non-banks, consider how previous partnerships between retailers and banks have played out. One common trend, for example, was for supermarket chains to partner with traditional banks in order to launch loyalty schemes that enable customers to link their bank credit cards with the retailer’s loyalty card, earning loyalty points as they spend. One such partnership programme cost a retailer in Ireland around €40 million per year in order to turn its one million loyalty card customers into bank customers.
Using popular challenger bank Revolut’s valuation as an example, those converted bank customers equate to a company’s net worth of €1 billion – and that’s just for the bank customers. Now imagine converting those customers without the requirement of a bank. That’s what BaaS can do. Instead of getting a loyalty scheme that costs €40m, a retailer gets a fully functioning bank that costs one-fifth of that.
The use cases for natively embedded banking products by non-banks are vast and, at LEVERIS, we plan to help large consumer brands and retail merchants take advantage by entering new areas of banking and lending in a highly time- and cost-effective way.
As we do, we expect to see the lines between non-financial services companies and FS players to become ever more blurred. We’ll also see companies such as Goldman Sachs, BBVA and JP Morgan build out their BaaS capabilities as they identify opportunities arising from these trends.
No matter how blurred the lines become, non-banks that use BaaS in the right way, true BaaS providers (not middleware or front-end providers posing as such) and the end customers stand to be the true beneficiaries.