Friday, October 13, 2023
Tanner Mayo, co-founder of Bankers Helping Bankers, noted that BaaS has the potential to democratize a playing field historically dominated by traditional financial institutions.
"These elite bankers lead in profitability and innovation," he said in a statement. "It is essential that banks getting into this space do so in a safe, sound, and regulatory-compliant way. This association is intended to help them embrace the opportunities of BaaS, while proactively identifying and mitigating risks."
In addition to promoting BaaS best practices and standards to non-banks, Mayo noted the association will promote a business-friendly regulatory environment and build a community of like-minded stakeholders to facilitate successful BaaS programs.
Describing BaaS as a highly specialized niche fueled by fintech funding and an abundant startup pipeline, Mayo remarked that there just aren't enough BaaS banks to meet growing demand from fintech applicants. "BaaS banks are mostly community banks; a few are larger, but one thing they have in common is that they are the top-earning banks in the United States," he said. "The BHB BaaS Association is representing the greatest hope in a generation for the future of community banking, embracing new technologies and new diverse products that are more inclusive for all."
Steven Farrar, chief financial officer at Obsidian Bank, agreed, stating, "BaaS is said to be the way to close all the gaps, but we need to be careful and intentional in how it's implemented so that we can build increased trust in Fintech and our financial system for the different niches it serves."
Rebecca Walden, a payments marketing consultant, advised legacy institutions to take heed of tech-savvy BaaS providers, as traditional banks that are slow to adapt may be left in the dust. "Traditional banks still have a vitally important seat at the table, but there is no room for complacency," she said. "BaaS partnerships are a smart play for the financial institutions that are serious about growing their business banking portfolio."
Walden predicted the viral BaaS trend will continue to accelerate, attracting big tech companies and new market entrants. Citing an April 2022 study by Vodeno, Market Research: Banking-as-a-Service 2.0 - Why Embedded Finance will make its mark in 2023, she called the premise of platform-based banking a marketing win trifecta that, when well executed, can deliver higher conversions, larger orders and brand loyalty. In this space, she noted, compliant BaaS providers, in sync with regulatory and licensing requirements, will have a strategic advantage.
"These providers already have the tech stack to offer what would otherwise only be available through a traditional bank," she said. "It changes the entire game for SMBs, e-commerce businesses, and especially for financial institutions tethered to legacy infrastructure."
Vodeno researchers project a total addressable market for BaaS in the UK and Europe of between $90 billion and $105 billion by 2030.
"With some reports indicating it will reach mainstream adoption in just two years, it is fair to say that BaaS is gathering pace," researchers wrote. "Non-financial brands have sought to use BaaS to embed innovative financial products directly into their customer journey in order to increase engagement and grow revenue, while banks and other financial entities have leveraged it to fast-track the speed to market of new products and services."
Based on an independent survey of approximately 1,000 senior decision-makers in the UK, Belgium and the Netherlands, the Vodeno study found debit cards and other depository products popular with consumer brands. Researchers expect this trend to continue, fueled by robust payments infrastructure and real-time payments.
"In the current climate, where the cost of living remains high and both consumers and businesses face an assortment of financial pressures, it was telling to see flexible lending solutions such as BNPL, [installment] loans, SME lending and merchant financing ranking high on the list," researchers wrote.
Philip McHugh, chairman of Vodeno, compared European BaaS use cases to the U.S. evolution of Square, which began as a mobile POS and expanded beyond payments into lending, deposits and a cash app to create BaaS for SMBs.
"BaaS offers a single point of integration that can plug into multiple functionalities, such as checking, savings, deposit-taking, payment clearing and basic consumer lending functions, all linked to a single customer account that brands can court in multiple markets," he said. "These capabilities, paired with a bank license, regulatory compliance and balance sheet capabilities, are a powerful combination."
The Vodeno white paper is available at vodeno.com/embedded-banking-customer-experience-and-the-future-of-retail/
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