Over the past few years, the financial services industry has undergone a significant transformation. Traditional financial institutions are facing new competition from startups leveraging technology to deliver innovative financial products and services, commonly referred to as the fintech landscape.
But there is a distinction between traditional finance offering new digital products to compete in a dynamic market.
In an uncertain economic climate, consumers are increasingly turning to digital platforms and apps to help them save money.
At the same time, businesses (including banks and other financial institutions) want to optimize their investments in digital transformation to ensure quality returns on investment.
The demand for financial services has evolved in recent years
Consumers now want more personalized and convenient services that meet their changing needs, especially post-pandemic and as new innovative solutions emerge.
This perspective has led to the rise of embedded finance, a new way of providing support for money services.
Traditional finance is often not equipped to offer these trendy new services, such as ‘Buy now Pay later‘ (BNPL) or cashback/loyalty points for transactions using their platform, out of the box.
This is often due to the archaism of mainframe-based banking systems – they are not built with the ability to quickly adapt emerging digital solutions on top of their analog systems.
Overhauling their internal architecture will be costly and will likely take critical services offline during the transition.
Thus, modern banks often ironically turn to fintechs provide banking-like digital resources to provide third-party financial services for which the B2B and B2C markets are increasingly in demand.
These digital financial services are referred to as integrated finance, helping the traditional financial services (ISP) industry to quickly integrate emerging digital banking capabilities that are accelerating their digitalization journey.
The adoption of integrated financing options appeals to both consumers and shareholders, as users want the convenience of knowing that their banking institution offers fintech-like services.
At the same time, the board can rest assured that the bank is modernizing quickly without consuming too much cost.
The trend is set to continue to explode in mainstream adoption by ISPs, according to forecasts from digital consultancy Publicis Sapient an annual growth rate of 41% of global integrated bank revenues from 2021 to 2025.
BaaS on the rise for merchant sites to be like banks
In contrast to the growing growth of integrated finance, organizations not traditionally affiliated with ISPs want to offer banking-like financial services to simplify the customer experience on their digital native platforms.
Breaking out of their core competencies to offer on-demand financial services, such as integrating payments into their web or mobile platforms easily through APIs, or providing branded payment cards for valuable customers to shopping offline, could disrupt many platforms. if they didn’t have the ability to offer banking as a service (BaaS).
In a word, BaaS are bundled offersoften white label or co-branded services to brand the company instead of the financial service provider, which non-banks can use to serve their customers.
BaaS allows non-banks to offer financial products and services without obtaining a banking license or developing the necessary infrastructure.
Although BaaS is still in its infancy, it has the potential to disrupt the traditional banking model and create new opportunities for non-banks to enter the financial services industry.
On the other hand, bank as a service (BaaS) allows companies to offer financial services and products to their customers without having to be a financial institution.
This is accomplished through APIs, which allow companies to access the necessary financial services from a provider quickly and without building everything from scratch.
BaaS providers offer financial services that can integrate with a company’s existing product or service. This allows companies to provide customers with offers on their platforms without having to build their banking-like infrastructure.
examples of BaaS offerings could provide financing optionslike microcredit lines for consumers on e-commerce sites — so they can shop at ease without paying immediately — and small loans for businesses, like what all-in-one superapps for smartphones like Grab from Singapore and Gojek from Indonesia offer merchants who leverage other services on their platform.
The rise of integrated finance and BaaS is changing the financial services landscape. Financial institutions must adapt to this new trend to remain competitive.
Featured image credit: edited from Freepik