In the previous article. In a seismically changing landscape, and in order to maintain their relevance within an ever-evolving financial ecosystem, banks have been compelled to ride the wind of change. They have come to acknowledge the emergence of Fintech and other financial services vendors as pivotal players in the customer’s banking journey. Simultaneously, they have recognized and facilitated the seamless integration of financial products and services into the value propositions of non-financial companies.
Now there is a connector tissue that allowed banks to co-exist and evolve alongside other participants; API (Application Programming Interfaces). But what exactly is API? API is a collection of established rules that facilitate communication between different applications. Serving as a software middleman to allow the interchange of data and functionality between multiple unrelated parties.
A connector tissue at the base of a disconnected banking value chain. Banks were able to participate in an ecosystem that supports collaboration and innovation thanks to API power. API has opened doors for share innovations, allowing banks to explore new opportunities. It has also allowed them to increase their service offerings, and provide additional value to their clients. Furthermore, banks now have the capability to access new revenue streams and establish new channels for the distribution of financial products.
In today’s fast paced era of technological progress, building upon the foundation of API or the use of API to share financial data and services with third parties, non-banks can now integrate with banks to offer financial services to their customers. This is a groundbreaking concept. Banks can now collaborate with third parties to provide better financial services and products is called Banking as a Service (BaaS).
BaaS is the future
For instance, the production and delivery of banking services will keep moving away from the bank. A combination of non-traditional competitors has eroded the value chain of the banking industry. A tech-savvy and less dedicated client is the reality today. This, together with the high operational costs of incumbent players has challenged the historically lone player, the bank, and forced it to work with various players.
The market has been totally dominated by traditional banks. But it is the advent of BaaS that has empowered fintechs, telecommunication companies, e-commerce platforms, and other non-banking entities to become key players in the financial services arena.
Without having to build the entire banking infrastructure from scratch and using the infrastructure and regulatory framework of licensed banks, these non-banking institutions are now offering a wide range of banking services, such as account creation, deposits, transfers, lending and more.
The key is collaboration
This strategic collaboration has allowed non-banking entities access to a new ecosytem. This features cutting-edge technology solutions, and a leverage of expertise, infrastructure, and regulatory supplies of well-established banks. Partners of this collaborative ecosystem can excel in shaping the experience of their customers, all while accessing new revenue streams.
This is how revolutionary BaaS has turned out to be. For it has changed how financial services and products are supplied. But it has also enlarged the spectrum of entities capable of offering these services.
Another possible benefit of reinventing BaaS is the possibility to address the underserved and non-banked segments. It enables a more inclusive and diversified financial ecosystem through fostering inclusion for people previously restricted to access the banking services.
Put simply, BaaS has enabled embedding of financial products into non-financial customer journeys and platforms. However, there is a difference between BaaS and services and products embeddedness.
Embeddedness enables all types of businesses (both financial and non-financial) to effortlessly incorporate financial services into their offerings. Although the terms are used interchangeably, BaaS and embedded finance are not the same. Embedded finance refers to the placement of a financial product in a non-financial client experience. Where BaaS is the lowest infrastructure layer supplying various embedded financial solutions.
Non-banks have been doing embedded finance for decades by including private label cards, for example, as part of their client’s journeys. BaaS is a bigger concept, a comprehensive way that allows non-banking organizations to access a full range of banking capabilities. It does this by connecting non-banking businesses with regulated financial infrastructure.
A win-win across all business sectors
From retailers to ride-sharing applications to coffee shops to telcos, insurance providers, and luxury marketplaces. Brands across all sectors are integrating financial services into their online channels to increase revenue and foster loyalty. Today, customers are continuously looking for a seamless integrated end-to-end online experience. Embedded-finance distributors began by selling deposit and payment solutions. Now they’ve expanded into lending goods like credit cards and point of sales financing.
In the long run, embedded financial services will take on a significant portion of the banking sector. Given the importance of returns to scale in that industry, early adopters may benefit from winner-takes-all dynamics. However, players will not benefit equally from the rise of embedded finance. For example, revenues from lending products will accrue to risk takers (the firm bearing the risk of credit default). As for payments and deposits products the distributors owners of the customer relationship will benefit the most.
Banks are concerned that embeddedness may jeopardize their client relationships. Yet end customers are increasingly adopting embedded finance. So banks have little alternative but to create BaaS business lines. For it is becoming ubiquitous, the more non-banks entities embed financial services into their experience.
In the next article: As the disruptive technologies mature within the financial services. The unbundling of banking value chain will accelerate and gather faster pace. This trend presents a compelling opportunity for key players in the financial services industry to better position themselves and reap significant benefits. From harnessing the power of big data, to innovating unique propositions, from adopting novel business models, to leveraging an ecosystem of partners, all the way to tapping the untapped market. Next we will explore multifaceted avenues for value generation.
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