“Banking as a service, and embedded finance, taken together — they just represent where the world is going.”
To put some dollar signs on it: As estimated by Finastra, BaaS will represent a $7 trillion opportunity by 2030.
Haymond said that projection, among others, illustrates an evolution that has its roots in the pandemic and now has the tailwinds in place to turn all companies into finance companies.
All manner of providers (FinTechs and others) across verticals are partnering with banks to help give client firms greater access to financial services.
There’s a happy confluence of events that will help BaaS and embedded finance reach their full potentials, said Haymond. FinTechs have the solutions that are spurring enterprises to want to bring those offerings into their own businesses — and businesses themselves see an opportunity to engage customers through a richer experience.
The Start of Banking-as-a-Service
No surprise, the seeds were sown during the pandemic, where despite the gradual emergence nowadays of in-person commerce and banking, consumers have permanently altered their expectations of how to conduct their financial lives.
In short, we want financial services at our fingertips, firmly entrenched in the digital channels and ecosystems in which we spend a lot of time. Living our lives financially, on platforms and through apps means more than just opening accounts and juggling checking and savings activities. For the forward-thinking firm that wishes to offer banking everywhere, options extend well beyond the confines of simply offering a debit card or pre-paid solution.
Now, embedded finance can help enterprises leverage customer-level data in real time to offer personalized credit and payment options to individuals and enterprises in context.
Many Different Banking-as-a-Service Paths
Uber and Lyft may stand as key examples (and perhaps early iterations) of embedded finance — offering payouts and payments that are essentially invisible. In serving the gig economy, that embedded interaction is no longer a nice thing to have; it will become table stakes.
“Banking as a service is happening in so many different ways,” Haymond noted. We’re seeing the emergence of FinTech partner banks that provide a full stack of lending, servicing, underwriting and card issuance. That’s a departure from just a few years ago when a non-bank company wishing to offer those products had to go to a traditional, large FI to get up or running or piece those functionalities together. Indeed, some FinTechs may have started by offering bank accounts to small businesses in just one evolution — and then started offering ancillary services such as expense management.
And as Haymond observed of these firms, “they have to think about, ‘how much work am I going to want to do myself? Do I want a whole team running the show, or do I want to basically outsource the running of this or most of it to, to someone else?’”
Tailoring Banking Services to Meet Needs
BaaS providers and platforms (such as Mastercard) now offer one-stop-shop functionalities to embed financial services into websites and apps — offering a “modern layer” of tech that fits on top of legacy operations.
The platform model offers the opportunity for FinTechs to pick the providers they want and to create the solutions they desire. The compliance and data security inherent in the banks’ and payment networks’ business models can speed and streamline the time to launch, she said, especially as specialized providers branch out into other verticals.
A slew of other use cases and examples are emerging, sparked by partnerships between FinTechs, FIs and BaaS initiatives. Haymond gave the example where Mastercard last year issued a co-branded credit card with Instacart. The card lets users earn unlimited cash back with various redemption options.
“Because of the data that [Instacart] has on you, from a shopping perspective,” said Haymond, “they’ve been able to work with Chase Bank to pre-qualify you” for the card, “and to serve that card up to the people on the platform that are good candidates … and appreciate the value proposition.”
As time goes on, we’ll see the emergence of transactional opportunities in traditionally non-transactional channels. Embedded finance can and will continue to scale and reach individuals consuming digital content or music.
Banking-as-a-Service Will Be Able to Reach the Digital Consumer
“We’re already starting to see commerce in those environments,” she said.
Mastercard, she said, has worked with WhatsApp in Brazil to enable P2P transactions — sending, receiving and splitting payments without ever leaving the messaging platform.
“There are a few different models,” said Haymond, “and I do not think that there’s one winner. The different models serve different needs.”
But no matter the means of getting there — going it alone or linking up with BaaS providers, she told Webster, one principle governs all: “You’ve got to allow people to transact where they are,” she said. “This just makes sense.”
This year, Mastercard’s own BaaS efforts will focus on customizing solution sets and capabilities for FinTechs serving individual verticals and segments.
“What was once a small cottage industry here at Mastercard is now becoming a big business,” she told Webster. “We’ve done a lot of work in this area and now we’ll be taking it to the next level.”