The global market for Banking as a Service (BaaS) has quickly become a $1 trillion industry, but new projections suggest this uptrend will continue — and accelerate — over the coming decade with a near-quadrupling in demand that could boost uptake to $3.6 trillion by 2030.
Unsurprisingly, PYMNTS reports that more than 12,000 financial startups are vying for a slice of this growing BaaS pie, including legacy lenders who stand to get a cut for their regulated oversight and contributions.
In fact, PYMNTS reports U.S. lenders that offer BaaS already generated 200% to 300% greater returns on assets than other banks by offering these back-office services to their business customers.
Need Driving Demand
Even though consumers can routinely make purchases and payments now with a single tap or swipe, PYMNTS data shows that when it comes to business-to-business (B2B) transactions, one-fourth are still being paid for with checks.
Simply put, the BaaS model allows companies to quickly roll out and scale their own financial and banking services.
For example, consider the use of BaaS by two tech giants. Uber uses several iterations to offer its drivers vehicle financing, instant payouts and other financial services. For its part, Amazon has used BaaS to make a major push into financial services through merchant and consumer financing and generated more than $1 billion through small business financing in 2019 alone.
Beyond that, BaaS has other applications across the economy. Real estate companies are using it to offer mortgage financing services. Third-party credit financing services are using BaaS to help smaller merchants offer online financing.
Flexibility Is Key
In each instance, flexibility is a defining characteristic of the BaaS model. Firms can take advantage of wide-ranging banking operations for customer-facing and back-office purposes, allowing for organization-specific applications.
Through BaaS, they can provide superior, novel digital banking capabilities and replace business customers’ antiquated payment systems.
One glaring example of where pokey payment processing can be seen is the nation’s healthcare clinics and medical practices, which frequently get put on hold for three to six months as they wait to get paid on a single invoice, insurance payout to process or to collect from a patient.
To be sure, these sorts of inefficiencies in invoicing and disbursements are not unique to healthcare and are why there’s a trillion-dollar potential for transformation within the category.
The BaaS Background
With BaaS, banks contribute their regulatory licenses, payments infrastructures and institutional trust while FinTechs supply their ability to develop new capabilities for sending and receiving payments and managing data.
They then offer these capabilities to businesses, which can use them to improve their own operations.
The Banking As A Service Playbook: Powering The Next Generation Of FinTech Innovation, published by PYMNTS, examines how banks, FinTechs and corporations are developing new financial solutions to address B2B payment pain points. All the while, banks can maintain and add value to their existing corporate customers.
For their part, a small army of FinTechs is constantly developing solutions that address specific back-office inefficiencies without dealing with the regulatory and technical complications that would hinder traditional banks.
As far as end users, businesses can implement mission-specific digital payment and banking solutions that fit their needs, such as using embedded payments and financing services to improve the value they provide to their own customers.
As a result, BaaS models serve as an important and growing framework for the three-way relationship between banks, FinTechs and businesses.