Deep Dive: How FIs Can Capture the BaaS Opportunity to Engage Digital-First Customers

Demand for interconnected, more personalized banking experiences has risen steadily among both businesses and consumers in recent years, a trend that received an unprecedented boost from the global pandemic.

Fulfilling clients’ new expectations for embedded banking services can help reduce payment frictions and is becoming crucial for customer engagement and retention. This development, in turn, is driving a growing interest in Banking-as-a-Service (BaaS) solutions, which use technologies such as application programming interfaces (APIs) to connect different platforms and easily integrate financial products from third-party providers.

Many banks seek ways to innovate their payment processes to meet customers’ changing expectations, but their awareness of the BaaS opportunity remains nascent. One study found that just 11% of banks are currently pursuing a BaaS strategy, and just 8% reported they are in the process of building such a strategy for future use.

Financial institutions (FIs) also remain primarily reliant on legacy infrastructure, which hampers their ability to create and bring innovative solutions to market with the speed necessary to capture this opportunity. One white paper reported that 48% of FIs said they believe their legacy infrastructure is not equipped to help them meet either consumers’ or business clients’ expectations.

Implementing swift payment solutions has become a top priority for FIs, with 77% of banks saying that enabling faster and smoother adoption of new payment methods is their foremost requirement in a payment partner. Banks and BaaS providers can leverage partnerships with key industry players, such as innovative payment processors, to offer the interconnected financial experiences their customers now demand.

How BaaS Solutions Can Help Meet Changing User Expectations

Speedy, convenient and personalized banking and payment experiences are becoming nonnegotiable since consumers have developed increasingly digital-first habits due to the pandemic. Those familiar with mobile wallets, peer-to-peer (P2P) apps and other digital-first payment solutions are now seeking more connected banking, with many already linking their online bank accounts to payment apps.

Consumers are also becoming more familiar with solutions that enable this type of connectivity, as evidenced by reports finding that a significant number of U.S. adults are aware of the term “open banking.” Individuals are beginning to place a higher value on these connected experiences, making them essential features for FIs to keep customers from straying toward more digitally-savvy competitors.

BaaS providers can connect FIs with FinTechs and other third-party entities to offer their customers access to more comprehensive, holistic banking platforms.

Banks can then leverage the data generated by these platforms to personalize services for both consumer and corporate customers. Innovative payment processors such as i2c can round out the team to help remove lingering frictions from the experience by streamlining payments.

APIs and the Role of Payment Processors

APIs, the technology tools that allow for easier connectivity between two different systems or platforms, are key to the continued expansion of BaaS solutions and open banking applications. One survey found that 98% of organizations currently view APIs as crucial to their digital transformation strategies.

Banks and BaaS providers must also be sure they are using these technologies securely, however. API traffic has increased significantly in the past few years, rising 321% between 2020 and 2021 alone, resulting in a corresponding increase in fraud. API attack traffic grew 681% during the same period, making security features and fraud protection essential.

This is where partnering with innovative payment processors can offer significant benefits to FIs and BaaS providers as they look to create the data-driven experiences their customers want. Processors can focus on the details of the payment process, ensuring that both funds and data transfer safely, leaving BaaS providers, FinTechs and other partners free to create innovative experiences for banks to leverage.

As interconnected financial experiences become the norm, finding the right industry partners to help craft the smooth, secure payment experiences customers now crave will be increasingly critical for both FIs and BaaS providers.