Traditional Banks Risk Losing Ground to Banking-as-a-Service Rivals

Digital banking has become the default means of financial interaction for countless consumers worldwide, with the ongoing pandemic supercharging a shift that was years in the making. PYMNTS research found that nearly three-quarters of consumers have used digital channels to open a new account, for example, unlocking the gateway to a digital customer lifetime. Mobile apps are the most common banking method of choice, at 45% of consumers, with this number shooting up among younger generations, such as millennials and Generation Z.

Banking as a service (BaaS) is a key tool for providing the digital experiences that customers demand. It involves banks leveraging their charters to offer nonbank companies the ability to provide banking services to their customers. BaaS has two primary benefits: allowing customers to access financial services from a wider variety of sources and enabling banks to expand their footprints to include even customers not seeking traditional financial institution (FI) relationships. Choosing the right BaaS partners will be crucial to ensuring the industry’s long-term success.

The “Embedded Finance Tracker®” examines the embedded finance opportunities BaaS can enable for banks, FinTechs and other financial players.

Around the Embedded Finance Space

Embedded financial services are quickly gaining market share in the banking industry. A recent study found that these services will produce $230 billion in revenue by 2025 — up from $22.5 billion in 2020. An increase in online credit card spending and the introduction of new services, ranging from Uber’s provision of debit cards for its drivers to Ulta Beauty’s partnership with Klarna to offer installment payments to its customers, is fueling this growth.

The banking industry remains in flux following the tidal wave of digital innovation during the pandemic. A recent survey found that 25% of bankers saw BaaS as an opportunity to create new revenue streams, and 32% are currently assessing how BaaS can streamline their daily operations. BaaS is one of many new technologies banks are deploying to enhance the customer experience, including digital account opening, data analytics and reporting and digital lending. Sixty-one percent of bankers said investing in new digital technologies was a top priority in the coming year.

For more on these and other stories, visit the Tracker’s News and Trends section.

An Insider’s Take on How Banks Can Tap BaaS for Growth

Banks are brands, but individuals care more about brands they engage with on social media or via mobile apps than FIs. Therefore, BaaS platforms represent a huge opportunity for expanding use cases, such as early access to wages or payday advances.

To get the Insider POV, PYMNTS spoke with Mbanq CEO Vladimir Lounegov.

Partnering for BaaS Success

Banks embarking on a BaaS journey may feel they have their work cut out for them, especially if they are relatively new to the digital banking scene. Developing in-house BaaS solutions might work for large FIs with dedicated IT staff, but most banks will need to partner with technology providers to implement BaaS.

To learn more about how banks can partner to enable BaaS and how these partnerships can help banks unlock opportunities for greater personalization, read the Tracker’s PYMNTS Intelligence.

About the Tracker

The “Embedded Finance Tracker®,” a PYMNTS and Galileo collaboration, examines the embedded finance opportunities BaaS can enable for banks, FinTechs and other financial players.