IDC predicts that banks are set to hit as much as 18% of revenues through Banking-as-a-Service (BaaS) partners. The IDC report comes on the heels of Finastra's own report on the growth opportunities offered by BaaS.
Open banking, as initially envisioned, is essentially the sharing of basic financial data of customers to third parties. The sharing of customer data is useful in coming up with an aggregated view of a customer’s financial standing and is beneficial to many parties, such as aggregators, credit bureaus, other banks, and financial service providers that seek to get a share of customers' wallets.
New opportunities via BaaS
BaaS goes beyond the sharing of data as it allows the bank to offer financial products and services from within the distribution channels of nonbank third parties. Michael Araneta, associate vice president, IDC Financial Insights, says many banks are poised to go beyond open banking, priming themselves for BaaS.
The coming years will be interesting to watch because there now appears to be a spectrum of maturity being created of how "open" banks are, with some experimenters playing in the fringes of open banking while some mature and innovation-focused organizations are succeeding with BaaS,” he continued.
With BaaS, the bank can externalise products (e.g., debit cards for nonbank third parties can launch their own loyalty cards, white-labelling the bank's debit cards), financial services (e.g., the bank can fund a buy-now-pay-later [BNPL] transaction on an e-commerce site), or services (e.g., identity authentication for an e-commerce transaction). BaaS brings banks to a much larger playing field than open banking, requiring banks to have more mature approaches to technology, innovation, the creation of business partnerships, and the design of business models.
As different banks approach openness differently, some strategies might include white-labelled banking, embedded finance (offering a financial service at the point of need of the customer), lifestyle banking, ecosystem banking, and platform banking (when a bank offers third-party capabilities on the bank's own application, channel of distribution, or platform).
“Long before the distraction from open banking — the banks were envisioning close to 15% of partner-generated revenues out of the total, with some regional banks setting their sights on 18% by 2021. In the recovery year, banks are back to the 18% targets,” says Araneta.
