Banking-as-a-Service to become mainstream in two years

  • By Zilla Efrat

Gartner predicts that 30 per cent of banks with greater than $1 billion in assets will launch Banking-as-a-Service (BaaS) for new revenue by the end of 2024, but half will not meet targeted revenue expectations.

Speaking at Gartner IT Symposium/Xpo 2022 on the Gold Coast on Monday, Jeff Casey, senior director analyst at Gartner said: “These banks typically have ambitions to generate and diversify revenue streams, or to a lesser degree, aspire to extend previously sunk regulatory investments, such as Payment Services Directive Two in Europe, into revenue-generating machines.”

Gartner believes that BaaS is one of four technologies have the potential for high levels of transformation in the banking sector and which are likely to mature within the next couple of years.

The other technologies include chatbots, public cloud for banking and social messaging payments apps.

According to the latest Gartner Hype Cycle for Digital Banking Transformation report, BaaS is gaining traction from both banks and non-banks aspiring to establish or enhance direct and intermediated revenue streams.

“Technology innovations like these are driving bank and nonbank competitor activity, influencing customer demand for products and services, and shaping regulators’ actions globally,” Casey said.

Put simply, BaaS enables collaboration between banks and regulated entity third parties to take place to provide better financial services to the customers or power new business models that can be used by other banking market participants, such as fintechs, neobanks, traditional banks and other third parties.

While open banking allows third-party access to the customer's data, BaaS allows third-party access to the bank's functionality.

Gartner’s report notes that market participants are increasingly drawn to collaborative models that enable enhanced customer experiences, such as richer features, a broader set of products and innovative customer experiences.

Non-bank participants benefit from a quick onramp to the banking market by leveraging a regulated entity’s or bank’s license instead of pursuing their own charter, it says