Six trends driving banking as a service models
There are six trends that McKinsey consultants have identified as banks and wider industry move to adopting an embedded-finance and banking-as-a-service models.
1. Customer demand for integrated experiences
The most significant trend is that customers increasingly seek simple, holistic, embedded, and direct experiences, according to McKinsey associate partner Zac Townsend.
According to the McKinsey research, customers now want a multiproduct customer experience also known as the widely used phrase of ecosystems.
“By definition, ecosystem orchestrators seek to offer as much integration as possible, so an embedded integrated financial offering fits the model perfectly,” Townsend said.
Indeed, Westpac’s move into a BaS model is in part to provide customers with a range of products, hence its tie up with Afterpay and most recently SocietyOne.
Outside of banking, Townsend notes other examples such as Walmart’s recent announcement that it is building a financial-services offering with financial-technology investor Ribbit or Ikea’s recent announcement that it is purchasing 49 percent of its banking partner.
2. Fintech demand will grow
While big tech firms and other non-banks will be able to build and offer financial services products, regulatory hurdles will make it challenging for these businesses to become banks. This will create an opportunity for fintechs to provide banky services. At the same time, fintechs will also need banks to provide access to bank accounts, payments and lending. According to Townsend, banking as a service will become the only means for fintechs to offer customers embedded finance. “These players require end-to-end BaaS infrastructure solutions coupled with regulatory support and balance sheet or other funding sources to serve their massive customer bases”.
3. The rise of open data
“Regulatory trends including PSD2 and open banking are promoting the development of banking APIs and universal access,” Townsend said. “The need to comply with these new requirements—often through IT modernization—is driving some banks to consider expanded or new BaaS business models to recoup costs and take advantage of tech builds.”
But even beyond these regulatory challenges, Townsend that changing customer expectations for data and account information portability, will spur a rethink by aggregators which will mean increasing IT modernization and greater investment in BaaS projects.
4. Search for new revenue models
With margin pressures, banks are now exploring alternative sources of revenue and product growth. “Particularly advantageous are sources that have scalable business models and fixed IT.”
5. Adoption of technology capabilities
“With the acceleration of digitization, including automation and APIs, banks can scale BaaS faster, putting embedded finance within reach for more companies considering it,” Townsend sad. At the same time, he added companies seeking to embed financial services increasingly see their digital experiences as a composition of modules built by others. “This is often because they focus on software engineering as a core competency, seeing payments, lending, or deposit and checking accounts as just another product capability to add to the user experience.”
6. Changing trust levels in financial services
RFi Group data shows that in Australia banks do remain trusted among consumers particularly in managing data and money. McKinsey’s research shows that in the United States, people actualy trust tech companies. “Banks that enable white-label or cobranded financial services through partners can build on the increasing trust in other brands to distribute their products,” Townsend said. “Banks won’t necessarily need to white-label fully across all products and geographies; rather, they may identify markets or products where they can tactically leverage the growing trust in nonbanks.”