Banking-as-a-service, or BaaS, is a great opportunity for existing banks, insurers, and wealth managers to reach a greater number of customers at a lower cost by teaming up with non-financial businesses. But if they do not react in a rapid, strategic manner, BaaS could also pose a threat, as it opens up the financial services market to new challengers. Incumbent banks and other financial institutions need to make strategic decisions about how to enter this growing business – what products to offer and which partners to work with.
BaaS is enabled by the seamless integration of financial services and products into other kinds of customer activities, typically on non-financial digital platforms. Consumers increasingly use these platforms to access services such as e-commerce, travel, retail, health, and telcom. The financial service could be someone taking out a small loan when they pay for a holiday on a travel site; or the instant calculation and sale of micro-insurance for newly purchased jewelry.
A non-financial business can thus distribute financial products under its own brand, so that the customer experience is of buying a product from that brand – but the financial product is actually provided by a financial institution. A financial institution that wants to offer BaaS via a distributor can set up a platform for this purpose based on the latest low-cost, cloud-native, scalable technology, which will reduce its cost to serve customers.
For a financial institution, it is an opportunity to reach a greater number of customers at a lower cost. The cost of acquiring a customer is typically in the range of $100 to $200, according to Oliver Wyman analysis. With a new, BaaS technology stack, the cost can range between $5 and $35. For the distributor, offering financial products opens up new revenue lines at attractive margins and can deepen its relationships with customers, and can then capitalize on cross-selling opportunities.
This opportunity comes as financial services incumbents struggle with low performance. One reason is that incumbent financial institutions are not using their technological assets as efficiently as they could and find it difficult to reduce the cost of technology.
Digital challenger banks are now running at a fraction of the cost of incumbents. Some technology companies have obtained banking licenses, enabling them to offer their BaaS platforms to distributors that want to provide financial products to their customers.
To fight back, some incumbent financial institutions are spending billions of dollars to digitize their existing business models. But it might be more effective for them to start up new models – that is, BaaS – by embedding their products in other platforms.
In one study we sponsored in the Asia-Pacific region in late 2020, we examined the BaaS opportunities in selected markets for a range of financial products and various potential distributors including e-commerce platforms, retailers, conglomerates, lifestyle services, and healthcare providers.
Take one established, medium-large global bank with between $300 billion and $400 billion in assets in Asia. If it entered a fee-sharing arrangement with five major non-financial partners or distributors, with around 50 million active customers between them, we estimate the bank could gain $200 million to $500 million of BaaS revenues over three to five years. That would increase its Asian revenues by between 2 and 5 percent.
We believe that BaaS will bring together digital technology platforms and finance to change the shape of economies and most sectors for years to come. BaaS is a clear opportunity for financial institutions to capture new revenue growth at a low cost. Also, a BaaS business is scalable and agile, making it particularly suitable for entering new markets and then expanding. For distributors, it is an opportunity to open new revenue lines at attractive margins and gain a much deeper understanding of consumer behavior through financial data.