The global Banking-as-a-Service market is expected to register significant growth over the forecast period. Increased adoption in financial services, rapid digital transformation, and presence of Application Programming Interfaces (API), coupled with the growth of fintech industries, are the major factors driving the growth of the market. Moreover, the increased use of financial services, such as banking, mutual funds, insurance, stock exchange, wealth management, tax/audit consulting, treasury/debt instruments, portfolio management, and capital restructuring, reflects increased banking transactions with the use of digital technology. For instance, as per RBI, during 2019-2020, the payment and settlement systems experienced significant growth, increasing by 44.1% in volume on top of a 55.8% increase over the previous year. Additionally, the share of digital transactions in total non-cash retail payments increased to 97.0%, up from 95.4% during the previous year. Similarly, debit card and credit card transactions increased from 16.1% to 23.5% during the same period. These factors are contributing to the growth of the Banking-as-a-Service (BaaS) market.
The growing awareness of online banking is also driving the growth of the BaaS market. As more customers prefer using online banking to access a variety of services, including balance checks, cash transfers, account statements, and online purchases, fintech companies are focused on offering enhanced digital services to customers for improved convenience and customer satisfaction. According to Fortunly, a news magazine that provides information on financial planning, the U.S. online banking statics showed that 66% of customers said they are satisfied with their bank’s digital services. Moreover, a U.S. internet banking survey showed that only 20% of customers prefer visiting a physical bank than using digital services. The added benefit of being available 24 hours a day and 7 days a week is also contributing to the growing preference of customers for online banking services, as it saves their significant time and money in terms of transportation costs.
The BaaS model offers numerous benefits for banks, fintech players, and customers. For banks, it provides benefits such as increased revenue, cost-saving initiative, and increased customer insights. BaaS model allows banks to use APIs to share data with third-party financial institutions to increase their source of revenue. For instance, according to the Cash-free Payment blog, 43% of the banks prefer a BaaS model that allows them to charge fees per API transaction. For fintech players, the BaaS model offers faster startup launch and increased customer trust. As customers trust banks to look after their financial well-being for long term, fintech players integrate with banks to leverage this trust in order to increase their customer base.
Fintech companies also focus on the Payment Service Directive (PSD2) to improve consumer data protection and boost competition and innovation in the financial sector. However, the high cost of adoption of BaaS technology may hinder the growth of small banking entities. Small banks lack the resources and capital to adapt to newer technology. Moreover, in order to adopt the BaaS technology, banks need to invest in IT hardware and software to effectively enable cloud services that can streamline operations related to BaaS without any hassle.
Major players operating in the Banking-as-a-Service market include Solarisbank AG, Bnkbl Ltd, Treezor, 11: FS Foundry, Green Dot Bank , Fidor Bank AG, Moven Enterprise, and Square, Inc. BaaS companies have been focusing on venture capital investments over the recent years, with the funds allowing them to enhance their product offerings and market position. For instance, Solarisbank AG closed a Series B funding round of USD 62.7 million in 2018, which included investments from Banco Bilbao Vizcaya Argentaria (BBVA), S.A, Visa Inc., SBI Group, and Lakestar. The company used the funds to develop its BaaS platform and offered various product development solutions to its customers. Moreover, fintech players are also collaborating with companies to provide better financial services. For instance, in May 2021, OpenPayd, a banking-as-a-service solution provider, announced its collaboration with SwissBorg, a blockchain-based crypto wealth management platform, to provide a full suite of financial services to SwissBorg clients.
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