Open finance is a transformative force, reshaping industries across the board, with regulated and non-regulated organizations providing financial products and services directly to their customers via banking-as-a-service (BaaS), embedded finance, and banking-as-a-platform (BaaP).
A world of untapped opportunities is ready to be unlocked, but financial institutions (FIs) need to adapt to these business models.
What do banks entering this next-generation realm need to understand? Emmanuel Methivier, Business Program Director at Axway, and Paola Diallo, Open Banking Product Manager at SBS, answered that question at the 2023 Summit. The session covered the importance of collaboration, connectivity, technology, and more.
Adapting with open finance models
Banks can leverage various open finance approaches to distribute their products and services, including:
- Banking-as-a-service: Banks provide a white-label product (or license) to a non-bank entity via application programming interfaces (APIs) and remain in the background, unseen by the end customer.
- Banking-as-a-platform: Banks integrate third-party services with their existing assets – core infrastructure, distribution channels, licenses, etc. – enriching their offering to customers.
- Ecosystem management: Banks work with select partners to create a new and upgraded value proposition, mixing banking and non-banking products across areas like real estate and travel to position themselves as a “majordomo” that comprehensively serves customers’ needs.
Per Paola Diallo, “BaaS and embedded finance are two sides of the same coin.” The former enables the latter, with financial services or products like accounts, payments, and borrowing money invisibly built and integrated into non-bank customer journeys. For example, a person takes out a loan directly from the app of an accounting business, meaning they benefit from a more seamless experience.
What’s the current state of play?
At the moment, Emmanuel Methivier says traditional banks find themselves “trapped” between big tech behemoths – Google, Amazon, Apple, and Meta – and a “constellation of fintechs”.
Big tech giants are leaders when it comes to customer relationships. They’re champions of super apps, security, and biometry, have a huge client base, and big capacity to finance new projects. More importantly, they “own the man-to-machine tools – iPhone, Android, etc. – creating a level of servitude between traditional banks and this overlord of the digital market”.
Meanwhile, fintechs are eroding the power of banks, particularly in areas like payments. As such, it’s hard for incumbents to maintain their historical position. “There’s a real risk for banks and they must react quickly,” says Emmanuel Methivier.
That being said, Paola Diallo believes, “Even if banks face all those challenges, they’re incredibly well positioned to benefit from open finance and the emerging business models coming with it like BaaS and embedded finance.”
The primary reason is the trust people have – a lynchpin of the banking industry, according to Sopra Steria’s 2023 DBX Report. Indeed, their data revealed that “A full 80% of consumers trust their banks.”
Another factor is the rich data banks gather, allowing them to understand their customers better and offer relevant products and services at the right time. And then there’s brand recognition, attracting worthy collaboration partners. Paola Diallo sees non-banks and fintechs “increasingly looking to embed financial services into their applications, especially digital wallets”. As part of that, global spending is predicted to reach $17 trillion by 2029.
All sides benefit: Banks have an acquisition opportunity, helping them reach new people and expand their base. Fintechs gain a more holistic customer proposition: Onboarding is embedded into the journey, so there’s no need to build infrastructure in-house and the relevant regulatory requirements are handled. Finally, the customer has a best-in-class, convenient experience. “It’s a win-win-win situation,” says Paola Diallo.
Technology supports open finance strategies
To reposition themselves in the digital arena and capitalize on open finance, banks should leverage the power of technology, helping them achieve the following.
- Modular and flexible architecture
- Data aggregation, quality, and security
- Openness and interoperability
- No/low-code hyper-personalization
- Hyper-scalability, resilience, and availability
- Agility and improved time to market
Emmanuel Methivier says the new path is complex, requiring banks to open up their information systems, create ways for businesses to discover their services, and develop tools for monetizing APIs via Digital Service Marketplaces (DSMs).
At the same time, banks can access DSMs to find third-party services they may want to use for BaaP. Across the board, Emmanuel Methivier believes Digital Service Marketplaces should offer artificial intelligence (AI) tools and services as well as human ones.
Adoption of open finance models
There are endless open finance use cases in consumer and business spaces across retail, healthcare, education, mobility, and more. With that in mind, the global banking-as-a-service market is projected to soar to $1,231.49 billion by 2027, from an expected $731.13 billion in 2024, and the BaaP sector is set to grow over 1,500% by 2028.
Meanwhile, Paola Diallo believes embedded finance holds “immense potential,” with Juniper Research predicting worldwide revenues will reach $59 billion in 2027 and McKinsey forecasting they could “surpass €100 billion in Europe by the end of the decade”.
Payments are a prime example of embedded finance in action, with organizations wanting to control the customer experience from start to finish – examples include Uber, Lyft, and Klarna, offering frictionless journeys while increasing conversions.
Succeeding with BaaS and BaaP
Whether banks opt for BaaS, BaaP, or both (they’re not mutually exclusive), they need to rethink and define their strategies, using technology to embrace the digital world and the new breed of customers.
Listen to the “TechFuel for revenue growth: Unleash open finance” session here.
For more expert content, head to our Insights page, and for information on DSMs, check out the SBS Marketplace.