Traditional banks soar with BaaP while BaaS aids small Fintechs

As regulatory compliance causes more friction with issues such as KYC (Know Your Customer), small fintechs struggle in the Banking as a Service (BaaS) space against their rival traditional banks, although it’s fintechs that bring financial inclusion in the space by providing financial services to users with irregular income streams. Meanwhile, Banking as a Platform (BaaP) will rise as it helps traditional banks regain their competitive edge against neobanks.

As per a global Banking-as-a-Service market report, global BaaS platform revenue will reach $94 B globally by 2028, as API deployment unlocks fintech innovation. The BaaS business model involves the delivery of digital banking services by licenced banks. Through the APIs (Application Programming Interface), these integrate directly into the products of non-banking businesses.

Read more: Big banking looks up to GenAI launching its own LLMs

One of the reasons for this growth is that regulatory friction is raising the cost of compliance for BaaS providers, with issues around KYC processes increasing the scope of compliance programs. This can make it harder for smaller fintech companies from non-traditional backgrounds to succeed in the BaaS space. What BaaS providers can do to maximise revenue in a difficult market is integrating their solutions with digital platforms, including eCommerce platforms or travel companies.

“Financial inclusion is driven by accessibility, and BaaS helps serve specific industries or demographics overlooked by traditional banks’ all?encompassing approach. This allows businesses to stand out and focus on being inclusive to their specific audience; driving growth.” — Research author Daniel Bedford

Research author Daniel Bedford commented, “Financial inclusion is driven by accessibility, and BaaS helps serve specific industries or demographics overlooked by traditional banks’ all?encompassing approach. This allows businesses to stand out and focus on being inclusive to their specific audience; driving growth.”

BaaS platforms can cater to the financial needs of gig workers and freelancers offering specialized banking products such as short-term loans, or income-soothing solutions tailored to users with irregular income streams. What separates this from accessing traditional loans is that workers loan directly from the platform, or they can access their accrued wages early.

Traditional banks rise with BaaP

At the same time, as per a study, global revenue from BaaP services will increase to $73 B globally in 2028, from $4.8 B in 2023, because BaaP can help traditional banks regain their competitive edge against neobanks. Through collaboration with innovative vendors, banks can offer new services from partners, including embedded insurance, lifestyle offers with leading brands, or access to HR services for small businesses.

Juniper Research defines Banking-as-a-Platform as: “A business model that enables third-party partners to build products and services for bank customers, most commonly a technology company that can provide APIs while the bank manages data exchange, oversees authentication and ensures compliance.”

Banks can utilize partnerships with industry leaders to build upon their core banking model. This can help them compete with fintechs by offering more user-friendly services. Compared with traditional acquisitions, BaaP partnerships are highly flexible and can be easier to integrate, as banks transition to API-focused models. By offering a wide range of services via BaaP, banks can gain a competitive edge without having to stray from their core business.

Banking marketplaces are an effective way for banks to adapt to the digital age; helping them create financial services ecosystems that offer personalised customer experiences, without developing services themselves. For example, Revolut has extensively expanded its lifestyle offerings in-app; creating its own ecosystem of services, without taking on the costs traditional banks have faced in expanding services. In turn, customers benefit from innovative solutions that are tailored to their needs; increasing satisfaction and improving the stickiness of their banking relationships.

While small fintechs face significant challenges in the BaaS space due to regulatory compliance and KYC issues, they continue to play a crucial role in financial inclusion by serving users with irregular income streams. On the other hand, traditional banks can regain their competitive edge through BaaP by collaborating with innovative vendors and offering diverse services. Both BaaS and BaaP models are expected to see substantial growth in the coming years, driven by API deployments and the ability to integrate with digital platforms, ultimately benefiting a broad spectrum of financial service users.