The banking sector is navigating a period of transformation, one that demands a rethinking of traditional models to remain relevant in a rapidly evolving financial market landscape. This shift, driven by changing consumer needs, new financial expectations and market players, has fueled the rise of Banking-as-a-Service (BaaS).
What is Banking as a Service (BaaS)?
BaaS is a model where banks use Application Programming Interfaces (APIs) to exchange data with non-banking third parties, such as fintech, allowing them to offer banking services without navigating complex regulatory frameworks or building extensive infrastructure.
Leveraging its charter and expertise, BaaS opens doors for banks to expand their market presence and offers end consumers integrated access to financial services via platforms they already trust and use. This strategic alignment can improve the bank’s market relevance and resilience, particularly as financial services continue to evolve.
A study conducted by S&P Global analyzing 42 community banks that adopted BaaS, revealed an 18% average increase in deposits between the first quarter of 2022 and the first quarter of 2023. In contrast, other U.S. banks within the same asset class and outside of the BaaS ecosystem experienced no significant growth in deposits during this period.
We believe that BaaS has the potential to revolutionize multiple industries and is already contributing to democratizing finance globally. Staying ahead of the BaaS revolution is crucial for banks; understanding and adopting this model will be key to their success, particularly for smaller banks, in the near future.
To provide you with a comprehensive overview of the model, here are 5 key insights into BaaS backed by numbers:
1. Market Growth:
A report from Boston Consulting Group (BCG) and QED Investors states that the global Fintech industry is projected to reach $1.5 trillion by 2030. In the U.S., Cornerstone forecasts that the BaaS market could reach over $25 billion in annual revenue by 2026. Currently, more than 60 U.S. financial institutions participate in Banking-as-a-Service, with a majority being community banks holding under $10 billion in assets.
A 2022 survey by Finastra found that 33% of ecosystem partners aiming to deliver embedded finance solutions are now in advanced stages of BaaS implementation. This rapid growth underscores the industry’s collective shift toward innovation and operational efficiency among banking service providers.
2. Revenue Opportunities:
According to Cornerstone estimates on BaaS revenue potential, a sponsor bank managing one million consumer accounts and 300,000 commercial accounts could see annual revenues exceeding $40 million annually, around $15 per consumer account, and $71 per commercial account.
Through the BaaS model, banks enhance revenue by diversifying income streams as they grow their customer base. By leveraging fintech partnerships and BaaS platforms, these banks can scale deposits and generate income with low acquisition costs, supported by their fintech partners who focus on improving the consumer experience and implementing effective marketing strategies.
This collaborative approach enables banks to benefit from the fintech-driven ecosystem, ultimately enhancing their competitive edge by leveraging their banking and operational expertise.
3. Consumer Demand:
According to Capgemini, 75% of customers surveyed are drawn to fintech’s cost-effective and seamless services.
Customers are looking beyond banks for financial products; the market demands personalized financial services and flexible payment options. Participating in BaaS offers banks a chance to re-evaluate and refine their value proposition.
The challenge for banks is to meet the global consumer demand for digital products and tailored user experiences tied to banking products like debit and credit cards, savings and checking accounts, as well as lending solutions such as Buy-Now-Pay-Later, mortgages, business loans, and personal loans. Through the versatility of BaaS, banks serve as key players in driving this transition forward.
4. Consumer Acquisition Cost Reduction:
BaaS offers a chance to connect with a broader customer base at a reduced expense. According to an analysis by Oliver Wyman, acquiring a customer typically costs between $100 and $200. However, utilizing the BaaS model can lower that cost to between $5 and $35.
Numerous non-bank brands boast substantial and loyal customer bases, offering a vast potential audience for banks that collaborate with third-party providers. By serving these end-users through BaaS, banks can more efficiently reach these new customers at significantly lower costs compared to traditional direct acquisition methods.
5. Global adoption:
In many cases, unmet demand has spurred the adoption of fintech solutions, which has, in turn, helped broaden access to financial services, and the banks have a key role in this adoption through BaaS.
In an EY study, it was found that in 2019, an average of 64% of consumers used fintech services globally in contrast to the 33% reported in 2017. The development and maturity of the BaaS industry in the past years suggest that this figure is undoubtedly higher today, especially in emerging markets and those where financial services tend to be more expensive.
A market survey conducted by EY in 2023 indicates that 70% of respondents—twenty-one technology providers across the Americas, Europe, Middle East, India, Africa, and Asia-Pacific—believe that more than half of financial services will be offered via non-financial services platforms in the near future.
Conclusion
As BaaS transforms the financial landscape, those prepared to adapt can expect a significant competitive advantage in the years ahead. By partnering with fintech and other third-party providers, banks not only meet the rising demand for convenient, embedded financial services but also broaden their reach and revenue streams without the high costs of traditional customer acquisition.
Banks that embrace this model, especially smaller institutions, can position themselves at the forefront of the evolving banking ecosystem. By understanding and integrating BaaS, they gain an opportunity to stay relevant and competitive in a technology-driven, consumer-focused financial landscape.
With projections indicating substantial revenue growth and increased consumer adoption, BaaS represents a powerful strategy to expand a bank’s market presence while supporting the global shift towards more accessible financial services.
At Chaindots, we empower financial institutions to develop scalable, future-ready BaaS models that seamlessly adapt to evolving regulatory demands. Discover how Chaindots can support your journey through the BaaS landscape—reach out to learn more.
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References:
1. “Banking as a service: The role of banks in powering the fintech industry”
2. “Fintech to become $1.5 trillion industry by 2030”
3. “Banking as a Service: Banks’ $25 Billion Revenue Opportunity in Fintech Banking”
4. “BaaS and embedded finance: a $7 trillion opportunity”
5. See reference 1.
6. “The customerengagement imperative. What banks can learn from the fintech playbook”
7. “The rise of banking as a service. New opportunities and growing urgency for financial institutions”
8. “Global FinTech Adoption Index 2019”
9. “How banks are staking a claim in the embedded finance ecosystem”,