Most big businesses are taking up banking as a service

API-based banking services allow corporate customers to offer financial services without the need for heavy tech development or regulatory approval

Most large businesses are investing in banking capabilities to provide customers with complementary financial products.

The next 18 months will see large numbers of organisations invest in banking-as-a-service (BaaS) contracts to enable them to offer financial services to their customers.

According to interviews with 50 senior business executives and a survey of 1,600 more, carried out by financial IT software supplier Finastra, 85% are already implementing banking-as-a-service capabilities or planning to do so in the next 18 months.

Non-banking businesses such as retailers, e-commerce companies and distributors are increasingly looking to offer financial products to their customers. This could be credit, loans or even debit cards.

To provide these services, however, they need to be regulated and have access to expensive banking tech, so businesses are instead using financial services offered by banks and fintechs. The application programming interface (API)-driven services are regulated through the bank, which also provides the tech infrastructure.

According to Finastra, people are changing where they source financial services and shifting to non-bank channels. “This trend will only accelerate as integrating regulated products into the customer journey becomes as simple as creating a social media account,” it said.

HSBC’s chief innovation officer, Brian McKenney, said BaaS could add contextualised, integrated banking services to the products and platforms that businesses use every day.

More than 80% of regulated financial service providers expect the overall BaaS market to grow, with 30% of these expecting it to grow by more than 50% a year over the next five years.

In October 2021, HSBC made its banking services available to corporate customers on their own technology platforms through an agreement with Oracle NetSuite. This meant using APIs to embed HSBC banking services, such as international payments and expense management, on their own tech platforms.

Meanwhile, app-based challenger bank Starling launched its banking as a service in the UK in 2018. After gaining 25 business customers, it has expanded the service into continental Europe. Starling APIs can be implemented with a few lines of code and give businesses access to major payment systems such as Faster Payments, Sepa and Bacs.

In the past, financial services firms and retail businesses have partnered with banks to offer financial services, whereby they brand the front end, but the banking service, which includes the systems and regulatory approval, is provided by a traditional bank. But demand for financial services to be embedded into services is increasing as digital technology automates transactions.

David Palmer, head of digital asset broker product at Vodafone, said take-up of BaaS was part of the evolving “economy of things”.

“It is estimated there will be as many as 60 billion IoT [internet of things] devices in operation by 2025. We expect these devices to be interacting and transacting, and many will need to be financed. Incorporating embedded finance and BaaS solutions with IoT and the economy of things presents exciting new business and monetisation opportunities,” he added.

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