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True to the seemingly paradoxical term ‘creative destruction’ coined by Joseph Schumpeter, the emerging wave of fintechs, riding on Banking as-a-Service (BaaS), has ushered in a new era for banking. For the established banks, it’s an era of existential crisis.
BaaS has altered the very way a loan is originated, distributed, collected, and above all, it plays to the increasing demand for embedded finance (digital credit at the point of sale).
For lending, BaaS could potentially disintermediate incumbent banks. In addition, having to rely on third parties to sell financial products is unlikely to be an exciting proposition for any well-established bank. But, if banks sit this out, they would be missing out on a $45-50 billion opportunity that is buy-now-pay-later - just a drop in the BaaS ocean.
Considering the increasing role of non-bank entities in the BaaS model, will banks fall off the map? Not quite.
BaaS is the fire alarm, not the fire
The fact that banks will need to adapt for the future is beyond question. And the advantages BaaS brings to the table is incentive enough to evolve and adapt. Yet there’s something unsettling about Baas for banks. Mainly, they fear two profound BaaS effects in the long run, that could force them into the game as underdogs.
One, banks worry about being eclipsed by the platform partner’s brand.
Two, banks fear losing interface with the customers.
If BaaS were to become as ubiquitous as mobile banking, then banks fear they will become invisible entities caught in the interplay between entities fighting for space in the marketplace.
However, the solution is not to steer clear. Instead banks must prepare for the future of banking. Look closely, and it becomes clear that banks have the upper ground in this battle. We explore how banks can navigate the coming era of marketplaces by leveraging BaaS and consolidating their individual identity.
More of an opportunity, less of a threat
Embedded finance (EF) - a use case for BaaS - has proven to be a key monetization lever for companies of all shapes and sizes. It could be for banks too. Here are six ways banks can play their cards right in the BaaS game.
Achieve cost efficiency
Banks have always struggled with cost inefficiency due to legacy systems. BaaS could potentially be the one-shot solution. In the EF model, an end-to-end highly automated and intelligent tech stack manages the entire lending funnel - from onboarding to underwriting to collections. McKinsey research suggests that a bank with a balance sheet of $250 billion could capture as much as $230 million in annual profit - half of which would come from cost efficiencies achieved through digitalization - faster turnaround times and cost optimization. Moreover, it stores and generates data systematically, thereby, continuously improving risk assessment and aiding constant optimization.
Play to your strengths
No other player in the lending business enjoys a lower cost of funds than banks. Therefore, banks have the advantage of taking a low-margin business approach that no other alternative lender can match.
The online marketplace is ripe for the picking. It's the perfect place to widen one's customer base. Banks will be able to access a ready pool of borrowers at practically zero customer acquisition cost. They can partner with fintechs through licensing or white-labelling and reach untapped markets without having to do the heavy lifting on innovation. Fintechs may just be the golden egg-laying hens; rear them, not kill them.
Build on existing digital initiatives
Along with a presence across platforms, banks must invest in building a digital identity and a standalone interface to engage customers. Majority of the banks have some digital presence and a good number of them maintain an individual identity through a dedicated website and mobile app. And some of them have begun offering integrated digital experiences for their existing customer base. They can partner with fintechs to further bolster their digital outreach.
Customize products as per customer cohorts
Banks can also expand the scope of their business to include diverse customer segments, a range of ticket sizes, and varied loan formats. This would be a no-brainer if banks partner with fintechs that use improved data-driven underwriting and collections models.
Rethink brand positioning
Banks fear fading into oblivion. But what if they could have a unique identifiable identity in the network. All it takes is for banks to revamp their marketing strategy and adopt an ‘ingredient branding’ approach to leave their stamp on the final bundled offerings. Case in point, Intel inside justifying the premium price of a PC. Intangible services layered within the offering can still enjoy visibility and hold sway with a bit of strategic branding.
Cashing in on BaaS
All said and done, change is inevitable. There’s no dispute in the fact that BaaS has set the stage for a complete overhaul of banking processes. One thing is for sure, banks need to re-evaluate where they can play best to win, before it’s too late. The best way to stay ahead of the curve would be to forge partnerships.
FinBox - a leading provider of digital credit infrastructure - can help banks foster partnerships with MSME aggregators and be the capital providers to a largely untapped customer base. We bring with us alternative data-based underwriting models that can speed up approvals by 90% and help banks approve 50% more customers.
If you’d like to tap into newer customer acquisition channels and ride the growing BaaS wave, hit us up here.
The myriad opportunities that BaaS presents are hard to miss and it is likely that traditional banks will jump on the EF bandwagon, sooner than later. Therefore, it would be more than mere conjecture to state that banks will be around until the next disruption.