EXCLUSIVE: ‘Gold BaaS’ – Angus Ross, Finastra in ‘Discover Money20/20’

During the first wave of fintech disruption, banks feared they would be condemned to irrelevance. Now, that’s very far from the case, says Finastra’s Angus Ross.

A tidal wave of ever-improving digital technology is constantly transforming the way the world lives, works and plays. Spotting which of these digital horses to back is the challenge. But, as the hurdles get higher and the pace faster, global financial services solutions specialist Finastra is betting on one to make all the running.

Banking-as-a-service (BaaS) is bringing huge new opportunities to sectors far beyond banking by creating an ecosystem of providers, enablers and distributors. And it’s as an enabler that Finastra plans to lead the field and bring its 8,500 or so banking clients along for the ride. The company recently conducted a study of the BaaS market, expected to be worth $7trillion by 2030, and established the first BaaS ‘maturity index’ to assess where the juiciest opportunities for banks lie. Interviews with 50 senior executives and surveys with a further 1,600 – who could be providers or distributors of such services – showed that 85 per cent are already implementing BaaS solutions, or plan to do so within the next 12-18 months.

It also revealed that the main participants in the BaaS ecosystem also want to increase their investments and partnerships as they expect the market to grow by more than 50 per cent annually over the next five years. And, while those with BaaS offerings have, so far, primarily focussed on retail banking services – which will continue to grow, the report said – considerably more, green-field opportunities lie in corporate and SME-specific products.

Key takeaways from the report include:

• Buy now, pay later (BNPL) is poised to be as ubiquitous a service as e-wallets, adopted across every single sector (although with the highest usage among e-commerce and fintechs)
  over the next three to five years
• Virtual ledgers will be much in demand among automotive and fintech users
• There will be increasing demand for trade/supply chain finance from retail, technology, e-commerce and banking
• There will be high demand for FX services across e-commerce, healthcare, manufacturing and automotive
• Expect growth in working capital, trade finance and SME lending in the banking, healthcare and retail sectors in particular

Some of those findings are supported by separate research by accounting giant Deloitte, which also predicts there will be more change in the auto financing industry in the next decade than in the last 30 years with customers wanting flexible usage packages as the progressive connectivity of vehicles make new pay-as-you-use services possible. Manufacturers have also realised that they can earn more in future from the use of the vehicle over its lifecycle than from the one-off sale of a new car.

Healthcare is another area where companies have a distinct opportunity to create viable embedded finance business models, according to Deloitte. Good health is increasingly considered a key component of the employee experience and companies are starting to assess links between the wellness of their workforce and the company’s financial performance.

Financial institutions can, therefore, not only be an active participant in the evolving ecosystems but, in some cases, be the lead orchestrator if they are able to act fast and now, Deloitte concludes. That call for banks to speedily join the BaaS revolution is echoed by Angus Ross, Finastra’s chief revenue officer for BaaS.

“It’s quite easy to identify what the opportunity and threat [for banks] is from embedded finance,” he says. “As a bank, you’ve got existing customers for whom it may be more relevant to do what they do with you today through a third-party interface or a channel that you don’t own, in the future. So, existing customers will increasingly engage with those touchpoints. Equally, the new customers that you’re wanting to onboard and attract, don’t come into your points of context or your channels anymore. They’re somewhere else that you don’t own.

“So [this trend] is customer-led, it’s not fintech-led. Those customers are influencing where those demand points are, and, to be relevant as a bank, you’ve got to quickly get in front of those touchpoints or those channels.”

While that may raise questions around agility, technology and mindset, BaaS isn’t the meteor that’s threatening to wipe banks off the map. Because to enable embedded finance – banking-like services offered by non-banks – you need a regulated licence holder with big capital reserves at the top of the food chain. Since challengers, by and large, don’t have the same capital deposits as the established banks, while big techs, who do have the capital aren’t and don’t want to be regulated, big banks could be said to be at something of an evolutionary advantage when it comes to exploiting this new moneyspinner called BaaS.

In a blog last year, McKinsey’s Zac Townsend wrote: “Many banks are concerned that distributing their products through partners threatens their client relationships, but if end users begin adopting embedded finance in significant numbers, banks may have little choice but to launch BaaS business lines.

“The good news is that enabling partners to distribute banking products can be a low-margin, high-volume business for banks. Banks often struggle with their cost structures, which are frequently based on legacy technology and enabled through manual processes and operations. To offer BaaS, banks must undergo digital transformations, but many already have.”

So, they may well have to revise their business models to stay a) relevant and b) continue to have a relationship with the end customer, if, indeed, they still need that relationship.

Ross addresses that head on: “To be relevant in three or five years’ time as a bank, you need to follow your customer, and prioritise your products and services in that point of context. At Finastra, our customers are the banks that are wanting to follow their customers, so how can we, as an enabler, help them do that? Equally – and increasingly – a number of our customers are those endpoints of distribution/consumption of the product. And they want to know how we can help serve their existing customers by embedding financial services that are relevant and valuable for those customers.

“If I’m a large retailer, for example, and my customers are saying to me, ‘it’s far more relevant that I do some financial transactions – payments, or lending, or forecasting – within your point of context, and I’m prepared to pay you for that’, then, of course, as a retailer, I’m going to start to think about it.

“For Finastra, it’s about brokering that relationship, and, more importantly, bringing fintech partners – whether they’re big tech, fintech, or new tech – to the partnership, so that we jointly solve it.”

For Ross, the collaborative imperative of BaaS should skewer the perception that fintechs are hostile predators of incumbent providers.

“I lived the fintech disruption hype of the last eight years or so where it was thought fintech was going to completely cannibalise most of the business that the banks dealt with, and that didn’t manifest,” he says.

“They [fintechs] took a bit of the clip around payments, they’ve done things around home improvement lending, there are different spots where they’ve encroached on. But, if you look at where we are today, the opportunity is more around partnering with those organisations because I don’t think you can talk about pace and embedded finance adoption based on just the new market entrants.

“There are incumbents across all sectors that are very aware of the opportunity, they are very hungry for it, and for partnering with different organisations that help them fill the gaps, whether that’s commercialising a partnership deal, providing a capability, or providing a channel.”

Finastra’s vision, Ross says, is to be ‘the ‘orchestrator of open finance in context’, dynamically connecting its 8,500 or so banking customers to distributors in an open-API-based ecosystem, so they can readily consume banking products, rather than have them sitting on a shelf in a digital BaaS warehouse that no one visits.

“The last thing we want to build is a banking-as-a-service marketplace that has all the best and variable products and services in it that no-one consumes, or no-one connects to, whether it’s a fintech, bank or distributor,” says Ross. “Neither do we want to focus solely on getting our existing banks’ products and services into a marketplace without any view as to who’s going to consume them. So, we’re working concurrently with end users for very specific consumption points, and with a select number of our [bank] customers to be the anchor providers for those.”

One of its most interesting projects, says Ross, involves a large telco and a large bank looking at machine-to-machine payments and lending.

“It’s early days, but machine-to-machine is a whole new world for embedded finance,” says Ross. “If I’m a large freight company, for example, with a chip in different parts of my value chain that tracks when payments get made, based on where a container is, or if I want to pay a unit price for an electronic vehicle charging station – anywhere humans aren’t involved in handing over or asking for money, embedded finance will enable all of it.”

The modus operandi for Finastra is ‘about small partnerships, with the intent to go after a business opportunity in discreet or MVP steps – to experiment, to see what works on what scale’.

“It’s that approach which, I think, is the secret sauce,” says Ross.

His prediction is that most financial transactions will, eventually, occur in channels that banks don’t own.

“It may be big enterprise resource planners, accommodation platforms, it may be telcos,” he says. “But the bulk of financial service transactions will happen in those new touchpoints.”

This article was published in Discover Money20/20, Page 8-9