EXCLUSIVE: “Take Your Partner” – Dee Burke and Josh Cogan, Finastra in ‘The Fintech Magazine’
The first BaaS market maturity index from Finastra has identified a wide open goal to improve lending and other services to SMEs. Dee Burke and Josh Cogan walk us through the results
“The banking-as-a-service (BaaS) market is leading a revolution in financial services, and we’re convinced that it’s just getting started.”
So says Josh Cogan, a director and lead client partner for BaaS at financial software solutions giant Finastra. Put simply, BaaS enables non-banking businesses to develop embedded finance propositions within their customer experience using an existing licensed institution’s secure and regulated infrastructure, often through API-driven platforms that allow data sharing under open banking and, in those regions that have already achieved it, open finance.
And with Finastra noting that the ‘unstoppable momentum’ of BaaS is expected to give this sector of financial services a $7trillion market valuation in as short a time as 2030, you can see Cogan’s point. That figure is highlighted in Finastra’s newly-published Banking As A Service: Outlook 2022 Paving The Way For Embedded Finance report.
It followed the most in-depth analysis ever carried out of the market, which involved interviews with 50 senior executives and surveys with a further 1,600. Other major findings include that 85 per cent of the senior executives surveyed are already implementing BaaS solutions or intend to do so within the next 18 months. And the major players in the BaaS ecosystem, be they distributors, enablers, or financial institutions themselves (the providers), want to increase their BaaS investments and partnerships as they expect the market to grow by more than 50 per cent annually over the next five years.
The survey revealed that 60-70 per cent of distributors of BaaS products plan to increase their spending on financial partnerships; 40-50 per cent of the enablers who provide the technology bridgeto banks, want to increase their BaaS partnerships by more than 50 per cent; and 30 per cent of banking providers expect the market to grow by more than 50 per cent over the next five years. As an established global enabler, providing technology services to 90 of the world’s top 100 banks, ‘banking-as-a-service is Finastra’s big bet’, asserts Dee Burke, who heads up the company’s BaaS marketing.
“We’re going all in on this. We’re aligning our product organisation, our sales, our marketing, our customer support, all to ensuring that we are the number one orchestrator of open finance. Banking-as-a-service is transforming financial services around the world. We’re seeing big brands, from enterprise resource planning (ERP) providers, to retailers and e-commerce now starting to offer financial services directly to their clients.”
As a technology enabler, Finastra is among those ‘making the magic happen’, as Burke puts it, facilitating and forging partnerships between provider and distributor. So, where does it see the biggest opportunities in the BaaS market?
In order of magnitude, they currently rank as retail, SME and corporate banking. Finastra’s survey predicts steady growth in the first, but a huge uptick in demand for SME services in particular, in a remarkably short timeframe. Providers said they saw a way to increase their margins in the SME and corporate segments on select products (including working capital finance, cash and treasury management) by using BaaS solutions to reduce distribution, operational, and risk-related costs. In fact, more than 70 per cent expected to pivot to SME and corporate banking BaaS use-cases.
The report identified ‘significant potential for a BaaS SME lending offering, driven by an API-enabled marketplace’, concluding that ‘SMEs will increasingly turn to embedded finance and other technology trends as traditional banking has historically not met their needs, offering low optionality and unfavourable terms’. But, as with other segments, Finastra’s advice was that providers tailor their use of BaaS to target SMEs, given that margins and monetisation approaches differ across products, use-cases, technology sophistication and assets under management.
Long processes and decisioning, exhaustive documentation requirements and limited credit options for SMEs dealing directly with banks have been a feature of the market for years. But despite the long-acknowledged need for an alternative, the report observes there are fewer established players in SME lending than other products. Given the wide open goal, Finastra’s research found that simplifying SME lending through BaaS could grow 30 per cent by 2024. Meanwhile, it expected corporate lending to grow by 14 per cent, and treasury and FX services by seven per cent over the same timescale.
So will BaaS ease those long-established pain points for SMEs in accessing finance and, by doing so, release pent-up entrepreneurial demand? There are already examples of BaaS partnerships providing clear evidence that it will. Finastra, itself, is working with tech giant Microsoft to provide embedded finance options to SMEs through Microsoft’s business platform Dynamic 365, which is expected to go live across the US this summer. Also in the US, San Francisco-based start-up Synctera has secured funding from major backers, including Mastercard, to develop a BaaS platform to act as a ‘matchmaker’ between community banks and fintechs to overcome the banks’ historical reluctance to lend to such companies due to costs and time issues. And in 2021, eBay in the UK teamed up with financing partners to offer loans of up to £5million through its Capital for eBay Business Sellers (CEBS) programme, which saw £25million of loans approved in the first three months alone.
E-commerce titan Amazon is now in discussions to pair up with Goldman Sachs to provide SME loans after hitting problems with its own Amazon Lending service which started in 2012 for businesses that sell through its platform. With growth slowing since 2016 and with $863million of outstanding loans on its books, Amazon has even pulled the service in Japan with its critics blaming its poor understanding of credit risk alongside its over-reliance on its own limited company data. It rather proves Burke’s point that: “A lot of the focus with banking-as-a-service is on the distributor, due to their proximity to the end customer, but let’s not forget that banks put the B in BaaS; without the banks, there is no licence holder, there is no banking-as-a-service.”
The Finastra report notes that ‘distributors’, enablers’ and providers’ BaaS monetisation strategies are all largely aligned, including offering specialised products, white-labelling customer journeys, and providing access to a marketplace (aggregator of providers/distributors)’, but who you choose to partner with is key, stresses Cogan.
“In order to accelerate the development of your proposition and get it to market quickly, you need to seek the right capabilities. We’ve seen that distributors, for example, look at a couple of really important factors, when considering who to select. First of all, they want to see a variety of use cases that their partners have brought to market; second, they want to see a clear business case and return on investment; and thirdly, they want to see the ability to trial products, to test them out, whilst bringing them to market.”
Seventy per cent of bank providers expect to pivot to SME lending and banking use cases, according to the report. As for their BaaS strategy, Burke says: “We’re seeing a bit of a split here: the larger financial institutions are taking a dual-pronged approach, and they are either choosing to partner direct with the distributors, or they are leaning on enablers to make that happen for them. And at the smaller end of the scale, the small banks, are looking to go straight to partnering with enablers.
“When it comes to monetising BaaS, the providers have three preferred approaches; to offer specialised solutions, to offer front-to-back white labelled customer journeys, and also to secure access to a marketplace.”
The survey results allowed Finastra to develop a first-of-its-kind BaaS market maturity index to try to identify what areas of the BaaS market were most advanced, in terms of the propositions developed.
“We looked at the characteristics and traits of the pioneers, and tried to dive into some of their strategies, and highlight that to the newer entrants in the market, so they could learn from those lessons,” says Burke.
Detailing the results, Cogan says: “We saw that providers and distributors are the most mature areas of the market, whereas enablers, being a relatively new participant, are lacking. But, the enablers are going to grow by 4.3 per cent annually, over thenext three years, and we forecast that they will catch up with the providers and distributors over that time period.”
Finastra’s report also makes clear that while there is huge potential for growth, particularly in the SME sector, time will wait for no BaaS laggard.
“Businesses across all industries need to evolve faster than ever, to keep their proposition relevant, and stay top-of-mind for customers,” warns Cogan.
To gain value from BaaS in the SME and corporate segments, the report identifies three core capabilities that providers need to develop: sector specific products and services that acknowledge the nuanced needs of businesses, even those operating in the same broad category; a data and analytics platform to provide better risk decisioning, which may require them to source SME data from aggregator services to combine with their own insights; and specialised digital solutions for customers that will require investment outside their current business-as-usual offerings.
But, if they climb on board the BaaS bus, the rewards, as one global bank that contributed to the report made clear, could be enormous. Cogan concludes: “Banking-as-a-service enables companies to solve problems for customers that they could never do before.”