EXCLUSIVE: “The future of finance is open”: The Finastra Forum Europe and why banks need BaaS

By Aniqah Majid, Fintech Finance

Finastra Forum Europe 2022 presented interesting insight into the world of digital banking and financial services. The most prophetic take-away was aimed directly at the banking industry and its legacy institutions. During the pandemic, $1.9 trillion in market capital was added to the financial system – over half of these investments were funnelled into payment exchanges and niche service providers. 

Global banking is being challenged by the rapid integration of embedded finance and banking as a service (BaaS) offerings. Banks slow to join this transition run the risk of missing out on the majority of today’s capital gains. 

“We are seeing the rise of experimental banking and Banking as a Service,” says Eric Duffaut, President and Global Head of Customer Operations at Finastra, who offered the keynote speech for the event. “Customers expect financial products and services to be brought to them wherever they are. They want them in the right context, and this means for you – banks – your cost-to-serve is 100%, but for FinTechs, it’s about 40%. It costs you more than double to serve the same customers and yet you don’t get a share of revenues from outside of banking.”

With embedded finance, the potential gross for BaaS is expected to skyrocket to $7 trillion by 2030. 

Some financial institutions are apprehensive of offering BaaS because of the risk involved with entering into an already saturated market. Duffaut proclaims this phenomenon as “the ideation inertia,” where banks involve themselves in markets that are so busy that they fail to control their placement or their profits. This problem, coupled with hesitance to integrate new digital banking solutions, puts banks in what Deloitte calls a “pervasive and pernicious technology trap” where banks stop themselves from realising their full scaling potential. 

Finastra, leaders in the open finance movement, provide a wide range of technology solutions for financial institutions. With their Fusion software architecture and cloud ecosystem, they have developed a platform – FusionFabric.cloud – that connects banks with potential partners in financial and non-financial service brands and big tech providers. 

 Finastra’s platform provides applications that streamline BaaS integration for financial institutions, reducing the level of risk in the process. 

Andrew Dawson, Chief Operating Officer (COO) for BaaS, Data and Platform at Finastra, emphasised in his segment of the forum, ‘Banking as a Service: The $7 Trillion Opportunity’, the importance of partnerships and delivering banking services at the point of need, or “in context.” 

“Now whilst some financial institutions may perceive BaaS as a threat, in our opinion, the enormous potential it offers banks to reach new customers, and to enter new markets, at scale, provides an opportunity that is simply too great to ignore.”

The way the BaaS model works, Dawson describes, is in a three-layer stack. 

First up is the provider of BaaS, the bank, that offers secure and compliant banking infrastructure and capabilities. These services are integrated through the enabler, who, with their API-driven platform, distributes the provider’s service through the final layer – the embedder or distributor – to the customer (either a business or an individual). This B2B2C model is delivered in context, through embedded financial services,

directly in the end-user’s journey. 

This frictionless end-to-end process, Dawson says, is what will catapult BaaS to $7 trillion. As it is projected, the transition of traditional financial services transactions to embedded channels is expected to be worth $3.6 trillion according to Bain Capital Ventures. With the addition of embedded finance being delivered as a service for anything from cash management to trade, Finastra says this will take the market to over $5 trillion. The final push to $7 trillion comes from the emergence of net new offerings enabled by BaaS. 

In their upcoming BaaS Outlook 2022 report, in which 1600 industry professionals have been surveyed, the company revealed a range of optimistic findings from all perspectives of the BaaS movement. 30% of providers, specifically financial institutions, expect BaaS to grow by 50% in the next 5 years. 40% of distributors expect BaaS revenues to increase by 15% year on year for the next 5 years. 

For providers, the shift to BaaS is possible through the use of open API platforms to present their capabilities, and mechanisms in which to view data in an integrated way. 

As this data shows, many banks have seen the potential of BaaS integration and have made the move to partner effectively with disruptors in the FinTech space. 

Stripe recently partnered with Apple to launch an industry-first tap to pay service. The service, due to drop this spring, will allow businesses to accept contactless payments, using an iPhone as a payment terminal. The service will be available to all Stripe clients and merchants across the US, being available on additional payment services later this year. 

Last year HSBC announced its partnership with Oracle NetSuite in launching its BaaS offering. HSBC will embed its financial services into NetSuite’s new SuiteBanking solution, so NetSuite customers will be able to automate processes like pay bills and send invoices, from one system. Almost exactly portrayed by Dawson’s three-layer stack, providers and distributors are integrating BaaS in predicted concessions. 

Banks are integral to the global economy. Instead of trying to gain a monopoly on the financial services industry through micro-managing, banks benefit more from partnering with fintechs than competing with them. 

Mark Williamson, a Managing Director at HSBC gives this advice to banks during the panel discussion ‘Banking as a Service: The $7 Trillion Opportunity’. “Know what you’re good at and be good at what you know. This holds true when considering provision of financial services to clients […] Rather than trying to offer many bespoke solutions to many different clients, how can you connect once to many. Platforms are key to achieving this ambition by embedding financial services into applications our clients use on a daily basis which also provides the opportunity to connect with our clients’ clients.” 

This level of connectivity puts providers in contact with both clients and clients’ clients. If financial institutions can tap into client supply chains and embed their services into them, they indirectly connect with the goods and services companies who also move along those chains – it provides another layer of connections to the providers. 

The panel included industry leaders Angus Ross, CRO of BaaS at Finastra (top-left), Ritesh Agarwal, a Partner at McKinsey (top-right), Jeanette Kescenovitz, Senior Director Solution Management, BaaS & Orchestration at Finastra (bottom-left), and Mark Williamson, Managing Director at HSBC.

When it comes to making BaaS actionable for financial institutions, big or small, the work falls directly into developing software that makes embedded finance scalable: primarily open APIs and cloud-based platforms. 

“Traditional architecture and point-to-point integrations are going to fall short when it comes to delivering scalable BaaS solutions,” says Jeannette Kescenovitz, Senior Director at Finastra. “We’re working not only on modernising our tech stack and delivering open APIs, but we’re also making sure that what we’re building is on the modern, scalable and secure Finastra platform that our financial institutions trust.”

Finastra’s model, as Kescenovitz puts it, is built on operating like a start-up, trialling in-house on innovating BaaS, which is a key motivator in experimental banking. Future-proof tech, however, does not guarantee success with BaaS. With a great tech stack, financial institutions also need an informed operating model. With embedded finance, banks are exposed to a new set of customers that they do not own. How they navigate this comes from the partnerships they make with distributors. 

Echoing Kescenovitz’s start-up parallel, a solid operating model cannot be achieved without the lead of CEOs and leading executives in financial institutions. 

“The first and foremost critical success factor we are seeing is a CEO-driven imperative for embedded and contextual finance, it has to be top-down driven,” says Angus Ross, Chief Revenue Officer for BaaS and Finastra. 

Ross further clarified to FF News: “BaaS presents a new and significant opportunity. However, there is no single executive owner for indirect channel revenue and operations in most FIs. There are product, segment and direct channel owners but no single accountable executives responsible for driving revenue via embedded finance channels banks do not own. BaaS is a completely new revenue stream and operating model for FIs.

For BaaS to be successful, it needs to be prioritised by bank CEOs and their leadership teams, and driven actively by accountable executives; otherwise, it will be descoped in favour of competing ‘business as usual’ interests.”

Financial institutions need to act fast with BaaS if they want to see a sizable return in the markets. What Finastra is doing is building a fully-functioning management system, which would allow institutions to integrate BaaS immediately. 

Using FusionFabric.cloud, Finastra acts as an enabler. Swiftly connecting financial institutions to distributors, for example in the buy now pay later (BNPL) marketplace. 

Through their FusionFabric.cloud platform, Finastra can operate as a BaaS marketplace for institutions that have access to Finastra’s public and private data cloud. So, if banks want to leverage certain applications on a private cloud instead of a public cloud, that transition is possible. 

The platform enables a two-sided network, connecting core solutions to providers of other services who want to gain access to these solutions. As data is exchanged, intelligent apps can be developed and deployed to enhance the customer journey, of which the cloud holds over 200 Fintech apps. 

“We developed our platform, FusionFabric.cloud, to expose banks’ services wherever and however they run,” said Dawson. Finastra ensures that customers can use their existing tech stack without changing their integration process. 

Finastra also has a data platform, the Fusion Data Cloud, which is used to develop products and solutions around data sharing, analytical services and compliance. Using their large data sets, the platform gives its clients a centralised location to access key customer data. Banks can track the behaviour of their customers and use it to further personalise their products, all from Finastra’s platform. 

The ethos echoed throughout the Finastra Forum is that of immediate action. BaaS represents a new technological shift in banking, soon to become the industry standard. 

As mentioned by Margaret Franco, Chief Marketing Officer, and moderator of the panel discussion, “Banks are vital for banking as a service, and platforming and partnering is the key to get there”. 

With Finastra’s platform, financial institutions have no reason to remain aloof when it comes to BaaS, as the tools required to move to embedded financial services are readily available to them.