The future of Banking as a Service: Banking trends 2024

Banking as a Service holds enormous potential, with its estimated market opportunity set at $7 trillion. BaaS, meaning Banking as a Service, is a model whereby licensed banks provide their digital banking services for products offered by other, non-bank businesses - for example, helping fintechs and other merchant partners offer banking and/or payment services. These non-bank businesses may not hold the relevant banking license needed to operate banking services, and with BaaS, they won’t need to. By empowering a non-financial business with the financial infrastructure of regulated banks, Banking as a Service is unlocking new opportunities for all parties involved.

Emerging banking industry trends in BaaS

As Banking as a Service continues to evolve, so too have certain trends within the space. BaaS has assisted in driving innovation within the financial services industry through collaboration. It enables both parties - i.e., the bank and the non-bank business - to support each other by doing what they do best. The non-bank business can focus on creating optimized products tailored to the customer and their desired experience, while the bank fuels this with its regulated, licensed financial infrastructure. This fosters an environment where creativity can thrive, and subsequently, where offerings from the industry can evolve.

Digital trends in financial services have flourished from this environment - one trend being the emphasis on API-driven ecosystems. From a banking industry outlook, providing services through APIs expands the banks’ reach, resulting in more revenue and opportunistic growth. For the non-bank business, utilizing APIs enables them to offer financial services without needing certain licenses, or dealing with the possible costs associated with this. Another digital trend that has emerged from Banking as a Service is customization within financial offerings. Thanks to flexible APIs, providers have the freedom to adapt and tailor their offerings according to what their customers want and need - diversifying and personalizing finance to the customer. This evolution within BaaS couldn’t come at a more apt time, with consumer demands rising for more frictionless and personalized banking experiences.

Technological advancements shaping the banking industry

When looking at the banking trends 2024 may bring, technological advancements must be considered. Tech is impacting the sector in a number of ways - AI being just one, albeit significant, area. AI technology has become the talking point across so many industries, banking being no exception to this. The technology is revolutionizing the financial landscape, both in terms of management and decision-making for consumers and providers. AI is now used to analyze users' spending habits and provide budgeting advice, personalizing financial solutions and empowering customers to take charge of their financial health. This technology is also being used to improve fraud detection, analyzing vast amounts of financial data with the ability to spot signals of possible fraudulent activity. What’s more, it can also be used to monitor activity on accounts in real-time, as well as enhance security via measures like biometric authentication.

Another interesting technology trend gaining traction in the industry is Decentralized Finance (DeFi). DeFi utilizes blockchain technology to enable people to make financial transactions amongst themselves and, in theory, negates the need for banks and financial service providers. The concept of DeFi challenges centralized financial systems, such as the SEC-regulated banks and brokerages of the US, via a peer-to-peer transactions model. While DeFi provides a stand-out offering in terms of autonomy and accessibility, this technology comes with limitations. DeFi is currently unregulated, and weak DeFi applications could be vulnerable to significant security breaches from thieves and hackers.

Advancements to the Internet of Things (IoT) and wearable tech are also worth watching. IoT is enabling banks and financial service providers to advance their operations, enabling these institutions to collect customer data and better personalize their products and services. Within the fintech scene, numerous pieces of wearable technology have emerged, allowing customers to make purchases via phones, watches, rings, and bracelets. These wearables can help simplify customer transactions while protecting their data from thieves - as many of them require biometric data from the user to authorize payments.

Predictions for the future of BaaS

Reflecting on the banking industry trends and emerging technologies explored, what does the future hold for Banking as a Service? And is the banking system changing as a result?

The unbanked remains high while financial inclusivity is low, but Banking as a Service systems are helping to change that. While their impact on the customer isn’t direct, it enables non-bank providers to explore new and untapped markets, and expand their embed offerings to underserved consumers. With these non-bank providers, fueled by BaaS, consumers aren’t restricted to traditional banking requirements and now have a wider variety of payment and credit options. As this sector progresses, we could see access and inclusivity to financial services increase, with more personalized finance solutions diversifying the industry’s offering.

The adoption of Banking as a Service by traditionally non-financial entities is also a top area to watch. Companies in areas such as telecommunications, energy and utilities, and even education are integrating financial services into their systems, streamlining transactions and improving customer experience. Looking ahead, we could see Banking as a Service expand its reach even further into other non-financial areas, expanding the industry and its boundaries.

As Banking as a Service continues to grow, so may the regulations surrounding it, too. Over the course of 2023, concerns were raised across the globe over bank-fintech relationships and BaaS being provided through these. From numerous bans and restrictions on unruly BaaS providers to the Federal Reserve Board’s creation of the Novel Activities Supervision Program (enhancing supervision on bank activities such as tech-driven partnerships with non-banks delivering financial services to customers) - it’s not only predicted, but rather expected, that regulations will adapt and grow to cover more ground in the BaaS landscape.

Regulatory developments impacting BaaS

Developments to regulations within the BaaS landscape are already being explored. The Basel Committee on Banking Supervision (BCBS) - the global standard setter for banks’ prudential regulations - is currently running its two-year Basel Committee Work Programme. Through this, the BCBS are conducting a “deep dive analysis” on BaaS supervisory implications.

Regulating Banking as a Service is complex, even from the standpoint of ensuring non-banking entities keep up with the same standards as their partnering traditional banks. Add the cross-border nature that comes with a number of these firms, and the situation becomes even more challenging - attempting to adhere to each jurisdiction’s rules while somehow making operations as seamless as possible. Looking ahead, it’ll be interesting to see how regulations evolve in this space, and the findings from the Basel Committee Work Programme.

Discover the future of banking: Embrace BaaS innovations today for financial evolution and empowerment

At Finastra, we understand how complex managing BaaS can be, and how to make this innovative model work for you. Learn more about Banking as a Service, and how we can help you manage this via our BaaS Solutions page.