Embedded Finance: How Banks Can Go Beyond BaaS

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Embedded finance, the seamless integration of financial services adopted by non-financial companies, has been making waves in the payments industry for years. One form of it, BaaS (Banking-as-a-Service), has received particular attention for its innovation in the sector that reaps benefits in banking’s competitive market.

In BaaS, a financial institution partners with a fintech or other non-financial institution brand to offer financial services to the partner’s customer base. Now, banks need to build on this B2B2C model to further leverage customer data from a more human-centric consumer experience (UX). Banks should utilize all the tools available to them, such as artificial intelligence (AI) chatbot, to create data analytics for a deeper understanding of consumer behaviors and needs. This is BaaS at its best: When it allows enterprises to personalize and upgrade their financial service offerings.

BaaS opens a gateway to new sales opportunities, white-label solutions, and credit services for merchants. Well-known examples include Starbucks, which offers an integrated wallet and payments in its app, and Lyft, which provides a debit card to its drivers. A customer-centric mindset helps businesses gain a competitive edge as they deep-dive into consumer lives to see where convenience and efficiency could be improved – and offer the appropriate products and services in response.

Let’s look at how a BaaS model of embedded finance is helping banks and enterprises alike to connect with new pathways for growth.

First, let’s examine the current embedded finance market. Due to regulations and lack of financial capital, fintech companies and retailers would rather use banks’ financial products than develop their own.

Cornerstones’ survey of financial institutions found that 11% of banks already have a BaaS strategy, 8% are developing one, and 20% are considering it. The increasing competition puts pressure on banks to adopt advanced technologies and offer their services to many consumers. Extending the current BaaS approach is good for brands as it means better oversight, control, and flexibility in program terms with a direct relationship with their customers.

However, there are some prominent downsides to BaaS for banks. As they are, partnerships bring a lot of money to entrepreneurs, while the risk remains on the side of financial institutions. This risk can even lead to significant losses on the financial side: According to American Express, a few years ago, 21% of outstanding credit card loans were for people with a Delta credit card. There can be a myriad of personal factors that contribute to why individuals are unable to pay off credit cards so banks that take a holistic view of their customers will be better placed to understand why and help individuals find tailored solutions.

In addition, when enterprises are used as BaaS platform providers, it makes it difficult to establish a direct interaction between brand and bank. Therefore, banks should find additional ways to sell individual financial products or services to merchants. Then, they can prove themselves in the area they are best known: Being customer-focused financial services providers.

When established banks offer white-label or co-brand their financial products, their customer acquisition, and awareness can be negatively impacted. A collaborative co-brand approach allows banks to reach multiple customers (B2B) at a lower cost, but they lose out when it comes to customer (B2C) as this relationship is passed on to the merchant.

Effective BaaS solutions could upgrade the UX status quo of financial services offerings such as payment processing, credit fraud management, compliance, and account management to all enterprises and companies who, in turn, issue them to their employees and clients. BaaS represents a new way of looking at customer service at scale. In the digital era, the traditional bond between bank and client has been lost, but technology is also there to rehumanize banking for the mass market, and profitability will follow.

The idea is for banks to expand their products in this B2B2C space and focus on financial services and wellness. While banks often simply license in BaaS, the core is to permit services. To put it bluntly, banks can approve their entire platform and lend it out entirely for a reasonable sum of money. One example is where banking giant Goldman & Sachs reached a new market by delivering the entirety of their banking services to end-users via the Apple card. In turn, Apple is seen to have reinvented the credit card to have the simplicity they’re widely regarded for.

Elsewhere, Amazon has instrumented its own approach to embedded finance by introducing banking services for sellers on the Amazon platform. The fast-moving consumer goods (FMCG) giant is known for revolutionizing industries and methods, and its offerings to small and medium-sized businesses (SMBs) could further disrupt the financial sector. Twitter CEO Jack Dorsey has also developed financial services for small businesses as his fintech company Square grows beyond payments processing for an integrated approach to business banking.

But this is far from exhausting all the avenues for growth. Increasing competition makes it harder for banks to attract new customers, and there is pressure to differentiate further; so where are more market opportunities? One emerging trend is further embedded banking potential at the enterprise level: the employee/employer.

BaaS allows Company A customers and employees to use Bank B’s product through their platform. Typically, employees in a company using their own bank account can provide it to the company and give them their payroll. But this is where the great potential for banks lies. What if the company works closely with a bank and offers far more services than a payroll transfer? For example, what if that account helps the user build employee financial health?

Whether someone is employed or working in the gig economy, the integration of bank accounts with the employer or contractor is becoming a key trend – especially for larger companies looking to improve their recruiting.

BaaS offers a chance to reimagine our current banking system so both banks and enterprises can go beyond what they’re currently offering. Fintechs may have disrupted traditional financial markets, but this shake-up has also set loose new possibilities across the sector. Banks who think collaboratively with enterprise partners and prioritize customer UX will see the value of creating BaaS-driven, holistic customer journeys.