Banking-as-a-service to hit mainstream adoption by 2024

With digital and open banking systems gaining rapid acceptance, banking-as-a-service (BaaS) is set to hit mainstream adoption within two years, according to analyst firm Gartner, which predicts that 30% of banks with greater than $1 billion in assets will launch BaaS to generate new revenues by the end of 2024.  

In simple terms, BaaS emerged as a core component of open banking, in which banks open their application programming interfaces (APIs) for third parties that allows neobanks, fintech players or any other third party running a digital platform to create new services, giving account holders more financial transparency choices.

 “These banks typically have ambitions to generate and diversify revenue streams, or to a lesser degree, aspire to extend previously sunk regulatory investments, such as PSD2 in Europe, into revenue-generating machines,” Jeff Casey, senior director analyst at Gartner, adding that while the technology is not new, it is likely to mature within the next couple of years.

The other technologies including chatbots, public cloud for banking and social messaging payments apps will continue to drive the BaaS trend. Bank CIOs should consider how key innovations are shaping their industry and prioritise their technology investment strategies accordingly, said Gartner.

“Technology innovations like these are driving bank and nonbank competitor activity, influencing customer demand for product and services, and shaping regulators’ actions globally,” Casey said.

Many global banks are now drawn to collaborative models that enable enhanced customer experiences, such as richer features, a broader set of products and innovative customer experiences, the analyst firm said.

India too is seeing traditional banks and fintech collaboration. For example, State Bank of India’s partnership with Uber to provide vehicle finance to drivers, RBL Bank’s collaboration with Razorpay for digital merchant onboarding and payment solutions and also the Snapdeal and FreeCharge partnership with Yes Bank to provide “instant refunds”.

According to a global study done by Future Market insights in November last year, the global BaaS market size was valued at $2.5 billion in 2020 and is estimated to rise at 15.7% CAGR between 2021 and 2031 in comparison with 11.8% CAGR registered during 2016-2020.

The advent of newer technologies such as artificial intelligence, robotic process automation, blockchain, and IoT which have the potential to dramatically alter the banking landscape, when harnessed together, can drive the entire BaaS market, the research said. In addition, increasing awareness regarding the internet banking is also driving the growth of BaaS market, it added.