Traditional banking under threat from platform-based alternatives

Half of non-banking businesses believe that banking as a service (BaaS) will eventually replace traditional banking, with the cost-of-living crisis hastening this, as consumers look for alternative sources of financial services.

A survey of 1,000 businesses in the UK and Benelux region found that 51% expect BaaS to spell the end of traditional banking, with 56% citing the cost-of-living crisis as a catalyst for the adoption of BaaS.

The survey, from BaaS supplier Vodeno and Aion Bank, found that as more non-banking businesses embed financial services into their offerings, traditional banking will lose customers. It revealed that 65% expect to see more consumers using banking services via non-financial brands enabled by BaaS, rather than traditional banking.

Non-banking businesses such as retailers, e-commerce companies and distributors are increasingly looking to offer financial products to their customers. This could be credit, loans or even debit cards.

To provide these services, however, they need to be regulated and have access to expensive banking tech, so businesses are instead using financial services offered by banks and fintechs. The application programming interface (API)-driven services, known as BaaS, are regulated through suppliers.

A total of 39% of respondents to the survey said they have already implemented BaaS services and products, and another 38% are considering using BaaS this year. The most common BaaS being offered is foreign exchange (48%), buy now, pay later (48%), small and medium-sized enterprise lending (47%), and loyalty schemes (46%).

Of the businesses that are not yet offering financial services through BaaS platforms, 32% said they do not know enough about BaaS, 29% said there is a lack of understanding about the products available, and 27% said compliance and security concerns are a key barrier to adoption.

Wojciech Sobieraj, CEO at Vodeno, said: “Platform banking – where financial products are embedded in the customer journeys of brands people use everyday – is the future. We know that companies looking to implement BaaS also want care-free products and services, with the technology, necessary licence and regulatory checks offered in one combined solution.”

In October 2021, HSBC made its banking services available to corporate customers on their own technology platforms through an agreement with Oracle NetSuite. This meant using application programming interfaces (APIs) to embed HSBC banking services, such as international payments and expense management, on their own tech platforms.

Meanwhile, app-based challenger bank Starling launched its BaaS in the UK in 2018. After gaining 25 business customers, it has expanded the service into continental Europe. Starling APIs can be implemented with a few lines of code and give businesses access to major payment systems such as Faster Payments, Sepa and Bacs.

In the past, financial services firms and retail businesses have partnered with banks to offer financial services, whereby they brand the front end, but the banking service, which includes the systems and regulatory approval, is provided by a traditional bank. But demand for financial services to be embedded into services is increasing as digital technology automates transactions.

In March, following interviews with 50 senior business executives and a survey of 1,600 more, financial IT software supplier Finastra said 85% are already implementing BaaS capabilities or planning to do so in the next 18 months.

“This trend will only accelerate as integrating regulated products into the customer journey becomes as simple as creating a social media account,” Finastra’s report said.