Singapore, March 9, 2021 – With a new Banking-as-a-Service (“BaaS”) model, financial services providers can save up to 95 percent of a typical customer acquisition cost, from a range of $100 to $200 to between $5 to $35, according to a new report from Oliver Wyman.
The report, The Rise of Banking as a Service, expects the BaaS model to rise as a new battleground for financial incumbents and their digital challengers, as the model has the potential to generate significant new revenue growth for both financial and non-financial businesses.
BaaS is enabled by the seamless integration of financial services and products into other kinds of customer activities, typically on non-financial digital platforms, such as e-commerce, travel, retail, health, and telecom. These businesses can thus distribute financial products under their own brands (“distributors”), so that the customer experience is of taking out a loan when checking out of an e-commerce store, for example, but the loan product is actually provided by a bank.
Both financial institutions and distributors could achieve major revenue growth by launching BaaS business models. The report looked into selected markets in the Asia-Pacific region to estimate the size of opportunity. With a four to five percent of penetration rate, it would generate between $5 million and $13 million in revenue for every million customers that purchase financial products on the digital platform, creating enormous opportunities for fee-sharing-based partnerships.
“BaaS is a great opportunity for existing banks, insurers, and wealth managers to reach a greater number of customers at a lower cost by teaming up with non-financial businesses”, said Dan Jones, an Oliver Wyman Digital Partner and the lead author of the report. “But if they do not react in a rapid, strategic manner, BaaS could also pose a threat, as it opens up the financial services market to new challengers.”
Digital challenger banks are now running at a fraction of the cost of incumbents, according to the report. Some technology companies have obtained banking licenses, enabling them to offer their BaaS platforms to distributors that want to provide financial products to their customers. This leaves incumbents with just a few competitive advantages: the regulatory license, the handling of cash through branches, and a recognized, trusted finance brand.
To fight back, financial incumbents have been spending billions of dollars on digitalization, while the report suggested strategic decisions over BaaS model and potential partnerships with digital platforms.
“We believe BaaS will bring together digital technology platforms and finance to change the shape of economies and most sectors for years to come”, added Jones. “Financial incumbents need to start making decisions about how to enter this growing business – what products to offer and which partners to work with. For distributors, it is also an opportunity to gain a much deeper understanding of consumer behavior through financial data.”