Banking as a service Market Trends

Growth Drivers

• Growing demand for embedded financial services: The growing demand for embedded finance solutions from various corners of industry verticals like retail, e-commerce, and logistics is driving banking as a service market growth. Companies are embedding banking solutions into their platforms to up the ante of customer experiences and engagement levels. In February 2023, Oracle announced the launch of its Oracle Banking Cloud Services to enable the successful execution of demand through modular solutions by reducing complexity and improving scalability.

• Advances in API technology: API-driven banking solutions have been revolutionizing financial services, making integrations with third-party applications seamless and effortless.  For example, in October 2022, Treasury Prime partnered with First Internet Bank, offering sophisticated API connections for extended scalability of service. Innovation with API-based platforms lets businesses embed financial services without developing complex core banking systems.
• Increased focus on financial inclusion: The banking as a service (BaaS) market is also being propelled by governments and financial regulating bodies, which promote financial inclusions through BaaS solutions for extending banking services to unbanked populations. For instance, in March 2023, ICICI Bank launched bespoke digital solutions for capital market players, which is a perfect example of how BaaS improves access to banking services for a wide range of customers. This inclusiveness is one of the major factors contributing to market growth.

Challenges

• Regulatory complexity and compliance: One of the main challenges faced by any BaaS provider is to survive in the complex regulatory ecosystem. Financial institutions need to comply with strict regulatory requirements, sometimes extremely divergent across diverse jurisdictions. These regulations demand huge investments in legal competencies, compliance frameworks, and reporting systems. Non-compliance with regulations draws severe penalties and reputational loss. Furthermore, the evolving nature of regulations adds more complexity to compliance for a BaaS provider.

• Cybersecurity threats: With increased digitalization on BaaS platforms, cybersecurity threats have also grown more severe. The imperative for the security of sensitive financial data against theft, hacking, and fraud has emerged as a key concern for businesses. Installation of security measures like encryption, multi-factor authentication, and real-time monitoring involves expensive modalities. This will continue to be a significant challenge for BaaS providers as the threat landscape continuously evolves.