Mahesh Paolini-Subramanya, CTO at BKN301, explores what BaaS is, how it functions, and the significant benefits it offers to the financial landscape.
The Middle East’s financial landscape has been experiencing a profound transformation in recent years, fuelled predominantly by the widespread recognition of Banking as a Service (BaaS) as a “must have” in the world of fintech.
We often hear the term Banking as a Service (BaaS), but what does it really mean?
Essentially, BaaS is a process that allows digital banks and third parties to easily offer banking services by integrating their business infrastructure directly to a bank’s system via APIs. This seamlessly allows companies to embed comprehensive banking services throughout their products and services, creating unique eCommerce experiences by merging non-banking businesses with regulated financial institutions.
Throughout the Middle East and Africa , the use of BaaS is expanding quickly, with the region’s market projected to reach USD 100.53 billion by 2029, growing at a CAGR of 7.40 per cent during the forecast period (2024-2029). The number of fintech firms in the Middle East has been steadily increasing, growing by 460 last year and contributing to the expansion of the BaaS market in the region. Major national banks such as Qatar National Bank, First Abu Dhabi Bank, Emirates NBD, Standard Bank Group, and Saudi National Bank are also actively expanding their BaaS services through collaborations with fintech companies in the region.
On the other side of the equation, banks are increasingly utilising BaaS to fundamentally change their cost structures, turning their (large) fixed expenditures into more manageable costs, resulting in considerable cost savings. The need for larger incumbent banks to stay competitive in an ever-changing market is one of the factors driving this trend.
One may wonder why it is difficult for banks to integrate BaaS in spite of the necessity.
Integrating BaaS independently can be challenging for banks due to several factors. They often struggle with outdated legacy systems that complicate integration, face stringent regulatory and compliance requirements, and must ensure robust security and fraud prevention. Additionally, the process requires significant technical expertise, resources and financial investment. In addition, banks also need to manage complex operational aspects, maintain a consistent customer experience, and ensure scalability and flexibility. All of this must be carried out in an environment where banks typically lack the operational and financial headroom to proceed. Specialised BaaS providers simplify this by offering ready-made solutions, allowing banks to focus on their core business while managing the complexities of modern banking systems.
At first, BaaS solutions focused on payments and accounts. However, the scope of BaaS is poised to develop further into consumer lending in order to support innovative products and options, including ‘Buy Now Pay Later (BNPL)’. This expansion will significantly contribute to transforming the financial services landscape with more tailored and accessible solutions for customers across the debit and credit landscapes.
The potential of BaaS is immense. However, payment fintech companies must carefully and strategically navigate this landscape in order to fully reap its benefits.
There are several issues that needs to be resolved, for instance, high costs and little flexibility, which might hinder the expansion of fintech companies. Therefore, it becomes crucial for companies to negotiate better terms, explore other suppliers, and look for niche BaaS companies that could provide more favourable offers. Additionally, cooperation is also essential as fintech companies can create strategic partnerships and alliances to introduce more innovative solutions as well as pave the way for an open and competitive environment.
Moreover, fintech companies often encounter challenges regarding having to pay high bank fees and mandatory service charges. In light of this, it is essential for them to work together with other players to pool resources, lower total expenses, negotiate fees, and explore partnerships with challenger banks or other fintech-friendly institutions in order to mitigate these.
Strict regulatory frameworks and a lack of BaaS providers can restrict choices and hinder innovation. Rather than seeing BaaS as a sure-fire way to achieve success, payment fintech businesses should see the solution as a useful tool to embed into their clearly defined business strategy. They can leverage BaaS and carve out a position for themselves in the Middle East’s constantly shifting financial scene by thoroughly comprehending the difficulties and actively seeking solutions.
There are a wide range of BaaS providers in the Middle East, each with unique capabilities that are best suited to the ever-changing needs of the financial services sector. Although some banks may be hesitant to implement BaaS because of concerns regarding the stability of service and loss of independence, these issues are highly outweighed by the advantages of the solution’s incorporation.
Some banks in the Middle East are already adopting BaaS as a a strategic response to disruptive forces, which establishes these organisations as pioneers in financial innovation. Incorporating BaaS technologies allows them to provide customers with more sophisticated and personalised services while also improving operational efficiency. As the BaaS market continues to grow, the financial ecosystem in the Middle East will be drastically revolutionised by its transformative impact, ushering in a new era of banking that is more technologically sophisticated, customer-centric, and nimble.
Image Credit: BKN301
