By: Sudhir Pai, Chief Technology & Innovation Officer, Capgemini Financial Services Global Business.
In the deeply connected world that we live in today, we are used to integrated online services that give us a seamless experience in whatever we set out to look for. Take any service for example. If we try to book movie tickets online, we are offered a plethora of services like loyalty points, custom cards, etc. All of this has been made possible via Banking-as-a-Service (BaaS). BaaS allows third party organizations to leverage existing banking services through APIs to provide seamless customer journeys.
BaaS has seen partnerships bloom between third party businesses and financial institutions as they strive to offer more customized financial solutions to customers. Such platforms offer new business models and revenue opportunities for all the players involved and can be seen as a natural evolution as another spoke in the Open Banking umbrella. Open Banking has revolutionized financial services by allowing third-parties access to information, creating innovative products and services. Similarly, BaaS will allow organizations to construct innovative financial services on top of bank’s regulated infrastructure.
BaaS: How it works
A general BaaS model has 3 main players: the bank, the BaaS platform, and the third-party business. The bank opens its core banking services to the BaaS platform. The platform ensures safe communication between the bank’s core services and the third party. The customer-facing third party then leverages this API to offer its users various financial products, thus bypassing the need for a financial license that it would have otherwise needed.
The BaaS Ecosystem: What’s in it for the players?
For banks, BaaS offers a new channel for customer acquisition through access to a customer base that it otherwise would not have had access to. In addition to additional revenue opportunities, banks could also gain from rich customer insights on user behaviour. Third party providers benefit from reduced barrier to entry to financial services as they avoid the hurdle of needing licenses to sell financial solutions. For the end users, they gain customized solutions which leverage pre-existing APIs (and are hence faster), thereby improving the overall transaction experience.
BaaS and Wealth Management
BaaS offers many use cases for today’s digital economy. While most popular applications have been around payments, BaaS also offers opportunities in lending, investment and personalized banking services. Wealth Management has also seen rise as a growing opportunity area for BaaS. These platforms enable banks to create embedded wealth management products out of the box.
Rapid surge in the mass affluent population has resulted in heightened demand for wealth management services over the past few years. As per Capgemini’s World Wealth Report 2021, the global high-net-worth individual (HNWI) population grew 6.3%, surpassing the 20-million bar, while HNWI wealth grew 7.6% in 2020, nearly reaching USD80-trillion. This presents a huge and growing market opportunity for BaaS services.
Over the years, these individuals are also becoming more hands-on with regards to managing their wealth. The report reveals that amidst an increase in philanthropic and socially responsible investing, they are demanding an increase in digital interactions to go along with direct interactions with their wealth management firms. They are also embracing hybrid advice and modular financial planning services. The trends in their behaviour point towards hyper-personalization of services and omni-channel connections with wealth managers. HNWIs also present an attractive customer base for BaaS services, as they already possess a high level of digital literacy. They use multiple digital devices, are likely to use them for five or more hours a day and make extensive use of smartphone apps. Such apps are primarily used for the convenience and speed they provide, with the younger wealthy also appreciating the high level of personalization they can offer.
All these trends indicate that widespread advent of BaaS is imminent in this space. Wealth management firms can deliver on all the major trends like customization once BaaS is implemented. Embedding their services into third-party channels allows them to enhance customer experience and also expand their customer base via network effects.
What does this mean for wealth management firms? The past years have seen them move from a more traditional outlook to technology-enabled provider of hyper-personalized services. The industry has seen a shift to open architecture where firms have broadened their portfolio to slowly include third-party products as well. Firms that tend to embrace a mindsetwhich encourages increased collaboration between financial and non-financial service players, will see an improvement in client experience and open the way to acquire new customers.
Major SaaS providers are realigning their offerings leveraging APIs that enable embedded wealth management. The idea is to enable wealth services to be distributed through bank’s proprietary channels as well as via third party channels using APIs. Simultaneously, SaaS service providers are working with brands directly to embed wealth management, putting in place the partnerships with core banking providers and custodians to be able to offer an end-to-end regulated service.
Despite the opportunities, BaaS penetration into wealth management will be a slow and steady race, owing to the high-trust nature of the industry. HNWIs may not appreciate moving away from a system where trust was cultivated with every part of the value chain and hence, firms will need to look for a more subtly way to embed BaaS into their portfolio. This is now slowly giving way to more collaborative business models where companies build leverage others’ core competencies to put a superior proposition in front of the customers.
The future seems bright, and the market is there for the raking for firms looking to incorporate BaaS intro their offerings. We have seen players like DriveWealth, WealthKernel and Bambu already offering services to the middle class and the affluent population. Incumbents like Goldman Sachs also see the merit and have made the entry as well. The ball is now in the court of wealth managers to grab a piece of the pie and embrace a young, blossoming market using what is clearly a service that has grabbed the attention of customers and financial service providers alike.