Oliver Wyman: Banking-as-a-service could provide new revenue
With a new Banking-as-a-Service (BaaS) model, financial services providers can save up to 95% of a typical customer acquisition cost, from a range of US$100-200 million to between US$5 million to US$35 million.
According to the report, the BaaS model is set to rise as a new battleground for financial incumbents and their digital challengers, with the model offering potential to generate significant new revenue growth for both financial and non-financial businesses.
Major revenue growth for both parties
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. This allows such businesses to then distribute financial products under their own brands, so 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.
According to the report, which looked into select markets in the Asia-Pacific region, both financial institutions and distributors could achieve major revenue growth by launching BaaS business models. With a 4-5% of penetration rate, it would generate between US$5 million and US$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”, says 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.”
Convening digital tech platforms and finance
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 who 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 recognised, trusted finance brand.
To fight back, financial incumbents have been spending billions of dollars on digitalisation, while the report suggests strategic decisions over BaaS model and potential partnerships with digital platforms.
Believing that BaaS will bring together digital technology platforms and finance to change the shape of economies and most sectors for years to come, Jones says that financial incumbents should 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 behaviour through financial data,” he adds.
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