Banks have become accustomed to hearing about potential threats and opportunities from fintech, big tech and digital challengers. Payments and lending have experienced noticeable fintech disruption however, other areas of banking have remained relatively untouched. The scale of disruption from fintechs has been hard to define, and increasingly banks see fintechs as partners to work with, rather than direct competition.

In contrast, the opportunity and threat posed by Banking as a Service (BaaS) and embedded finance today, is undeniably huge. It simply cannot be ignored, and it will fundamentally change the way financial services are sold and consumed in the future.

Defining BaaS at scale

BaaS is about providing relevant, valuable financial services to retail and corporate customers, and embedding these in context at their preferred point of consumption. This makes it relatively easy to identify the scale of the opportunity, or threat, that lies ahead. In fact, Finastra predicts the total market opportunity for BaaS will exceed $7 trillion by the end of the decade.

Put simply: customers that access financial services through banks’ proprietary channels today, will start to consume those same (and more) financial services through third-party interfaces that are more convenient and relevant to them, tomorrow. As financial experiences increasingly start and finish in channels and contexts that banks don’t own, banks will no longer own the customer journey. They will need to partner to succeed.

Who are the key players?

There are three archetypal participants involved in delivering embedded finance. First, you have the providers – those that hold a license for providing banking services. Next you have the distributors, or the end points of consumption, such as retailers, who engage with customers at relevant points of contact. And third, you have the enablers – the organisations which sit in the middle, orchestrating and enabling connections between supply and demand.

BaaS and embedded finance are starting to blur the lines between retail brands, financial institutions and technology providers. Whereas the role of the bank used to be clearly defined, bank services will eventually be so integrated into other user journeys that the boundaries will be virtually invisible.

Open collaboration is vital

So how do banks and other ecosystem participants need to evolve? First and foremost, all participants need a dynamic, open API and platform-based approach, that enables banking products to be offered and consumed, as a service, at scale.

When starting out, it’s essential to set clear goals and to quickly bring the right solutions, partnerships and talent together that will bring BaaS to life, in the eyes of the end customer. This should be done quickly, in agile sprints, not in years. BaaS is all about driving consumption at scale. In parallel to any BaaS development work, it’s important to identify key consumption points, in context, with go-to-market partners and accelerators.

Data analytics is also key. Close attention should be paid to what information can be gathered throughout the customer journey. An ecosystem that analyses data effectively, not just at the point of context, but as customers engage in different transactions with different brands, will be extremely powerful. Using identifiable data will help improve the customer experience through the delivery of additional value-added services. BaaS is not about replicating the existing bank:customer experience in a new channel; it is about creating a relevant contextual customer:brand experience that includes financial services.

Rise of machine-to-machine activity

Another area that will grow significantly in the coming years, is machine-to-machine payments and digital asset broking. This has huge potential, especially in areas of corporate banking. Imagine a large freight forwarding company, for example. The company could have a chip in different parts of its value chain that facilitates usage-based financing tracking-based payments. In such a scenario, financing and payments will be made automatically without human involvement.

Embedded finance is not just about banks providing products to humans in captive points of context. It also offers the potential to enable whole ecosystems of IoT machine-to-machine connectivity and payments – opening up a whole new world of opportunities.

Who will win?

The winners in BaaS will be the pioneers and early adopters that are embedding their products and services into other platforms and building partnerships with technology enablers and distributors. BaaS will give them an opportunity to reach a greater number of customers at a lower cost.

With embedded finance, it’s crucial to remember that everything starts and ends with the customer – whether retail or corporate. BaaS participants who understand the point of context and prioritise the placement of relevant offers will win.

Many pioneers are already experimenting with specific use cases – creating partnerships alongside distributors and orchestrators – to see what works and what could be profitable at scale. Early followers are watching closely and will no doubt catch up. But, as in any industry that’s being disrupted, there remain many players who are not actively doing anything. These are the ones that should expect to be disrupted in the years ahead. BaaS is not something that should be ignored!