The global Banking-as-a-Service (BaaS) market has achieved significant growth over recent years. Having been valued at $4 billion in 2022, it is forecast to expand more than five-fold to reach a valuation of $22.6 billion by 2032.
Transforming the way financial products and services are delivered, BaaS has once again been identified as a key trend to watch in the financial services, banking and fintech sectors in 2024. This is a safe bet, given the significant benefits BaaS presents to businesses and their customers.
But, what are the market dynamics that will drive BaaS adoption and growth of the BaaS market this year? Here we highlight three of the most important factors.
1. Consumer preferences shifting away from banks
Consumer behaviours and expectations are changing as a result of the advancement seen in BaaS and embedded finance (EF).
Consumers, particularly younger consumers, are no longer wedded to the concept of getting their financial products and services solely from traditional banks. Accessing tailored financial products and services through the apps and websites they use every day offers ease and convenience. In fact, many believe that non-financial businesses – brands, retailers and marketplaces – are doing a better job of offering financial products that meet their needs.
Aion/Vodeno research proved this point, underlining how millennials and Gen Z are the driving force for change. We surveyed more than 3,000 European consumers from the UK, Belgium, and Germany, finding that 52% of 25-34-year-olds prefer using financial products and services from their favourite brands over traditional banks. A similar number (51%) of respondents in that age group said they believe that brands are making banking more accessible, while 52% think brands offer financial products better tailored to their specific needs compared to traditional institutions.
Brands with significant, captive customer bases will increasingly be aware of the opportunities this presents. Working with BaaS providers will enable them to tap into these shifting consumer preferences – they can build greater loyalty, generate new revenue streams and deliver an enhanced customer experience. This will be the fundamental market dynamic that is likely to drive BaaS adoption in 2024.
2. Better understanding of BaaS Partnerships
Companies considering BaaS should understand that this is not an off-the-shelf offering. A successful BaaS deployment involves the BaaS provider having an in-depth understanding of its client’s customer journey – their business, their customers, their ecosystem. The first step in any successful BaaS provider/Client relationship is to gather customer insights, in order to understand the areas of frustration and friction in the customer journey, and identify the best BaaS use cases to help make the experience better.
Planning is crucial. A great deal of time and strategic thought must go into determining the right mix of products to offer, identify where and how to embed the products into the customer journey, and how to market and scale the solutions once deployed.
As the BaaS sector matures, adopters will increasingly value BaaS providers that can collaborate in a consultative way to shape strategy, rather than acting as an out-of-the-box tech vendor.
Similarly, maintaining compliance and adhering to regulatory requirements have become vital considerations for those wishing to capitalise on BaaS opportunities. Yet, among the growing number of BaaS providers emerging in recent years, there has not always been transparency over which party – the BaaS firm or the adopter – is accountable for compliance, which will be a key factor in 2024 and beyond as the sector sees greater regulatory scrutiny. .
It was a prominent issue in 2023, and we are now seeing a greater understanding that not all BaaS providers are created equal, particularly where compliance is concerned. Adopters increasingly recognise that BaaS providers need to offer a full end-to-end service, including technology, a banking licence, compliance and risk management, as well as strategic go-to-market support.
There is a better appreciation of these key considerations today, and BaaS providers able to offer the right products alongside the regulatory support and compliance tools to manage the associated risks will stand apart in 2024. What’s more, it is these providers that will continue to build trust in the BaaS industry and bring the most innovative, successful solutions to market with their clients.
3. Economic climate creating new opportunities
High inflation and rising interest rates have been the defining global economic trends for the past two years, putting consumers and businesses under considerable financial pressure.
From the perspective of end users, the cost-of-living crisis has placed greater importance on the accessibility of financial products. From savings and payments to loans and investments, many consumers have needed to reassess the financial products and services they are using.
Buy now, pay later (BNPL) is a prime example. In Aion/Vodeno’s study, 37% of European consumers said they were more likely to use BNPL and flexible payment options due to the cost-of-living crisis. This played out in shopping habits – during the latest Black Friday, US shoppers bought over $7.3 billion of goods with BNPL, an increase of 17% from 2022.
Economic conditions have fuelled the appetite among consumers and businesses for more innovative, flexible and targeted financial products. While runaway inflation has been brought under control by most major economies, the difficulties of recent years have created an environment wherein customers are seeking out more choice from their favourite brands– this will act as a motivating factor among BaaS adopters in 2024.
Growth to come as BaaS market matures
The growth of the BaaS market will continue as more use cases in more sectors are deployed, and the maturation of the BaaS industry will see an elite group of BaaS providers break from the crowd – those providers that combine both technical and banking expertise.
Immense opportunities lie ahead. Undoubtedly, 2024 will see BaaS break new ground, and it will be exciting to see new partnerships, growth and success stories emerge.
About the Author
Jean Jacques Le Bon is Chief Strategy and Product Officer for Vodeno. Vodeno’s proprietary blockchain-based, cloud-native platform combines with financial products based on Aion Bank’s ECB licence to offer embedded banking services to European companies. Together, Aion/Vodeno are uniquely positioned to offer comprehensive embedded financial services for banks, lenders and merchants across multiple sectors. Vodeno and Aion Bank are separate companies and backed by global private equity firm Warburg Pincus, as well as additional investors NatWest Group and EBRD (European Bank for Reconstruction and Development).
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