Mastercard – Opportunities of BaaS

Mastercard – Opportunities of BaaS

Open banking, embedded finance, modular banking, banking as a platform.
Fluid terms in a dynamic space. Underpinning and broadly unifying that space
is another term: Banking as a Service (BaaS).

“The mix of terminology
can be confusing.
Providers and
distributors of BaaS
can benefit from
finer distinctions.”

It is worth billions. Even a conservative estimate, which leaves out nontraditional banking services like point-of-sale lending and customer-consented
payment initiation services, projects a rise in total BaaS revenue from US$1.7
billion in 2021 to over US$17.3 billion in 2026.1 Factor in the breadth of
financial services beyond core banking, such as investments and insurance, and
that projection of double-digit billions comfortably moves into triple digits.
Yet the mix of terminology can be confusing. Providers and distributors of
BaaS, such as banks and financial technology (fintech) companies, can benefit
from finer distinctions to better avail of the opportunities BaaS brings. A more
refined understanding allows for a more considered approach that can flex
with the evolution of BaaS through its various terminological guises.
BaaS has grown via application programming interfaces (APIs) that allow
banks to easily connect with external parties to provide financial services for
more integrated customer experiences. Activity for now is largely restricted
to connections with newer businesses created with an API mindset, but the
future will see more and more public-facing consumer brands embrace APIs
across many industries.
As “API first” becomes the rallying cry to replace “digital first,” a proliferation
of BaaS will result. Already, 85% of senior executives—surveyed across a broad
three-way split between banks, tech/fintech companies, and other customerfacing brands—claim to implement or plan to soon implement BaaS.2 For
some businesses, that implementation will be as providers or distributors; for
others, it will be as recipients who own the relationship with the end consumer.
For all, a resolution of the confusion in the space will be paramount.
This report aims to guide banks and fintech companies in their business
decisions as providers and distributors of BaaS. It is divided into three parts.
Part one looks at the relationship between BaaS and open banking
and how it connects with embedded finance.
Part two looks at an aggregated approach to BaaS as it evolves
into hosted marketplaces and ecosystems via modular banking and
Banking as a Platform.
Part three looks at how banks and fintech companies can enable
BaaS at scale.

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Part 1: Origins
• Open banking
• Embedding finance

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PA RT 1 : ORIG INS

Open banking

A neat definition of open banking is the permissioned opening up of access to
account data and services via APIs. That compares with BaaS as the opening
up of banking capabilities via APIs. But the reality is not that simple, and a
deeper understanding is critical to the creation of a competitive BaaS offering.

“While some distinction
between BaaS and
open banking can
be made in theory,
it can often be
rendered somewhat
meaningless in
practice.”

Three times as many consumers worldwide picked making a payment over receiving
personalized financial insights as a beneficial use case of open banking

In many regions, including the EU where open banking first attained some
regulatory clout through the revised payment services directive (PSD2), open
banking includes payments. The inclusion makes sense: three times as many
consumers worldwide picked making a payment over receiving personalized
financial insights as a beneficial use case of open banking, according to a
recent Mastercard survey.3 Yet, alongside open banking, payments are also one
component of the BaaS stack (figure 1).

Figure 1:
The BaaS stack

Front end UX/UI
Program management
Core banking

BaaS stack

Payments
Capital related services
Compliance & risk
Banking license

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PA RT 1 : ORIG INS

In markets where open banking is regulated, the term premium API refers to
the opening up of APIs beyond mandated minimums. The focus tends to be on
the data side of things, but that largely just reflects how markets move faster
than regulations. Outside of certain discrete uses, even pure data sharing is
usually tied to other banking capabilities to create an effective
value proposition.
So while some distinction between BaaS and open banking can be made
in theory, it can often be rendered somewhat meaningless in practice. The
relationship between the two technically keeps BaaS as a subset of open
banking, but it effectively accords almost all activity to BaaS (figure 2).

55%

Figure 2: BaaS within open banking
Open Banking
BaaS

Of consumers claim to know
at least a little about open
banking, yet it is no wonder
that more of them actually
use it than they think.

Front end UX/UI

BaaS stack

Program management
Core banking
Payments
Capital related services
Compliance & risk
Banking license

For most BaaS recipients, whether businesses or their customers, the
distinction between BaaS and open banking is largely academic. Globally,
55% of consumers claim to know at least a little about open banking, yet it
is no wonder that more of them actually use it than they think.4 For them,
BaaS and open banking are two peas in a banking pod, and understanding
the difference is like knowing that a pea pod is a fruit with peas as its seeds.
Useful knowledge for a botanist; largely immaterial for everyone else.
Yet for the banks and fintech companies operating as botanists for a
banking pod, that lack of consumer awareness represents an important
nuance associated with two key opportunities. Most obvious is the ability to
differentiate when appealing to consumers. More broadly, it helps banks and
fintech companies flex with regulations as they evolve with the market and
address consumer sentiment by enabling capabilities beyond just data sharing.

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PA RT 1 : ORIG INS

Embedding finance

BaaS is a recent buzzword in the anything “as a service” trend, but the
concept is not new. White-label partnerships between traditional banks and
established retailers, car dealerships or airline brands go back more than a
decade, but they were uncommon and expensive to deploy. APIs changed all
that by giving rise to embedded finance.

“ BaaS partnerships
will potentially
extend to all
companies in
the future that
adopt API-based
business models.”

The term embedded finance refers to the insertion of capabilities shared via
BaaS into customer journeys as financial products. Almost two-thirds (64%)
of US consumers aged 21 to 41 are interested in receiving financial products
from non-financial brands, according to a recent survey.5
Initial BaaS partnerships were between banks and API-first fintech
companies, which could offer enhanced financial services more efficiently
when embedded. More recently, API-first tech companies outside of the
financial space, such as e-commerce marketplaces or rideshare apps, are
benefitting from embedded finance. These partnerships will potentially
extend to all companies in the future that adopt API-based business
models (figure 3).
Figure 3: The market for BaaS

2018: Fintech brands
e.g., neobanks and
payment service
providers

2020: tech brands
e.g., e-commerce
marketplaces and
rideshare apps

Future: all brands
e.g., any company
that embraces APIs

The providers of embedded finance via BaaS may be banks, or they may be
fintech companies acting as distributors with banks on the backend (figure 4):
Figure 4: Embedded finance

Bank

API–first
fintech company

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Public–facing
consumer brand
embedding finanace
into customer journeys

Customer

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Part 2: Aggregation
• Modular marketplaces
• Platform–based ecosystems

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PA RT 2 : AG G REGATI ON

Modular marketplaces

The broad applicability of BaaS across all brands caters to a variety of needs.
As a result, brands will want to access only the modules of the BaaS stack in
figure 1 that are applicable to their needs. The approach is self-evident, and
the strength of APIs makes it easy to add other modules as needs change.
A more dynamic model involves brands opting to source modules from
different providers—whether directly from banks or indirectly via intermediary
fintech companies. That concept is known as modular banking (figure 5).

Figure 5: Modular banking

Front end UX/UI
Program management
Core banking

BaaS stack

Payments
Capital related services
Compliance & risk
Banking license

BaaS
Provider 1

BaaS
Provider 2

BaaS
Provider 3

Public-facing brand

Customer

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PA RT 2 : AG G REGATI ON

Modular banking creates a marketplace where BaaS providers compete to
offer the best solutions at the best prices. Banks and fintech companies
can host those marketplaces by including solutions from their partners
to increase brand loyalty. The possible further inclusion of competitors’
solutions seems counterintuitive in the short term, but it can boost brand
trust in the long term by positioning the host as a source of reliable and
accurate information (figure 6).

“ The inclusion
of competitors’
solutions in a
marketplace seems
counterintuitive
but can boost
brand trust.”

Figure 6: A hosted BaaS marketplace
BaaS
marketplace
provider

BaaS providers on
the marketplace

Chosen BaaS
provider

BaaS

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PA RT 2 : AG G REGATI ON

Platform-based ecosystems

An alternative approach to the
mixing and matching of banking
products can come from the
creation of hosted ecosystems
via Banking as a Platform (BaaP).
A more precise term would be
bank platform as a service to
distinguish it from the provision
of BaaS on platforms in modular
marketplaces.
The difference with BaaP is that
providers open up modules on
shared platforms where fintech
and other API-first partners can
collaborate and co-innovate. In

that sense, the platform can be
treated as another module in the
BaaS stack (figure 7).
Yet the treatment of BaaP as a
simple module glosses over the
way it hosts multiple banking
modules found elsewhere in the
BaaS stack along with other
financial products created
and shared by partners on the
platform. On a cursory level, the
relationship between providers
almost represents an inversion
of what is found in a modular
banking marketplace (figure 8).

Figure 7: BaaP as part of the BaaS stack

A BaaP provider hosts a
collaborative ecosystem while
benefitting from the co-creation
of new products and services
that it can white label or take to
market itself. This differs from
the host of a BaaS marketplace
whose benefits are focused on
referral fees and increased brand
trust and loyalty. A powerful
combination results from the
use of BaaP to enhance existing
products and generate new
products before offering them on
a modular BaaS marketplace.

Figure 8: Banking as a Platform
BaaP partners

Bank platform with API–first partners

BaaS stack

Front end UX/UI
Program management
Core banking
Payments
Capital related services
Compliance & risk
Banking license

BaaP
provider

BaaP

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Part 3: Enabling at scale
• To aggregate for partners or to partner with aggregators?
• How to appeal across any brand’s customer journeys

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PA RT 3 : ENABL ING AT SCALE

To aggregate for partners or
to partner with aggregators?

The decision is not a simple one. In a marketplace approach, the aggregator
could be a bank in its role as a BaaS provider or a fintech company as part
of its BaaS distribution strategy. Yet in a BaaP approach, the aggregator
generally needs to be a bank to meet the more precise “bank platform as a
service” definition, although some fintech companies have obtained banking
licenses with the sole business objective of offering BaaS.
The decision often comes down to size. A large bank or fintech company may
have more resources than a local community bank or a fintech startup to act
as an aggregator. Yet there are strategic considerations in terms of tradeoffs
as well.

Revenue vs cost

Aggregators can earn incremental revenue by charging fees for
transactions, subscriptions or one-off implementations. But
the income needs to offset the set-up and maintenance costs
of a marketplace or BaaP.

Brand recognition vs customer acquisition

Aggregators can better control customer relationships and
increase brand recognition. But if the primary objective is rapid
customer acquisition or market expansion, then partnering
with an aggregator will likely be more efficient.

Data quantity vs data quality

Aggregators may have access to a wealth of data from across
their partners. But data inundation can be a problem, and
partners might find data-sharing deals more cost effective
without sacrificing the ability to understand credit risk or
create personalized offerings.

Competition vs collaboration

Collaborating with players already hosting platforms can often
work better than directly competing. That is particularly the
case for incumbents considering partnerships with API-first big
tech and fintech companies.

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PA RT 3 : ENABL ING AT SCALE

How to appeal across any brand’s
customer journeys

“No longer should
customer journeys
be interrupted by the
need to turn to an
external provider for
financial activities.”

No longer should customer
journeys associated with
financial or non-financial brands
be interrupted by the need to
turn to an external provider for
financial activities. Banks and
fintech companies as providers
and distributors of aggregated
approaches to BaaS can already
go beyond simply embedding
finance at a point of need. They
can now offer entire suites of
solutions by orchestrating multiple
instances of embedded finance
through an array of options.
Super-apps, which already aim
to provide unified functionality

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across a host of cross-sector
products and services, will
increasingly depend on BaaS
to embed finance. The purpose
may be for infrequent activities
such as applying for credit
cards and personal loans or
obtaining insurance, or it may
be for repeated activities such
as conducting transactions or
receiving point-of-sale loans.
The benefits may also extend
to corporate customers through
services like small-business loans,
asset management through
transaction banking, and tailored
financial rewards for loyalty
programs.

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PA RT 3 : ENABL ING AT SCALE

i. Fintech brands

The three brand categories in
figure 3 provide a variety of
opportunities for providers
and distributors of BaaS.
Most of the BaaS recipients
are currently in the first
fintech category, but the
real opportunity will come
from turning the other two
into fintech categories as
well. Banks and fintech
companies can achieve that
goal by appealing across
brand categories and along
customer journeys:

Fintech companies—particularly
the neobanks and payment service
providers (PSPs) shaking things
up for issuing banks and acquiring
banks—were the initial recipients
of BaaS. It continues to allow them
to efficiently develop and scale
customized products while avoiding
long development lead-times and
complex legal arrangements. As
a result, neobank issuers will likely
have 8% of the estimated global
total card volume of US$13.4 trillion
in 2025,6 and the share of payments
acquisition by non-traditional PSPs
increased from 9% in 2015 to 34%
in 2020.7

Yet the scope is more than just
point-of-sale payments. For
example, BaaS can enable a PSP
to give its retail customers access
to transaction banking features
to manage corporate assets.
Convenient and efficient liquidity
management can come from BaaSenabled near-instant access to
retail income for use with dedicated
interest-bearing accounts and
linked payment cards.

ii. Tech brands
Of the 34% share of payments
acquisition by non-traditional
PSPs in 2020, half is taken by
fintech companies and half by
a combination of e-commerce
marketplaces and independent
software vendors (ISVs).8 BaaS can
complement ISVs’ and e-commerce
marketplaces’ existing solutions by
keeping customers on one site for all
their financial needs.

Other tech companies, including
gig players in categories like
transportation and accommodation,
are similarly using embedded
finance to provide more streamlined
in-app solutions. The benefits go
beyond customers; a company’s
reputation often hinges as much
on customer satisfaction as on
employee satisfaction, and BaaS
beneficiaries may include gig
workers enjoying integrated bank
accounts and instant payouts.

iii. All brands
Customer loyalty is integral to most
brands. It was the main impetus
for major retailers to start offering
pre-BaaS financial services through
white-label partnerships; banks
could cross-sell banking products,
and consumers could access reward
points by using them. BaaS via APIs
now extends those opportunities to
small businesses. In some markets, it
can even help with financial inclusion
by giving consumers access to
new funding mechanisms, such as
installments or advance access to
direct deposits.

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Brands with complex customer
journeys particularly benefit from
BaaS. Streamlined efficiency
matters to businesses selling major
items, such as cars or houses, that
may require down payments, credit
scoring, loan servicing, financing,
insurance, and KYC verification.
BaaS removes the need for multiple
front-end providers by providing one
secure and largely automated point
of access to all the providers on
the backend.

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Conclusion

The ability of all brands to act like fintech companies is contingent on
access to BaaS on the backend—either directly from a bank or via a
fintech distributor. The dual role for fintech companies as providers and
recipients of BaaS poses the question of what guise BaaS will adopt in
the future as it evolves beyond its current open, embedded, modular and
platform-based approaches.

“The dual role for
fintech companies
as providers and
recipients of BaaS
poses the question
of what guise BaaS
will adopt in the
future.”

The answer comes from how regulators and customers are increasingly
putting neobanks and other fintech companies on the same level as
traditional banks.9 For example, when the Open Banking initiative by
the UK’s Competition and Markets Authority (CMA) went into force
in January 2018, it only required the nine largest banks, the CMA-9,
to comply with PSD2. Compare that with South Korea’s more recent
MyData and MyPayment initiatives, which apply equally to neobanks
and other fintech companies.10
The term embedded finance might technically refer to the integration of
BaaS into customer journeys, but it also makes none of the assumptions
inherent in BaaS around providers being licensed banks. The future of
BaaS is not about hierarchical relationships between banks and fintech
companies or other third parties. Rather, it is about equal relationships
between all providers and the mutual benefits they bring to consumers.

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Mastercard is a trusted partner of the bank providers, fintech distributors
and consumer-facing brand recipients of BaaS. Our suite of open banking
solutions further supports the foundations of BaaS by setting the
governance, standards, privacy safeguards and business rules to ensure
the safe transfer of value between participants.