As the Middle East and North Africa (MENA) region continues to grow as a fintech hub, so does the demand for new, personalised, digital services and how and where consumers want them. With nearly half of the region’s 400m people under 25, this demand will only increase.
In response, Banking as a Service (BaaS) and embedded finance are poised to grow significantly in the year ahead, estimated to reach $7tn by 2030, while growing by 26 percent year-on-year.
Open Banking has been a vital first step. It’s the impetus behind making banks’ products and services consumable and accessible through open APIs, allowing trusted third parties to offer their customers new, value-added financial services in real-time. Building on this, BaaS is all about providing relevant, valuable financial services to users and businesses by embedding these services at the point of consumption.
Companies are already using BaaS platforms to build deeper connections with their customers and build brand loyalty. In the UAE, a few BaaS models have been brought to market by banks and Fintech providers. Emirates Airline offers “fly now, pay down the line” over three months of interest-free instalments through Emirates NBD bank. Tabby offers Buy Now Pay Later (BNPL) services to many consumers brands. In KSA, Arab National Bank provides BaaS services to its customers in collaboration with US-based open-source solutions provider Red Hat.
A huge opportunity ahead
Just considering the ‘cannibalization’ of payments, lending, and insurance from traditional to embedded channels, Bain has valued the transition to BaaS at $3.6tn globally by 2030. This figure doesn’t account for the transformation of wholesale banking to embedded finance. Wholesale banking is when one bank delivers services to another bank lacking those services in areas like cash management, treasury management, trade finance, and FX. When you add in net new market opportunities and the emergence of new finance offerings that BaaS enables, Finastra estimates the total market opportunity will exceed $7 trillion by the end of the decade. The growth of BaaS, in some regards, is unsurprising, given its benefits to customers, banks, government agencies, and third parties.
BaaS can change the Middle East banking sector, enabling more innovation and giving banks new ways to stay competitive. It will enable banks in the region to have more control over their activities, digitise operations, and develop more client-centric products, increasing their customer base and becoming a crucial component in their future growth. Put simply, customers that access financial services through banks’ proprietary channels today will start to consume financial services through third-party interfaces that are more convenient and relevant to them tomorrow. As financial transactions increasingly begin to flow across channels and in contexts that banks don’t control, banks will no longer own the customer journey. They will need to partner to succeed.
All players must work collaboratively
It’s imperative that banks start to act now. The winners in BaaS will be the pioneers and early adopters, embedding their products and services into other platforms, either exclusively or with priority placement. BaaS will allow them to reach a more significant number of customers at a lower cost.
Banks that collaborate with technology enablers (orchestrators) and distributors will be in the best position to develop and enhance their services. Early movers – and those most willing to collaborate – will be rewarded. Late adopters will find it very hard to succeed. The impact of BaaS in the Middle East is very evident and is seen in the hiring of Chief Digital Officers (CDOs) who report directly to their banks’ Board of Directors. And CDOs jobs aren’t just about automation; they are about transforming entire banks, including streamlining existing operations, identifying new revenue streams, and rethinking client journeys.
The global banking industry’s Return on Equity (ROE) is down from 8 percent in 2011 to 6 percent in 2020 since other safer, more commoditised sectors have emerged. Banks must reinvent themselves by developing new opportunities by offering digital products and collaborating with other tech enablers and consumer brands. BaaS is the way forward and a necessary approach if banks not only want to survive but also to thrive.
Nour Sabri, Lead Client Partner – BaaS at Finastra
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