Standing Out with Invisible Payments: The Banking-as-a-Service Paradox

Banking-as-a-Service, or more commonly known as BaaS, is an end-to-end process that enables third parties to directly connect with banks  systems so they can build products on top of the banks’ regulated infrastructure. The reason BaaS is a big deal today is that it makes it far easier for anyone — from start-ups to multinational enterprises — to create seamless, scalable payment experiences across and within borders.

Southeast Asia’s high smartphone penetration and engagement—even higher than banking penetration in most countries in the region—make customer adoption of services like e- commerce and ride-hailing easier. It also provides opportunities to offer embedded financial services, writes Bain & Co. in the article "Fulfilling Southeast Asia’s Digital Financial Services Promise." According to a study by Google, Temasek and Bain, of the nearly 400 million adults in Southeast Asia, only 104 million are fully “Banked” and enjoy full access to Financial Services. Another 98 million are “Underbanked”, with a bank account but insufficient access to credit, investment and insurance, while 198 million remain “Unbanked” and do not own a bank account. Millions of small and medium enterprises also face large funding gaps. As a result, all eyes are now turned to digital financial services as the means to overcome these challenges.

Yet, we’re seeing a paradox. In the last decade, digital financial services have been integrated so seamlessly in our daily lives, that it has becom e frictionless, maybe almost invisible. However, with the high volume of competition in the market, there becomes an increasing need for players to offer more differentiation, or become more visible in their offerings.

Invisibility, achieved by close collaboration
Industry players, such as regulators, FinTech partners, and businesses in the banking, financial services and insurance industries, are starting to realise that it is not ideal to be a ‘jack-of-all-trades’. In fact, the core of BaaS is built upon strategic collaboration. As such, there should be more acceptance of strengths and weaknesses from financial players so they can better identify what they are good at and what they need help with.

Essentially, financial players need to ‘piggyback’ on either big banks or other financial service partners with strong regulatory license network. Furthermore, if they can identify a market that is underpenetrated, this is a good opportunity to work with existing players to fill the gap.

For instance, the recent partnership between InstaReM and SBM Bank India allow users to remit money to more markets and send funds overseas in real-time. As its licensed banking partner, InstaReM will facilitate international money transfers from India to an expanded list of markets, including new destinations such as Malaysia and Hong Kong. In another example, Nium’s partnership with Geoswift, an innovative payment technology company, will enable overseas customers to remit money into China. Nium also recently announced the expansion of new remittance corridors for customers of KasikornBank (KBank) through its K PLUS app. The new routes add onto the existing 24 rails currently in developed markets and will include emerging markets in Asia Pacific.

Visbility, achieved by differentiation
On the other hand, there is a fine line between choice and fatigue. The financial services industry today is a crowded space, with everyone wanting a piece of the banking pie. Besides the types of companies that would typically play in this field — banks, remittance companies and insurance companies, for instance — the ecosystem also includes ride hailing and e-Commerce companies, airlines, telecommunications companies, and social media platforms, among others. As such, there still needs to be a diverse and fragmented competitive landscape to make clear differentiation of services.

For instance, then ride-hailing to financial tech company Grab in Southeast Asia has recently expanded its consumer ecosystem with new financial products and services, including the first micro-investment solution, third-party loan platform and ‘buy-now-pay-later’ products for e-commerce websites.

What’s next?
This is the new world of payments, and possibilities surrounding BaaS are tremendous. Both digital payments and digital remittances are at approaching inflection points now. According to Google, Temasek and Bain’s e-Conomy SEA research, digital payments is the most advanced and will exceed US$1 trillion in transaction value by 2025. The other services—lending, investment and insurance—are still emerging, but each should grow by more than 20 per cent annually through 2025.

As the field of competitors quickly expands, lines are blurring between different categories of players in the ecosystem and partnerships are becoming more common, as noted by Bain & Co. Disruption at scale will more likely come from consumer technology platforms than from fintechs, it added.

One thing is certain, though, the way forward is close collaboration, yet healthy competition. Financial service providers will have to strike a balance between being visible by offering greater product and service differentiation for the discerning consumer; yet invisible such that it integrates seamlessly with our lives and daily activities. While many have tapped on the capabilities of existing players, some are still behind and will need to catch up if they want to reap the benefits of a dynamic financial ecosystem.