Banking as a Service model to disrupt Middle East banking scene

31 January 2023 5 min. read
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Driven by advances in technology, the world of banking is increasingly moving to new collaborative, cross-industry and shared models, with the so-called ‘banking as a service’ scene set to take off in the coming years, according to a new report by global strategy consultancy Arthur D. Little.

Touted as one of the industry’s top disruptors, banking as a service (Baas) is a model where banks integrate their digital banking services directly into the products of non-bank businesses. Technology is the key, with cloud-based solutions enabling a seamless experience for users, and an efficient process between banks and their outside-industry partners.

In its report titled ‘Banking as a Service: at the Heart of the Bank of Tomorrow’, experts from Arthur D. Little delved into the BaasS market and its future potential, to uncover that the model heralds a “huge opportunity” for banks of all sizes.

The bank of the future

According to the analysis, banking as a service is at present mainly being adopted by small and midsize banks. With some notable pioneering exceptions, incumbent banks lag behind in their adoption. But the promise is big, and as a result, Arthur D. Little predicts that BaaS will in the coming years grow at a compound annual growth rate (CAGR) of approximately 25% worldwide.

Putting a number to this development: by 2026, revenues from BaaS in the Middle East alone could stand at $5 billion approximately, or 4% of the total banking income in the Middle East.

Philippe de Backer, Managing Partner and Global Financial Services Lead at Arthur D. Little said: “Banking as a service enables banks and non-banks to offer a host of completely new financial products to their end-customers. Without having to commit the time and resources to developing all offerings in-house, BaaS-using banks can cut time-to-market of new products by as much as ten times.”

From the side of non-banks, being able to adopt a basically white-label banking model and then offer banking services such as checking and savings accounts, debit and credit cards, money transfers, and much more, means that they can offer a realm of new financial products and services to their user base. Take Emirates as an example, which offers its own credit card.

Four segments of BaaS users

According to Arthur D. Little’s exploration, retailers, e-commerce firms, telecom companies and other brands are keen on migrating towards the BaaS model. The key here is for them to carefully assess which financial products and services they embrace, and who they select as a BaaS partner.

Reinventing banking legacy

For banks, the BaaS model allows banking institutions to “reinvent themselves with a more competitive offering” said De Backer. A welcome promise for many, in particular incumbent banks, which are seeing chunks of their margins eroded by regulatory pressures, and heightened competitions from fintechs, digital platforms and bigtechs.

“As their traditional markets and margins come increasingly under threat from disruptors, BaaS will be the route to salvation for many incumbent banks,” predicted De Backer.

Further reading: Banks and new entrants step up their open banking endeavours.

If incumbent banks indeed bet big on banking as a service, then the market will shift gear again, says Arthur D. Little. “The larger scale arrival of incumbent banks in the BaaS market would lift BaaS revenues to $28 billion by 2031, the equivalent of about 17% of total banking income in the Middle East.”

Similarly, also at the side of banks, key strategic decisions will need to be made. De Backer: “Of course, banks first must determine whether they can offer BaaS at all. Doing so may require heavy upgrades to their legacy technology infrastructure.”

That aside, most banks will likely pick the payments and accounts segments for their initial roll-out. “This will likely be followed by movement into consumer lending, as products such as ‘buy now, pay later’ gain more traction.”

BaaS as part of “as-a-service” universe

Nael Amin, Senior Manager at Arthur D. Little in the Middle East, added: “In terms of market positioning, there are two routes to BaaS success. The first is for a bank to become a global specialist that focuses on high-quality delivery of a narrow range of products and services. The second route is for a bank to turn into a full-scale regional provider with a banking license, able to offer a full spectrum of BaaS products across a restricted geography.”

In the Middle East, the latter model is already gaining rapid traction, added Amin.

De Backer concluded: “The expansion of the “as-a-service” model has the potential to fundamentally change both banks and those looking to offer financial services to their clients. Banking as a service is the missing link between legacy players in banking and new disruptors, providing a common platform from which the various players can draw and benefit.”

“In an era of connectivity and open banking, we believe BaaS will soon be at the heart of every successful (digital) bank.”