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According to Arthur D Little (ADL), the world’s first banking-as-a-service (BaaS) management consulting firm, BaaS revenue in the Middle East will reach $28 billion by 2031, accounting for about 17% of total banking revenue.
In a report titled “Banking-as-a-Service: The Heart of Tomorrow’s Banks,” the company outlined many signs that BaaS is being adopted by smaller, mid-sized banks, and that more market segments will be sold at around 25 % compound annual growth rate (CAGR) growth.
This means that BaaS revenues in the region could reach $5 billion by 2026, accounting for about 4% of total banking revenue in the Middle East.
road to redemption
To date, the BaaS market is still relatively small and dominated by digital banks, fintech companies and digital non-financial platforms. However, BaaS will be the path to salvation for many established banks as their traditional markets and margins are increasingly threatened by disruptors.
Philippe de Backer, Managing Partner and Global Head of Financial Services at Arthur D. Little, said: “Banking as a Service enables banks and non-banks to offer their end customers a whole new range of financial products. products, banks using BaaS can reduce time-to-market for new products by as much as ten times. Therefore, BaaS can play a vital role in enabling traditional banks, hindered by legacy IT, to reinvent themselves with more competitive offerings.”
For banks using BaaS, a new level of cost reduction opens up as they can completely restructure their cost base—reducing the overall cost base and converting remaining costs into more variable costs: Banks in the region should consider BaaS as Embrace disruptive forces for key enablers of their transformation, assuming regulators will catch up
The Potential of BaaS
After this expansion, secondary growth may be driven by the arrival of larger incumbent banks that have concluded that to remain competitive they also need to use BaaS solutions. BaaS evolves alongside the bank’s core business into a solid platform from which it can start rebuilding depressed market valuations to please investors. At the core of initial growth will be payments and accounts, as these are the easiest products to embed. A move to consumer loans could follow as products such as “buy now, pay later” gain more traction.
ADL divides providers into four main segments, differentiated by banking license and product range:
• Licensing pure players: These providers are primarily traditional regional banks, often with weak technology and application programming interface (API) capabilities. They offer licenses to digital banks or BaaS partners.
• Modular licenses and API “hybrid” players: These providers have strong technology, API capabilities and banking licenses, which is how they offer BaaS.
• Modular API technology players: Because they specialize in specific areas, such as payments or cards, and have strong API and technology propositions, these are attractive partners for BaaS licensing providers.
• Monolithic BPaaS technology players: Their focus is on business process as a service (BPaaS), and these are providers of traditional core banking systems that provide the technology backbone for banks. Only those in categories 2 and 3 can truly be considered modern BaaS providers.
Implement BaaS
Assuming that BaaS will define the future of banking, the uniqueness of incumbent banks means that each bank must carefully assess whether it would benefit from BaaS – either as a user or as a provider – and identify any potential obstacle.
Some incumbent banks may be hesitant to use BaaS due to concerns about service robustness or loss of independence from third-party providers. For example, it may be contractually difficult to add new features to a product or to stop using it. They may also need to share costs with technology providers.
However, such concerns are often overblown and far outweigh the benefits of being able to focus on core competencies (front office and balance sheet management and risk management) as responsibilities for non-core areas are shifted to the most competent suppliers business.
Market positioning
“In terms of market positioning, there are two paths to success for BaaS. The first is for banks to become global specialists, focusing on high-quality service offering a narrow range of products and services. The second route is for banks to transform into full regional banking licenses Providers with the ability to offer a full range of BaaS offerings in geographically restricted areas. We have seen the latter rapidly gaining traction in the Middle East,” said Nael Amin, Senior Manager, Financial Services, Arthur D Little Middle East.
To mitigate risk, banks should have strategically flexible contracts that allow for vendor switching, a strong compliance control framework, a clear partner governance model and a strong API management process, with rigorous due diligence up front. Running pilot projects to eliminate potential disruptions can also ensure that implementation goes as smoothly as possible.
“The financial services ecosystem is being reconfigured around new clusters of existing and new players. Banking-as-a-service is the missing link between traditional players in banking and emerging disruptors, providing a and benefit from a common platform. In the era of interconnected and open banking, traditional banks must act quickly to transform, or other banks will fill the gap and prohibit traditional banks from competing in this window of opportunity,” De Backer concludes. — trade arab news agency
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