Banking as a Service (BaaS) is a highly promising pathway to growth for financial institutions. By adopting the BaaS model, FIs can distribute their banking services through a bevy of digital platforms and channels–both financial and nonfinancial–thereby reaching new customers at lower cost, increasing revenue and future-proofing their business. 

Given this transformative potential, it’s little surprise BaaS adoption is growing fast, with a global market value that’s projected to more than double over the next four years, from $731 billion in 2024 to $1.49 trillion in 2028, according to a recent report from Research and Markets. 

Overcoming the Banking-as-a-Service Adoption Curve: Insights for FIs

But for banks, building up BaaS capabilities–and adopting the modern, digital-first core banking technology required to integrate with BaaS partner platforms–can require a significant investment of money, time and effort.

The following are some key factors banks must consider and evaluate to ensure it’s getting enough bang for its BaaS buck. 

1. Technology strategy

To effectively adopt its banking services to be distributed via third-party platforms under a BaaS model, an FI must have access to a modern, cloud-based banking core that can support API-based integrations. And for banks still running their daily transaction processing through legacy cores that were built decades ago, bringing core banking technology up to snuff may require a significant initial outlay. 

How to Start Your Journey Toward Core Banking Modernization

However, these costs can be reduced by taking a strategic, phased approach to core banking modernization. For example, a bank can opt to establish a “sidecar core,” which underpins only a select subset of its services–in this case, those distributed via BaaS integrations–while the legacy core continues to handle the bulk of the FIs’ day-to-day transactions. 

This incremental method offers several key advantages over a “rip and replace” approach, including a smaller financial commitment than a wholesale core swap-out, as well as reduced risk of costly operational interruptions or data security issues that may arise during a wholesale core swap-out. 

Start Your Bank’s Tech Modernization Journey With This API

2. New revenue streams

On the other side of the cost-benefit equation, BaaS enables FIs to tap into new revenue streams by accessing the customer bases of third-party partners, such as an e-commerce merchant, telcom or small business management software. In addition to fees, interest and other direct revenue a bank can earn from providing these services through partner platforms, FIs also can adopt the additional, highly granular customer data captured via BaaS integrations for additional revenue opportunities.  

3. Lower acquisition costs 

BaaS enables banks to not only reach more new customers, but to do so at a lower cost. In effect, BaaS serves as a way for an FI to outsource customer acquisition to its distribution partner platforms, which tend to prioritize positive and streamlined user experience, thereby helping boost conversion rates. A study from Oliver Wyman estimated that the cost to an FI of acquiring a new customer via traditional, non-BaaS channels averaged from $100 to $200. In contrast, the average cost of acquisition via BaaS distribution channels ranged between just $5 and $35, according to the analysis. 

4. Enhanced customer engagement and lifetime value

Beyond helping acquire new customers, BaaS adoption offers banks new ways to keep those users happy, engaged–and profitable–over the long term. BaaS integrations provide FIs with new data streams regarding the services that customers use most, the features that result in strong engagement and a host of other actionable data points. Banks, in turn, can leverage that data to glean real-time insights and improve the personalization of both their BaaS offerings and their in-house banking services–highly effective levers to improve the all-important Customer Lifetime Value metric. 

Download our e-book on how BaaS can help FIs win more customers

Contact Galileo Financial Technologies to learn more about the ROI of BaaS