Pension With Your Pizza? 401 with your 501? The future of Baas

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Retailers are well positioned to compete in the emerging world of banking as a service.

Banking-as-a-Service (BaaS) is a well-understood strategy to provide non-banks with integrated financing options to provide financial services to their own customers, leveraging the bank’s license and core capabilities such as such as account management, compliance, fraud management and lending. It’s unbelievably profitable distribution strategy, measured by the return on equity (ROE) and return on assets (ROA) achieved by the banks that benefit from it. It is therefore obvious for many organizations to settle in this space and, therefore, the integrated finance sector is an axis of growth.

As I’m sure you all know, the heart of the proposition is that the consumer is not required to interact with financial institutions. For a Barclays example I saw recently, if you buy a TV and need to borrow money to pay for it, the retailer could integrate the loan process into the customer journey. This gives businesses the ability to create truly innovative financial offerings in a variety of areas, from retail to healthcare and travel to entertainment. The opportunities offered by integrated finance not only benefit customers but, as Barclays says, the banks and technology companies involved in the process.

The term embedded finance is attributed to Angela Strange of famed venture capitalists Andreessen Horowitz. She said that in the future, “every company will be a fintech company” because every company will be able to use integrated finance. I’m not the only person who thinks they were right to be optimistic about the opportunity, partly because of regulatory pressures around open banking and partly because it seems clear that many customers do not want to break with their experience. benefiting from access to a financial service provider.

The point is that customers have a relationship with brands that they don’t have with banks or credit card companies and for that reason it’s believed that brands expect integrated finance to add headed for a trillion dollars revenue over the next five years does not seem unreasonable.

pipedreams

Now, BaaS has been around for a while. BBVA, for example, launched its BaaS “open platform” in the United States in 2018 to allow third parties to offer financial products to its customers. Ron Shevlin wrote earlier this year about how integrated finance is driving BaaS and referenced a Cornerstone survey of US banks that showed only a fifth of them were pursuing or developing a BaaS strategy, because I would have thought that should be a priority for a lot of institutions: if they don’t have a decent BaaS strategy, they run the risk of being bypassed as more and more customers get the products and services they need from the brands they know and trust rather than directly from institutions.

This is a far from hypothetical threat. After all, financial services incumbents have lost the trust advantage they had over fintechs while at the same time, as McKinsey notes, many non-financial brands have dramatically higher levels of trust than they can exploit to offer financial services. In other words, banks can deploy BaaS to exploit consumer trust in other brands. Or, to put it another way, integrated finance means that some banks will end up being pipes, but being a high-volume, low-margin pipe can be a really good deal.

All of this has serious implications for institutions that want to succeed in this mode because, as any business school 101 on the subject will notice, pipeline companies depend on radical improvements in operational efficiency and that can be difficult for holders to reach for all kinds of reasons, among which the technological platform in place. Taking that old infrastructure and putting a Banking-as-a-Platform (BaaP) wrapper on top may not be enough to compete in the new world.

I think we’re still in the early days of embedded finance and there’s incredible potential there, so I was interested to read Jeff Kauflin’s excellent article on William Hockey (a co-founder of Plaid) and the new bank, Column, which he is launching in the United States with his wife Annie. Rather than Stripe attacking the payments space by focusing on developers, Column will have what it says is a “manic developer focus.” The idea is to remove middleware vendors that wrap legacy infrastructure (or what the Wall Street Journal has called “wobbly banking technology”) and instead provide core banking services like ACH , lending, card programs and debt financing directly to third parties.

Focus

A recent report on the sector from Dealroom, a market intelligence firm, and ABN AMRO Ventures (the venture capital arm of the Dutch bank) projects the total market value of the sector at more than seven trillion dollars by 2030, which is more than the current value of all fintech startups and the top 30 global banks and insurers combined! Nearly half of the value will come from the retail and e-commerce sector.

I’m particularly curious about the retail industry, as retailers have the relevant customers and touchpoints for a variety of financial services (not just Buy Now Pay Later and store credit). I couldn’t help but notice that in Jamie Dimon’s recent letter to JP Morgan Chase shareholders, he specifically mentioned Walmart

WMT
ability to bring “banking type services” to the 200 million people who visit their premises every week. Similarly, on this side of the Atlantic, a recent survey of European merchants conducted on behalf of BaaS provider Vodeno revealed that three quarters of European merchants already offer integrated financing solutions to customers (with programs cashback loyalty cards, credit cards and debit cards the most common products currently offered) and half of them plan to deploy more integrated financing solutions in the coming year.

I don’t think it’s hyperbole to say that the next generation of consumers may never interact with financial institutions at all! My kids will use their Nike

NKE
Walmart credit card and mortgage and Dominos retirement plan on the basis of service, convenience and price without even wondering if Column or JP Morgan Chase or First National Bank of the Kardashians is actually providing the financial service regulated behind the brand.

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