We see six trends that we think will be huge this year in the embedded-finance and banking-as-a-service arenas. Understanding and monitoring these trends can everyone in the financial services sectors identify opportunities and guard against threats.

1. Customers want integrated experiences.

The most significant trend is that customers increasingly seek simple, holistic, embedded, and direct experiences. This is great news for providers of embedded finance solutions, and an opportunity for others to get on board and start innovating – or partnering.

Need proof? Consider Walmart’s recent announcement that it is building a financial-services offering with fintech investor Ribbit or Ikea’s recent announcement that it is purchasing 49% of its banking partner. On the consumer side, we see that US consumers are welcoming embedded finance, with 43% of their wealth now circulating in non-traditional banking platforms.

2. Banking regulations leave fintechs in the BaaS space.

The many fintechs established every year need banking partners to provide access to bank accounts, payments, and lending. Fintechs can build and offer financial services but are unable to “become” banks themselves in the US and many other markets where the regulatory bars are so high. That leaves banking as a service (BaaS) as the only means for fintechs to offer customers embedded finance. These players require end-to-end BaaS infrastructure solutions coupled with regulatory support and balance sheet or other funding sources to serve their massive customer bases.

3. Regulations shifting toward openness.

Regulatory trends, including PSD2 in Europe and the adoption of open banking, are promoting the development of banking APIs and universal access. The need to comply with these new requirements—often through IT modernization—is driving some banks to consider expanded or new BaaS business models; they might even partner with existing fintechs to ease the transition. Even beyond regulation, Plaid and other aggregators are changing customer expectations for data and account information portability, which is increasing IT modernization and fast-tracking BaaS projects.

4. Widening revenue streams and increased stickiness. 

With declines in revenues and profitability for traditional banks, many financial institutions are exploring other ways to stay afloat. Scalable BaaS models and embedded finance innovations are attractive options as they offer a long-term view of financial services and often help increase stickiness among customers.

5. Adoption of technology.

While this seems like an obvious trend for the past few decades, it’s even more prevalent now with web3.0, DeFi/CeFi, and other tech-talk jargon. With the acceleration of digitization, banks & fintechs can scale BaaS faster, putting embedded finance within reach for more companies considering it. At the same time, companies seeking to embed financial services increasingly see their digital infrastructure as a composition of modules built by others. This is often because they focus on software engineering as a core competency, seeing payments, lending, or deposit and checking accounts as just another product capability to add to the user experience.

6. Changing trust levels among consumers.

While the majority of the population used to be weary and anxious toward fancy fintechs, the tides are turning as consumers realize the gaps in offerings from traditional banks, as shown in a McKinsey study. Simultaneously, many non-bank brands have high trust levels, which they can leverage into offering financial services and thus partner with innovative banks or fintechs directly.

Final Thoughts…

Financial services as an industry is at a crucial turning point; BaaS isn’t going away, and traditional institutions need to innovate or partner with innovators to keep customers on board.