The report reveals how banking as a service segment will grow to represent around 4% of total banking sector revenue in the region by 2026, and to reach 17% by 2031.
Banking sector revenues from banking-as-a-service models could reach $28 billion in the next decade
Banks that adopt banking-as-a-service models can reduce the time needed to market new products by up to 10-fold, thereby dramatically increasing their competitive service offerings.
Banking as a Service or BaaS models are shaping the future of banking in the Middle East at a compound annual growth rate of 25%
Dubai United Arab Emirates: Arthur D. Little, the world’s leading management consulting firm, has released a new report highlighting the growth prospects of Banking-as-a-Service (BaaS) models and the opportunities and competitiveness they present to the Middle East region . The report, titled “Banking as a Service Models: A Vital Necessity for Banks of the Future,” indicated that the “banking as a service” market is still relatively small so far, and investment in it is limited to digital banks, financial technology. institutions, and non-financial digital platforms. Traditional and marginal markets for this type of service model, increasing challenges due to competition from new and innovative companies in the market, banking models as a service is an important area and a fundamental pillar to the improve business portfolios of existing and existing banks.
The report examines the increasing trends in the adoption of banking as a service models by small and medium banks on a limited scale. In light of these trends, the banking services market as a service is expected to grow at a compound annual growth rate of approximately 25. %, which means that the revenue from this segment of services could grow to $5 billion, or the equivalent of 4% of total banking revenue in the Middle East region by 2026.
“BaaS models give banking and other non-banking institutions the ability to offer a range of entirely new financial products to their customers,” said Philipp de Backer, managing partner and global head of financial services at Arthur D Little. BaaS can speed up time. to market new products up to 10 times compared to other banks, without the need to allocate time and resources to develop service offerings internally. Therefore, BaaS services play an essential role in enabling banks that rely on traditional technology systems for their operations. Information helps them keep up with future requirements by helping them redesign their business models and improve the competitiveness of their services in the market.”
Banking as a Service (BaaS) contributes to reducing the expenses of banks by enabling them to radically restructure their cost bases, thus contributing to the reduction of the volume of basic expenses in general, and convert the remaining expenses into variable costs: banks operating in the region. must move towards adopting banking As a Service (BaaS) as a key enabler of the transformation journey and taking advantage of the opportunities and possibilities offered by emerging innovations, with regulators identifying frameworks that can contribute to supporting these trends .
On the heels of this expansion, the markets are likely to experience a secondary growth spurt, driven by the awareness of the larger established banks of the need to adopt Banking as a Service (BaaS) to maintain their leadership and competitiveness. BaaS revenues are expected to reach $28 billion by 2031, equivalent to approximately 17% of total banking sector revenues in the Middle East. BaaS services, which are developed in light of the core activities and operations of banks, will turn into a powerful platform that can be built on to redefine current market standards and increase levels of investor satisfaction. Payments and billing are key elements that will drive initial growth given the ease of integrating these products into the transformation path. It is likely that features of the transformation will extend to consumer loans for individuals, in line with the high demand for “buy now, pay later” solutions by consumers across the region.
Arthur D. Little categorizes service providers into 4 core areas, which differ according to the banking license and the services they provide:
Purely licensed: This category includes traditional banks in the region, which often suffer from challenges in terms of technologies and APIs. These banks offer their licenses to digital banks or Banking-as-a-Service (BaaS) model partners.
Multi-Active Provider with Standard Licensing and API Development Capability: This class of providers has superior technical capabilities, exceptional API performance and banking licenses, giving it the ability to provide Banking as a Service (BaaS).
Technology provider specializing in the development of standard APIs: This category gains exceptional status among BaaS license providers, due to its specialization in specific areas, such as payments or cards, in addition to advanced APIs in addition to a set of technical offers and services The exceptional.
BPaaS Technology Provider: This category of providers focuses on Business Processes as a Service (BPaaS), providing the traditional banking core systems that give banks the technology backbone. Tier 2 and 3 providers can be considered modern providers of banking-as-a-service models.
Implement banking-as-a-service models
With the premise that banking-as-a-service models will define the future of banking, incumbent banks need to assess whether they can benefit from these models – either as a user or as a provider – and identify any potential obstacles which may affect implementation.
Some established banks may be reluctant to use banking-as-a-service models due to concerns about the novelty and sophistication of the service provided by an external (third-party) provider or loss of independence. For example, it may be contractually difficult to add or discontinue new features in a product. Banks may also be required to share fees with technology providers. However, these rapidly waning concerns are often overemphasized compared to the benefits that can arise from the ability to concentrate on core capabilities – front office, balance sheet management and risk management – because responsibility for the pursuit of non-core areas to a more resourceful supplier specialty.
“Given the current market landscape, there are two paths to the success of banking-as-a-service models. The first path is for the bank to become a specialized global provider that focuses on providing high quality to a limited range of products and services Path 2 is the transformation of the bank into a broad regional provider with a banking license capable of offering a full range of banking-as-a-service model products across a limited geographic area We believe that Path 2 is already rapidly gaining momentum in the Middle East region in particular.
To mitigate risks, banks should strategically have flexible contracts that allow for change of suppliers, have a robust framework for monitoring compliance requirements, a clear partnership management model, robust API management, and adhere to strict due diligence practices. Carrying out pilot projects to identify and overcome potential challenges can also ensure that requirements are implemented as smoothly as possible.
De Backer added: “The financial services system is experiencing a new phase of restructuring with the participation of new groups of existing and new financial institutions. Banking as a service is the missing link between traditional institutions in the field of banking services and new innovative institutions. , and once this gap is bridged, a common platform will be available that can enable Everyone can benefit. Traditional banks in the era of connectivity and open banking must move quickly on the path of transformation, or they will find themselves behind competitors remain. to seize this opportunity.”
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