The Year of Fintech-as-a-Service: How FaaS Platforms Will Dominate 2021's Financial Landscape

Every business today looks to embrace the use of modern technology to ease their core functions and facilitate greater profitability. This includes lending businesses like banks, NBFCs, and MFIs.

Fintechs are companies that are an amalgamation of technology and financial functions to deliver streamlined products and services that were previously solely available through highly regulated traditional institutions. Thanks to their innovative capabilities, fintech is helping to transform the way banking is carried out.

Considering the optimisation opportunities that fintech infrastructure offers, traditional banks - for the first time ever - have found themselves up against some significant competition in terms of popularity. As a result, financial institutions that are based on legacy systems are beginning to lose out in the market to these new players.

(Image: The Economist)

Here, we can see the state of play as the traditional banking market dominance has been significantly eaten into over the past decade, with fintechs now taking up around 10% of the top 500 global banks, payment, and fintech firms.

With the fintech market continuing to expand, FaaS applications could become the emerging trend of 2021. Let’s take a deeper look at how Fintech-as-a-Service platforms will grow to dominate the financial landscape over the coming year:

Defining Fintech-as-a-Service

Fintech technology is a desirable solution for many traditional companies that look to utilize advanced business functionalities and financial processes. PayPal for instance, is a good example of a popular financial platform that can be regarded as a fintech company. This developing surge in the popularity of digital payments, as well as lending, insurance, and wealth management in this field, has bolstered the need for technology-backed banking.

Fintech can offer profitable insights for lending businesses that aim to play a significant role in the financial industry. Many fintech companies are offering their APIs to other players in financial markets as software that can be integrated into their own systems. This relatively new model within financial markets is called Fintech-as-a-Service.

Leveraging Fintech-as-a-Service platforms can allow financial businesses to optimize their end-to-end process - ensuring wholesome execution of an online commercial service on-demand within a specified timeframe.

FaaS platforms help to ensure complete management and deployment of delivery environments. Moreover, they can ensure legal compliance with various banking regulations along with key security mechanisms like strong authentication.

The Amazon Web Services of Finance

FaaS has the potential to span multiple companies, thanks to its complexity. This transformation has the potential to significantly reduce the cost and complications associated with becoming a financial services company. Significantly, it can unleash a multitude of applications that have the potential to revolutionize the future of banking.

It’s reasonable to expect this innovation to come from startups and existing financial services institutions, however, a percentage of it will derive from existing businesses that are looking to add financial services for the first time. For instance, Apple recently launched its own credit card.

Although this innovation from Apple may have been an unsurprising one for the tech giants to take, it's worth remembering that just a matter of years ago, Apple simply existed as a computer company. Today, it’s promoting its credit card alongside its repertoire of smartphones and its augmented reality glasses in the future. Although Apple has positioned itself at the forefront of technological innovation in recent years - making its move towards fintech seem inevitable - it’s worth acknowledging that this trend is occurring at an increasing pace.

For instance, let’s look at the cases of Uber and Lyft. Although the technology that these companies utilize is more ride-sharing oriented, for the drivers, the platform can also double up as a remote bank.

Uber and Lyft adding financial services enables the companies to spend money in acquiring drivers and then offers them the opportunity to make up this cost through margin on rides. In this case, it’s much quicker to make up that cost if they also have a margin on banking services.

Additionally, if you’re a driver, you may be more likely to stay with a company if they’re capable of providing your financial services. This means that the implementation of financial services can pave the way for Uber and Lyft needing to recruit fewer new drivers due to better retention levels.

Bringing FaaS to Community Banking

In late 2020, Synctera launched with $12.4 million in seed funding. The company claimed that its platform does the ‘work’ for banks and fintechs as they seek one another out and ensure that they’re in compliance as they combine to bring new accounts, services, and cards to users.

Peter Hazelhurst, Synctera CEO said: “Our primary customer base includes banks that have started doing the FinTech thing, but want to do it better or FinTechs that already have integrated everything and just need a bank.”

The platform offers FaaS to level the playing field for smaller banks that struggle with operational or cash constraints that can make it otherwise difficult to manage fintechs. These banks can collaborate with fintech companies to come up with fresh innovations and UX profiles while allowing them to continue functioning in collecting deposits that can help drive lending programs that put money back into the community. Subsequently, fintechs get access to invaluable compliance advice. They also benefit as the pool of banks they can work with is broadened further within Synctera’s online marketplace.

Looking at the mechanics of Synctera’s platform itself, the marketplace brings fintechs and banks together across a broad range of specifications - spanning geography, branding, and various business goals.

For instance, Hazelhurst noted that community banks have previously sought to make the transition to new digital offerings, but needed help in managing the billing and reconciliation aspects of their fintech partnerships. Whereas fintechs have been mindful of the legal and compliance hurdles in place as they introduce mobile checking, debit cards, and savings accounts to their repertoire.

Using this FaaS platform, banks can keep track of all that happens at the level of a fintech credit dashboard so the bank can review each prospective customer. If a red flag is raised, the bank can intervene with messages to the fintech organization stating that more documentation is needed.

The Sustained Growth of FaaS

One key reason behind why we may see a significant acceleration in FaaS companies before the end of 2021 is down to the Covid-19 pandemic, and how lockdown and social distancing measures have prompted rapid growth in eCommerce and digital payments industries.

With more tech companies emboldened to launch IPOs and go public with their platforms, retail investors can consider participating in some of these. Now, there are a number of brokers that allow IPO participation for the general public. For instance, a NasDaq-listed retail broker Freedom Holding Corp. (NASDAQ: FRHC) offers IPOs that tend to only accept institutional investors to the general public via their subsidiary platform, Freedom24. However, the threshold for applications begins at $2,000.

Other brokerages like Fidelity also offer IPOs for an increased threshold of between $100,000 to $500,000 depending on the terms of the initial public offering.

After a transformative 2020, the world of Fintech-as-a-Service is set to take off as more firms look to incorporate financial solutions within their products and services. With more companies looking to build on their respective prosperity with public offerings, we’re likely to see a great deal of strategic growth as the year goes on.

It’s only a matter of time before FaaS truly makes its mark on the financial landscape.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes