Money 20/20 predictions: the rise of true Banking as a Service, consumer-focused regulation and AI innovation
We dig deep on expectations for Banking as a Service and the banking industry as a whole in the second half of 2023.
Money20/20 Europe is almost here and with that, we’re kickstarting the second half of what has been a very rocky, albeit interesting year for the banking industry and fintech ecosystem.
While I am expecting content at the event to be focused on the changes the industry needs to avoid another SVB and avert a full blown banking crisis, I also anticipate a lot of conversations about what the last six months mean for the Banking as a Service (BaaS) space in particular.
Is the banking crisis that seared through the first half of the year over? Should we expect a better macroeconomic outlook as we go into Q3? Is BaaS truly dead, as suggested by Simon Taylor in his weekly newsletter, Fintech Food? And if not, what exactly are innovative companies looking for from their BaaS partners?
These are the questions that the top banking and finance minds in Europe are going to be trying to answer at Money20/20. Here are some of my thoughts and key predictions for banking and the state of BaaS for the second half of 2023.
BaaS is evolving and banks have something to do with it…
While payments service companies using the “BaaS” label have played an important role in the rise and launch of challenger fintechs, I believe the second half of 2023 will see full-stack BaaS players (i.e. those with actual banking licences) step on the scene as the only viable options.
Consumers are demanding better and more integrated financial experiences. The businesses who serve these consumers are looking for BaaS providers with highly differentiated capabilities and lower risks.
As Griffin’s Adam Moulson puts it in this Toqio report on the state of BaaS, “we will see more specialised embedded finance solutions emerge as standalone applications that do a lot more than just open accounts or send payments. Those solutions will come from a number of regulated firms, likely to be banks''.
With banks playing in the BaaS space and offering API-enabled, vertically integrated solutions, companies no longer need to stitch together technology from multiple BaaS providers to get their product to market. Banking relationships also become more direct and transparent by cutting out the middleman: when your BaaS provider is also your banking partner, the risk of getting de-banked is greatly reduced. This also means that businesses can innovate and embed financial services quickly and more cost-effectively.
More and more demand for better rates
The first half of the year came with three interest rate revisions by the Bank of England and with that, we saw businesses and consumers demanding better rates on savings products. Rates are expected to stay high in the second half of the year and consumers will remain resolute in their demand for better returns from banks and providers of banking services.
Businesses will be seeking BaaS players that can fulfil this demand, providing them with competitive returns that they can in turn pass on to their customers. Again, BaaS players with banking licences will have a major advantage here, as they can offer interest-bearing accounts and set their own rates.
Innovation driven by the cost-of-living crisis
One of the upsides of the cost-of-living crisis is that it is driving innovation in some sectors far quicker than we expected. We are seeing the rise of products that help us to pay our mortgages off sooner, save smarter, invest at the tap of a finger, and interact with our money efficiently.
But there are downsides too. Buy Now Pay Later (BNPL) products and Early Wage Access (EWA) products have become highly accessible and may help consumers manage their cashflow in the short term—but long-term, there are potential negative impacts on their financial wellbeing. There is also a question to be answered on whether Consumer Duty obligations are fulfilled at the point of sale.
Should these products and the companies enabling them, become regulated, and if so, to what degree? I am expecting to hear a number of productive discussions around this topic at Money 20/20 and see some more action taken in the second half of the year as Consumer Duty comes into force.
Regulation, regulation and some more regulation
If the 2023 banking crisis taught us anything, it is the need for a stronger handshake with regulators and more collaborative policy making. The call for action has extended beyond the mere need for suitable players in the market.
Banks and regulators need to open more dialogues with local governments to prepare off-the-shelf, fully governed solutions for situations like these. Perhaps Money20/20 will be just the place for bright minds across these three sectors to come together and get creative.
There’s a lot to discuss, from calls to increase deposit insurance to better liquidity management and oversight. But one thing is clearer than ever: we need to keep the regulated entities that look after all our money safely up and running.
AI in banking and finance
AI and ChatGPT in particular, is the hot topic of the moment. Is this the greatest new tool in a decade or is it a threat to jobs and businesses? Like every other industry, the banking sector is grappling with some existential questions in the face of this new technology.
I’m expecting lots of buzz around this at Money 20/20, and I hope the conversations will take a positive focus on how AI and machine learning can drive innovation in the sector. That said, giants like Apple wading into the fintech space will also have us asking some hard questions. With access to so much data, will AI help these giants become even bigger forces to be reckoned with in our industry?
I am expecting all this, and much more, to be discussed across the many stages, presentations, meetings and individual catch ups we have at Money 20/20.
Thinking about the second half of 2023, one word comes to mind: exciting!
See you in Amsterdam!