In collaboration with Antony Pinedo
From a renewable energy producer in Brazil to an accounting firm in Colombia: non-financial companies are striking deals to include financial products in their offerings using the Banking as a Service (BaaS) model.
The lure of BaaS is growing as users seek out payment, savings and credit products that have been embedded in the digital platforms of companies traditionally removed from the financial service industry.
For businesses, it’s a solution that allows them add value, bolster customer loyalty and improve browsing experiences. For financial institutions that provide BaaS, it’s a way to diversify their income.
As a result, it’s a trend that is expected to continue growing: BaaS arrangements are expected to increase 20% a year between 2023 and 2027, according to estimates by Technavio.
With this in mind, we present three use cases of banks and fintechs that are employing BaaS to bolster their business strategy:
Banco Original boosts turnover with BaaS platform
BaaS as a business concept has been around for some time, but it has really been gaining momentum since 2021 as banks realized they could use their technology platforms to generate new sources of income.
A pioneer in Brazil in letting customers open accounts entirely through their cell phones, Banco Original sees a lot of potential in the BaaS market. “Original developed a lot of technology, solutions based on APIs that allow the interoperability of data in the systems and the development of capabilities,” says Alex Conceição, head of BaaS at the bank’s technology solutions arm, Original HUB. “As its products became more robust, it realized that it could go further.”
Banco Original’s BaaS offering started in 2019 and quickly gained traction. “In 2020, it became an expansion project and gained strength year by year,” he adds.
Original HUB has a dedicated product, sales and support team focused on the B2B segment. Its main service is the payment of bills and invoices; for example, a tax bill or a receipt for business supplies. It also offers merchants a Pix-based means of payment —Pix Cobrança— which generates a QR Code with a unique identifier. “We have many customers that use this solution integrated into their ERP (enterprise resource planning software), which is becoming internet banking,” says Conceição.
ERP banking, as iupana has already pointed out, is experiencing an upswing, particularly in Brazil, thanks to its capacity to adapt to the changing needs of businesses to offer predictive financial support.
Original's focus on ERP is yielding results. The bank’s B2B technology division registered R$50 billion (US$10 billion) in transactions through its APIs in 2022, twice as much as the previous year. The number of transactions reached 500 million.
One potential growth area for BaaS is in Pix-related products. “Pix created a revolution by making instant payments easy, and the key was not to charge the individual,” Conceição says. Pix needs to continue evolving with greater functionality, he adds.
And who will lead the BaaS market? Conceição envisages a trend towards coopetition, a win-win scenario where banks will use other bank’s BaaS platforms to deliver their products. “Because there comes a time when, if every bank invests in everything, it’s counterproductive. I see more and more banks integrating their products. Alliances will intensify considerably,” he adds.
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BaaS delivers customer convenience for 2W Ecobank
For companies outside the banking sector, offering financial products and services under a BaaS model can boost customer allegiances, enhance the user experience and satisfaction.
One such example is 2W Ecobank, a Brazilian renewable energy and financial platform. Originally called 2W Energia, its core business is supplying small and medium-sized enterprises with power generated by two large wind farms in the northeast of Brazil, where it has invested some R$2 billion (US$396 million).
Recently regulatory changes will open up new markets for 2W from January 2024, allowing it to supply to a large number of small energy users.
Where does banking come in? 2W found that the smaller the customer gets, the more important it becomes to offer them a portfolio of complementary services. It becomes less about the price of energy, CEO Claudio Ribeiro Ribeiro tells iupana.
While 2W Ecobank is a fintech, it doesn’t have a license from Brazil’s central bank. Therefore, it relies on a BaaS service through which customers can access a 2W Ecobank account. So, while 2W operates the front-end of the service (the platform’s interface), the back-end is handled by a bank: transfers, deposits, payment of invoices and Pix packages.
Ribeiro declined to name the provider but says it is one of the four largest banks in Brazil.
At a future date, the plan is to offer credit as well. “We ended up being a commercial channel for the bank and that makes sense for us, even though at this initial stage, it’s a cost. It’s worth it for the convenience package, because I can bring more services. Our idea is in future to not only have transactional services from banks but also to offer lines of credit to this client that has entered the world of sustainability and help them in the energy transition,” adds Ribeiro.
As such, 2W Ecobank will also have access to a greater amount of information about its customers, with which it can present more personalized offerings.
Lending fintech Plurall uses BaaS to reach SME clients
Plurall is a fintech that offers savings and loan products to MSMEs in Colombia. It’s currently developing its API in order to integrate with other platforms that offer solutions to this market segment, with a view to distributing financial products through an additional channel.
The fintech stepped on the accelerator after executing a pilot project in partnership with an accounting firm serving SMEs and calculated it could capture 70% of its clients with this BaaS strategy.
“It’s a way of articulating the efforts of several players in the same business in order to serve this niche, and it becomes a very cost-effective channel in terms of customer acquisition. It really is a win-win for everyone,” Federico Gómez, co-founder and CEO of Plurall, tells iupana.
The executive says that in the space of two months, 124 small companies (such as neighborhood grocery or hardware stores) signed up through the partner platform. Of these, 33 businesses continued the process and 19 loans averaging US$350 each were disbursed.
The pilot has evolved into a comprehensive project within the business. Plurall approached a further five platforms where it is currently offering its services. The firm is interested in continuing to expand its integration with third parties, though its focus is on data.
“We’re not looking for distribution platforms: We’re looking for data. A client is only useful to us if its platform has enough data. If it’s a platform that has clients but does not have data, we may not be interested,” says Gómez.
Data processing and the adjustment of risk models allow Plurall to fine-tune its strategies while maintaining healthy portfolio margins—something that other credit-focused fintechs in the region are also hotly pursuing.
As an example of the variations that the BaaS model can have, in Colombia the fintech offers a debit card provided by dale!, a Grupo Aval subsidiary that provides BaaS. At the same time, it operates as a Fintech as a Service (FaaS) to provide embedded finance on partner platforms.
Plurall says that this strategy allows them to add scale, although it is still working on optimizing the user experience. Colombian regulation requires the fintech to clearly identify which institution is providing the additional financial services, even if it disrupts customer navigation through pop-ups or design changes.
“We have to be careful with brands,” says Gómez. “There's an obligation to state that we work in partnership, something that is also being required of our partners,” he adds.
The second obstacle is the requirement for double digital onboarding —on both the partner's platform and on Plurall’s— when users decide to acquire a product.
“We've not yet been able to optimize it yet, but the idea is to get to a point where there’s not so much reprocessing,” Gómez says.
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