More banks are Adopting the BaaS Business Model - Sudhir Pai, Capgemini

By Sudhir Pai, CTIO, Global Financial Services, Capgemini

COVID-19 has pushed cost transformation into overdrive, with companies looking at technology as a major lever to save their bottom-line. The important technological trends in the industry include rise in adoption of distributed ledger technology (DLT), while there are clear indications of hyper-personalization gaining ground. We see that DLT is gaining momentum, with prominent use cases such as CBDC and Asset Tokenization being picked up in multiple markets across the globe. Similarly, technology-driven hyper-personalization is increasingly becoming critical for loyalty and growth, especially in the wealth management industry.

The rising demand for embedded finance means more banks are adopting banking-as-a-servicer (BaaS) business model, pushing themselves to create a ‘new-age cloud-native, API-driven tech stack’ to cater to the demand. Also, data-driven offerings are becoming the latest winning propositions for payment firms. Access to alternate data and real-time data is enabling companies to offer contextual value-added services to customers.

The other trends that are picking up include use of cognitive technologies for better prediction, technology for healthcare, and uptake of intelligent automation in the insurance sector. In fact, more banks are now using cognitive technologies to strengthen credit risk management; these technologies enable banks to improve their predictive accuracy throughout the value chain of credit risk management to servicing.

Since data interoperability is expected to become a key to enable seamless coordinated delivery of healthcare, insurers are developing digital healthcare tools to allow patients to access and share their healthcare data. Insurance companies are also increasingly adopting intelligent automation to reduce operational costs and are turning to artificial intelligence- (AI) based models to accelerate their back-end processes.

Challenges, Solutions, Opportunities

While the BFSI industry has undergone significant upheaval in times of the COVID-19 pandemic, the industry has displayed significant inherent strength to tide over the challenges. It looks set to emerge strongly from these tough times, especially by leveraging new-age solutions and grasping the rise in new business opportunities.

Operate like a tech company: Every enterprise is on the path to become a tech company – digital to the core and agile in operations. Without this vision, companies run the risk of becoming obsolete in the near future. Hence, greater investment in efforts to anticipate and assess newer technologies is critical to ensure you are not left behind. Financial customers expect their services providers to offer experiences similar to what Google and Facebook have provided them. Banks, insurers, and other financial institutions are striving to live up to their expectation through reimagined customer journeys and hyper-personalized products. For banks and insurers, this also implies significant investments in talent and new ways of working.

Adapting to, and thriving on, regulatory reforms: Regulatory reforms in the near future will focus on two major aspects: ensuring real-time compliance, and stimulating innovation within the industry. The ability of organizations to adapt to these reforms will determine their success to a large extent, especially in markets with a proactive regulatory regime. Cryptocurrency is a good example. With multiple markets accepting the value it holds, players in the field can expect to see far-reaching reforms from regulators. Pioneers in this domain have the scope to set a precedent with regulators and gain a massive first-mover advantage.

Remodeling FS value chain: As-a-Service partnerships are gaining momentum within the industry, BaaS being the latest and most prominent of them. Financial institutions will continue to experiment and, in certain cases, win big with this business model, with focus shifting to possible collaborations with Big Tech companies. This will almost invariably imply that organizations move to a more ‘platform-driven’ operating model enabling unconventional partnerships, as well as driving production and distribution layers. While customer-facing platforms are already omnipresent, more organizations are expected to build internal platforms as well, with greater collaboration between business and technology functions within them.

Decentralized finance (DeFi): Rather than being viewed as a standalone technology trend, ‘decentralized future’ should be treated as a combined and powerful evolution of distributed technology that will manifest through currencies (Crypto), applications (dApps) and consensus, cloud, security, data portability and open-source practices.

However, the world of DeFi is not one that will replace traditional finance. The intrinsic nature of DeFi implies that it will coexist with traditional finance, driving innovation and improvement in a specific set of use cases. This is evidenced by the rise of CeDeFi, which combines the elements of traditional financial organizations with mature DeFi applications. For instance, Stablecoins is an effort to improve upon one of the pain points of cryptocurrencies, the price volatility.

Sustainable economy: Sustainability and its operationalization is becoming a mainstream agenda for BFSI. Banks and insurers are now planning their journey for a comprehensive transition to sustainable business operations. In addition to the climate debate, several emerging economies are burdened with issues ranging from inadequate infrastructure to underequipped social and healthcare systems. Over and above ensuring sustainable IT practices, financial institutions can serve as a key player by establishing sustainable offers, finance mechanisms, and investment principles, thereby establishing sustainability as a business opportunity.

Impact of intelligent industry: Intelligent industry will unleash waves of innovation across every industry through intelligent products and systems, intelligent operations, and intelligent support and services. New digital and disruptive technologies like 5G, AI, edge computing, internet of things (IoT), big data, and blockchain, etc., are enabling financial services companies to adapt in a digital and intelligent way for sustainable business success and competitive advantage.

Financial services also stand to gain through innovative offerings to address the needs of the new ‘intelligent industries.’ Use cases such as UBI that leverages telematics in auto industry and embedded finance leveraging IoT in retail industry are set to explode over the next 2-3 years.