BaaS is shaping Saudi Arabia’s payments industry

Financial services in the Middle East, and particularly in Saudi Arabia are constantly evolving.

To meet changing customer demands, it is critical for the industry to continue its journey into digital transformation and embrace further innovation.

The biggest trend shaping the future of financial services is the rise of banking as a service, which presents a $7 trillion market opportunity. According to our recent market study, 85 percent of senior executives are already implementing BaaS solutions, or plan to do so within 12 to 18 months.

With BaaS, regulated financial service providers can benefit from increased revenue streams and better serve a larger portion of the market. Brands such as online retailers or ERP systems, can benefit from access to richer data and stronger relationships with their customers. As for customers, they can access financial services how and where they want to consume them.

Even if its adoption is now soaring, BaaS is not a new concept. Payments, in particular, have been benefiting from BaaS for a number of years. For example, a well-known service — buy now, pay later — rapidly gained ground around the world, with 42 percent of customers using it. Payment cards and digital wallets have also been widely adopted for a number of years now.

In an increasingly saturated marketplace, what can we expect for the future of BaaS-enabled payments in Saudi Arabia?

Pathway for new use-cases

The Kingdom showed a strong commitment to driving innovation in financial services, with a great emphasis on payments.

Saudi Arabia and UAE central banks have jointly launched Project Aber — a pilot project to explore whether distributed ledger technology or blockchain could enable cross-border payments. The project was designed to reimagine domestic and cross-border payments, using the lessons learned to benefit the wider ecosystem.

Supporting further advancements in digital payments and exploring new ways to address key use-cases is a good indication of what we can expect for BaaS growth in the region.

While some use-cases are more established, others are still ripe for growth. One area that is expected to grow significantly in the coming years is machine-to-machine payments and digital asset broking.

In the shipping industry, for example, a large freight forwarding company could use a chip in different parts of its value chain to facilitate usage-based financing and tracking-based payments. This would automate the process of financing and payments without human involvement.

Electric vehicle charging is another excellent machine-to-machine payment use-case. Consider having to pay for charging your electric vehicle without having to register for different e-mobility providers. BaaS enablers can connect charge points to recognize customers’ vehicles and charge them automatically and securely through their connected account.

Implementing BaaS at scale

In addition to new payment use-cases, the way in which BaaS is monetized is evolving. Even with more established applications, embedding BaaS solutions on a point-to-point basis is not scalable.

It also takes time to form individual partnerships. Finding the right enabler partner — fintechs and bigtechs that help embed financial services within applications and platforms — can help to solve both of these issues. By orchestrating a marketplace where brands and financial institutions meet, enablers help both brands and financial services providers scale embedded finance options, while helping customers access the right product that suits their needs at a reduced cost.

For example, when it comes to POS financing, you could partner with one provider that may have fixed terms, such as repayment dates, interest rates, and so on. However, the customer may have complex or different needs which this provider does not meet. You could even partner with several providers offering different terms but this would involve forming individual partnerships and implementing these services one at a time.

With a marketplace model, a brand could give consumers access to a wide variety of providers so that they can find one or many that suit their individual needs. Brands also benefit from the convenience, speed, and cost-effectiveness of connecting to an ecosystem compared to point-to-point connectivity.

BaaS is clearly a trend that is here to stay in Saudi Arabia and beyond. While its adoption is fairly new in many industries, payments are witnessing the next phase of BaaS, governed by new use-cases and increasingly tailored experiences.

If done correctly, this will provide a massive monetization opportunity for financial services providers and an enhanced customer experience for regional brands.

• Nour Sabri is the lead client partner — BaaS at Finastra.