Banking for the Unbanked: How BaaS is Driving Financial Inclusion

For years, the way traditional banks operate has excluded billions of people around the world from accessing financial services. With the evolution of fintech, this scenario has shifted recently. By using the model of Banking as a Service (BaaS), bank and fintech partnerships could take financial inclusion to the next level.

The current state of financial inclusion.  

As of 2017, close to 1.7 billion adults – over 30% of the global adult population — remained unbanked. The type of requirements to open an account, high fees, and a lack of physical branches in underserved areas are some of the reasons that keep them without access to financial services.

According to the Global Findex 2021 report, the number of adults who own a bank account at financial institutions increased from 51% to 76% between 2011 and 2021. Banking adoption has increased thanks to digitalization, yet one out of four still lacks access to traditional banking services. There is still work to be done, and BaaS could lead the way in bridging this gap.

Molding financial inclusion with BaaS.

Through BaaS, fintech companies can use banks’ infrastructure and regulatory cover to provide financial services without becoming banks themselves. This partnership model is attractive for fintechs looking to provide innovative, customer-focused, and niche solutions while avoiding the cost and complexity of traditional banking.

For the unbanked and underbanked populations, this partnership translates to easy access to financial services created to meet their specific needs. Fintech’s approach, combined with the capabilities of traditional banks through BaaS, is a winning formula for fostering financial inclusion.

The results of a study by the Cambridge Centre for Alternative Finance (CCAF) with the World Bank Group and the World Economic Forum, based on data from 1,448 fintech companies across 192 jurisdictions, showed their impact on financial inclusion.

The study’s findings are clear: fintech companies are not only reaching underserved customers but also including financial inclusion into their business models as a key operational metric. They are solving real-world problems, providing innovative solutions that are both accessible and affordable to the masses.

How BaaS is making it simple and inclusive.

One of the key strengths of BaaS is its potential to bridge the gap between traditional banking systems and the innovation brought about by fintech startups. When banks, through BaaS include fintech in their portfolios, they can target unmet needs in the financial ecosystem and promote financial inclusion. Here is how they do it:

  1. Mobile Apps: BaaS allows the creation of user-friendly mobile apps that serve diverse populations. These apps provide convenient access to banking services, and features like balance inquiries, fund transfers, and bill payments are accessible at users’ fingertips, promoting financial inclusion.
  • Customized Banking Solutions for the Underserved: BaaS enables fintech companies and non-bank players to tailor services to specific customer needs. For underserved groups, this means designing products that solve unique challenges, such as microloans for small businesses, simplified account opening processes, personalized financial literacy content, or alternative credit scoring models to provide loans to those with poor or no credit history.
  • Embedded Financial Services: BaaS integrates financial capabilities into non-traditional platforms. For instance, customers can apply for credit or pay in installments directly within an e-commerce app. These embedded services reduce friction, improve the user experience, and extend financial access to underserved groups.
  • Scaling Efficiently: As customer demand grows, non-bank players can expand their services without worrying about infrastructure limitations, thanks to BaaS. This scalability is crucial for reaching underserved populations around the world.

Numerous BaaS initiatives are proof of the potential of this model. There are fintech companies that have partnered with BaaS providers to offer banking services to freelancers and the gig economy, a segment traditionally overlooked by banks. Another example are Fintech companies using BaaS to extend credit services to people with no formal credit history by using other data points such as mobile phone usage patterns and social media activity. This innovation is opening doors for many to the world of formal financial services.

Growth and challenges.

The BaaS model is predicted to grow as technology advances and more banks seek to partner with fintechs to expand their market reach. The BaaS Global Market Report 2024 estimates that the forecasted market value for this model will reach $1,486 USD billion dollars by 2028, with an annual growth rate of 19.4%.  

The growth, however, comes with challenges. Regulatory compliance remains a complex puzzle to address. Banks using BaaS and looking for Fintech partners to include in their portfolio must evaluate them to ensure they align with their values and meet regulatory requirements. 

In 2023 and part of this year, we’ve witnessed how regulatory scrutiny of Banking as a Service (BaaS) partnerships with fintechs has increased. Only in the fourth quarter of last year, fintech partner banks drew 33.3% of all formal enforcement orders from federal banking agencies. 

Regulators are watching BaaS entities closer to ensure these partnerships comply as this space evolves. BaaS providers and fintech companies can rely on regulatory technology to help them balance compliance and innovation to keep fostering financial inclusion.

Final Thoughts.

Banking as a Service stands as a leading model that can change the financial landscape, particularly for the unbanked. It combines the best qualities of traditional banks with its infrastructure and regulatory capabilities and the innovation-driven approach of fintech companies, creating a synergy that drives financial inclusion to new heights.

BaaS represents more than just a new business model for banks and financial institutions; it is also a solution for a future where financial access is not a privilege but a norm. 

  • Nicky Senyard

    Nicky Senyard is CEO and Founder of Fintel Connect, the leading specialist in performance marketing technology for the financial industry. Nicky is a 20-year pioneer and entrepreneur in performance marketing, building and exiting her first SaaS marketing tech company in 2016. She and her team are on a mission to create contribution and growth for the financial industry by developing scalable, secure, marketing intelligence solutions that drive breakthrough results.