Imagine a world where banking, insurance, payments, and lending are at your fingertips — a world where financial services are tailored to your needs, accessible at all times, and as flexible as you’d like them to be. You are not stepping into the future, you are witnessing the transformative power of Everything as a Service (XaaS) model reshaping the finance sector today.
Enabled by cloud computing, the XaaS model allows for anything — software, infrastructure, platforms, and even business processes — to be delivered as services over the internet on a pay-as-you-go basis. This global phenomenon is certainly gaining traction. In 2018, the global XaaS market was estimated at USD 281 billion and it is expected to reach USD 1610 billion by 2028, growing at a CAGR of 19.2%. Experts predict that XaaS solutions will continue to dominate within the XaaS landscape.
Everything as a Service (XaaS) market size, by offering, 2018 – 2028
Source: KBV Research
Evolution of XaaS in the finance industry
In the past, financial services were centered around banking halls and brick-and-mortar offices. Financial institutions managed all aspects of their business in-house, from IT systems to customer services and data management, which resulted in significant costs and operational inefficiencies.
In the late 20th century, digitization began to change the traditional model when banks started offering online banking services, providing customers with a way to check balances, transfer funds or apply for loans from the comfort of their homes. Technological advancements also paved the way for a new generation of financial organizations — fintech startups. These newcomers seized the opportunity to further disrupt the financial sector with innovative solutions.
Lately, the financial industry’s growing dependency on digital infrastructure has made fertile ground for the advent of XaaS. The first wave of XaaS was Software as a Service (SaaS) tools like cloud-based accounting software or CRM platforms. These SaaS solutions allowed financial firms to reduce costs, improve productivity, and meet customer expectations for seamless digital experiences. As advancements in cloud computing technologies continued, the XaaS model expanded, paving the way for new financial software solutions tailored specifically for the financial sector. In today’s landscape, the Banking, Financial Services, and Insurance (BFSI) sector represents a significant portion of the XaaS market.
Global Everything as a Service market share
Source: Grand View Research
An in-depth look at XaaS models in finance
Banking as a Service (BaaS)
Banking as a Service (BaaS) is revolutionizing the financial industry by enabling businesses to offer banking services. To do that, organizations even outside the scope of the traditional banking sector can integrate financial products into their services via APIs. For traditional banks, BaaS offers an opportunity to reach more customers and generate new revenue streams without substantial capital investments. For fintech and other businesses, BaaS allows for the quick and cost-effective launch of new services, enhancing their service offerings and providing greater convenience to users.
One such example is the British challenger bank Starling and Raisin, the online savings marketplace. Raisin was the first to tap into Starling Bank’s BaaS solution. By leveraging Starling’s robust API infrastructure, Raisin streamlined its account opening and transaction processes and enabled its customers to effortlessly open accounts, deposit money, and place funds with its partner banks via its marketplace.
Insurance as a Service
Insurance as a Service (IaaS) is another game-changer in the financial sector, allowing businesses to seamlessly integrate insurance products into their own offerings. And the benefits of the IaaS model are far-reaching. For insurance companies, IaaS offers an opportunity to reach a broader market base. For non-insurance businesses, IaaS opens up new avenues for revenue and value addition, enabling them to offer more comprehensive service packages to their customers.
A stellar example of this is the partnership between the insurtech firm Trov and Waymo, Alphabet’s self-driving technology company. Using its IaaS platform, Trov provides Waymo’s riders with insurance coverage for every trip they make. This partnership not only enhances Waymo’s value proposition but also demonstrates the potential for insurtech to transform traditional insurance practices.
Payments as a Service
Payments as a Service (PaaS) model allows businesses to integrate payment processing services into their platforms. For businesses, it means a simplified payment process, reduced PCI compliance burden, and the ability to focus more on their core services instead of backend payment processing. Moreover, with seamless and secure payment processing, businesses can enhance customer experience, thus driving customer retention.
A striking example of this is the global ride-hailing service Uber. Uber has integrated Braintree’s PaaS solution, enabling smooth and secure payments for millions of riders worldwide. By handling transactions within the app itself, Uber has enhanced user experience and fostered customer loyalty.
Lending as a Service
Lending as a Service (LaaS) is a model where traditional lending processes are provided as an outsourced service by a third-party company. LaaS platforms typically offer end-to-end lending solutions, including application processing, credit decisions, loan origination, underwriting, loan servicing, and collections. Advanced LaaS platforms use data analytics and artificial intelligence to provide risk assessments and personalize loan products. The LaaS model enables organizations to offer a seamless, digital lending experience without needing to invest heavily in developing or maintaining their own technology infrastructure.
A noteworthy example of this is the partnership between Kabbage and ING. Using Kabbage’s LaaS platform, ING was able to provide small businesses with the ability to apply for loans digitally and receive decisions in real-time, vastly improving the customer experience.
The flip side: Risks and challenges of XaaS in finance
While the XaaS model in finance has many advantages, it is not without its own challenges and risks. As organizations transform and shift to XaaS-based services, they need to keep in mind potential pitfalls and strategize to overcome them.
- Dependency and vendor lock-in: While XaaS empowers organizations with innovative capabilities, it simultaneously makes them reliant on service providers. This could lead to a vendor lock-in scenario where the transition to a new provider becomes a complex endeavor due to high switching costs.
- Performance and downtime: With the outsourcing of key services to third-party vendors, any downtime or performance issues can have direct implications on customer experience and ultimately on a company’s revenue streams.
- Integration issues: Financial institutions typically use a wide array of systems and platforms. Integrating all of these with new XaaS offerings can be complex, time-consuming, and costly.
- Data management and ownership: In a XaaS relationship, data management can pose significant challenges as there might be ambiguity regarding who owns the data. In addition, managing and extracting data from these services for analysis can be a complicated process.
- Regulatory Compliance: As the financial sector is subject to strict regulations, it is crucial that the XaaS service providers are compliant with these regulations. Any lapses in this respect can result in hefty fines and reputational damage for financial institutions.
The bottom line
The rise of XaaS in finance has truly reinvented the financial landscape, merging technology and services for outstanding efficiency and customer convenience. As it is clear from the statistics, XaaS is not just a fleeting trend, but rather a transformative wave expected to grow and become mainstream in financial services. By shifting to a service-based approach, financial institutions can keep pace with rapidly evolving customer demands and technology advancements while minimizing capital investments and operational inefficiencies. And even though the adoption of XaaS is not without challenges — like vendor dependency, integration complexity, and regulatory compliance — the benefits make it worth embracing.
