Opportunities are endless with Banking-as-a-Service (BaaS), and nowhere is this more true than in Asia Pacific (APAC).

Banks in the region, particularly in hubs like Singapore and Hong Kong, have embraced and become leaders in open banking, automated services, ever-improving APIs, and evolving customer expectations.

Now, BaaS has created exciting new propositions for consumers and reconfigured the value chain for banks and financial institutions.

A recent global report by Finastra, Banking as a Service: Outlook 2022 | Paving the way for Embedded Finance, revealed the true extent of the potential for digital disruption and transformation across multiple sectors.

This growth isn’t just on the horizon, its already here. 88% of senior executives we spoke to in APAC more than in any other region globally  have implemented BaaS solutions or are planning to. In turn, the BaaS market is expected to reach a value of US$3.6 trillion by 2030.

Of the key use cases we examined, ranging from lending in retail banking to cash management services for corporate banking — the growth potential of one use case stood clearly apart; lending for small and medium-sized enterprises (SMEs).

The issue with SME lending

Every SME has different lending needs to grow and run their business, and acquiring loans from traditional banks is cumbersome, with lengthy processes, exhaustive documentation requirements and limited credit options.

SMEs in APAC make an outsized contribution to the region’s economy, accounting for around 98% of enterprises and 50% of employment.

Despite their importance, SMEs continue to face significant barriers to their growth, one of the foremost being a lack of access to finance.

Difficulties in demonstrating creditworthiness to traditional lenders are a major issue for SMEs in APAC, especially in developing nations where the majority of SMEs are still heavily reliant on cash.

Research by the World Trade Organisation has found that over half of trade finance requests by SMEs are rejected globally, compared to just 7% for multinational companies, often due to a lack of information.

This issue has been exacerbated by the pandemic, as banks have sought to de-risk by moving away from funding SMEs.

Now, SMEs in APAC face a US$2 trillion funding gap, meaning these companies face an existential risk as they have less resilience and flexibility in dealing with the shocks brought on by the crisis

Enter Banking-as-a-Service

Clearly, a change is needed, regardless of external pandemic pressure.

A greater marketplace of specific SME targeted loan products is required, offering evermore choice to small and medium business owners.

For this reason, SME lending as a banking product is expected to rise quickly in the coming years.

This growth isn’t driven by one sector, but the entire spectrum, spanning retail to technology, banking to healthcare.

BaaS enables an ‘API marketplace’ to be embedded in a distributor experience, allowing SMEs to get access to sector-specific lending products.

For instance, taking online retail as an example, e-commerce platforms such as eBay, Etsy or Shopify gain access to data that helps them to predict and forecast an SME’s capacity to repay a loan.

A provider, such as PayPal, can then offer an affordable business loan at a fixed fee, helping to plug the financing shortfall and bypassing the needs for SMEs to acquire a bank loan.

This marketplace provides SME customers with a greater choice of products and providers, and will excel if it caters to specific needs of different businesses in multiple industries.

There is a growing pool of evidence showing the vast potential of API marketplaces.

The most high-profile of these is Shopify, which has partnered with the likes of Citigroup, Goldman Sachs and Barclays to offer SME lending, but currently does not offer clients the option to select the bank of their choosing.

It isn’t just the end customer that benefits from the marketplace model.

Distributors can deepen relationships with SME clients, and are presented with an opportunity to cross-sell and increase customer stickiness.

Banks, on the other hand, have increased customer acquisition at a low cost by leveraging the distributor’s customer base. Finally, enablers can provide solutions to an underserved-but-growing segment, creating additional revenue streams.

Finastra’s study points towards widespread support from distributors for a marketplace model, but highlighted a few considerations.

Firstly, too many options for customers will likely confuse them, although this can be mitigated by creating industry-specific marketplaces.

Secondly, large organisations like Amazon or Alibaba – that bear significant negotiating power – could opt for strategic partnerships with single banks.

Finally, regulatory differences across multiple countries must be overcome, if a consistent offering is to be provided by all banks.

Despite these reservations, BaaS will bring about dramatic changes to SME lending, creating greater choice and fewer funding rejections for the end customer.

The marketplace model will drive competition and unlock new possibilities for underserved SMEs, which truly are the lifeblood of any economy.

As such, we all stand to benefit from the emergence of BaaS.