Banking as a service is a significant disruption in the banking sector which presents limitless opportunities for brands, providers, and banks.
Gone are the times when banks operated and completely controlled their entire value chains.
With open banking and banking as a service (BaaS), the non-finance sector has become a digital economy stronghold, competing with banks’ vertically integrated business models.
Today, BaaS presents an excellent opportunity for wealth managers, fintech unicorns, insurers, and banks who could make profits by teaming up with non-financial digital platforms.
What is Banking as a Service or Baas?
Banking as a service is an end-to-end process where non-financial businesses can access and offer financial service capabilities in-house without starting from scratch.
This system is principally comprised of the three entities:
- Banks or legal financial service providers,
- Banking as a Service (BaaS) providers, and
- Fintech firms willing to offer BaaS.
Say, for instance, you run an e-commerce site. Among the many ways you can improve your direct sales is by providing your buyers with, say, for example, your own-branded credit card (think what Amazon Prime ICICI Bank Credit Card is) or a lending system.
This offering will not only boost direct sales (people without instant cash will buy more) but will drastically enhance the user experience (loans can be handy).
So, as a non-bank entity, you have to venture into a traditional banking operation that provides financial service.
However, if you want to provide financial services, you’ll need a banking licence – something that almost every government on the planet will require. Let’s not get started on how difficult and rigorous it can be to get a banking license, let alone implementing it.
This is where BaaS kicks in. It bridges the gap between non-banks wanting to offer financial services and the monopoly and restrictions of traditional banks and lenders.
How BaaS or Banking as a Service works?
The BaaS ecosystem consists of license holders (banks/regulatory institutions), brands, and BaaS providers that seamlessly embed financial services in a wide range of software applications.
Banks and third-party providers collaborate to integrate digital banking and payment services into the former’s products. This ecosystem of software providers and fintech firms uses application programming interfaces (APIs) to connect with the bank.
BaaS provides user interface design, risk assessment and management tools, account management and more.
Thus, non-financial businesses, e.g., brands, can distribute financial products under their name such that the customer experience is of buying a product from that very brand.
In contrast, a financial institution is actually behind the product. A financial institution can easily set up a platform via a distributor, which comes at a low cost, benefits of scalability and cloud technology.
Isn’t SaaS a truly revolutionary idea? Now that you know what BaaS is, it’s time to focus on the direct benefits.
Some benefits of BaaS include:
- Lower entry costs and faster time introducing services: BaaS helps fintech companies and banks choose and implement financial services in-house with lower initial investment costs. This ensures management resources can be well-spent in areas like marketing and development of products. As a result, they can launch the products and services rapidly.
- Customised ecosystems: Financial service marketers must stay ahead of competitors and focus on their business needs to capture market share. BaaS offers capital optimisation and a coherent data pipeline like transaction data and invoice history through a single-integrated banking platform.
- Regulatory and security compliance: BaaS lets banks integrate the services and products of external providers into their offerings as well as monitor and maintain compliance. By piggybacking onto the bank’s licensing agreement, providers can deal with complicated regulations.
- New customer bases and improved customer experience: BaaS helps connect banks and third parties to reach new customers without additional costs. This leads to new and potentially profitable relationships among brands, banks, and customers. BaaS also allows the integration of products and services into brand offerings without building new products.
So the question is:
What’s the Hype with Banking as a Service?
Today, banking is a big deal because it presents tremendous possibilities for the sector in simple, fast, transparent, and secure ways.
Never has in the history of the industrialised world, consumers have so many options than today with BaaS. It has ushered in an era of online banks, virtual loans and instant credits.
The digital finances sector is only set to expand with time. According to Research and Markets, the global digital banking platform is expected to reach $8.67 billion in the forecast period from 2019 to 2027.
BaaS promises to meet the rising demands by offering new revenue streams and a wide range of financial services such as e-wallets, loan processing, account and transaction services, and a lot more.
Many BaaS platforms are API-based, which act as a back-end to host different non-bank business and fintech start-ups. As a result, brands don’t need to dedicate a wealth of resources and time to build products from scratch.
Banks get to expand their geographic footprint without any physical branches while monetising their infrastructure and data. Fast-moving fintech firms gain access to banking services sans the legal and regulatory compliances otherwise laced with traditional banking. Win-win for all.
BaaS also focuses on democratising data – meaning, banks will no longer monopolise the markets – hence, banking services become more accessible and transparent.
Small and medium-sized businesses are exceptionally fortunate that BaaS lets them be in the financial ecosystem.
That is why you should care for BaaS.
Use-cases of Baas
With BaaS, there is a massive potential for the alchemy of finance, technology, and operational capabilities to focus on the banking sector’s pain points.
It has emerged as a revenue-driving and innovative business model that benefits everyone from banks to consumer-facing companies.
Today, any bank, merchant, or brand can set up their neo-bank with plug and play applications for their business and end-users. Neo-banks are 100% digital banks that combine traditional and fintech, officiated by regulations and provide simpler, affordable, and faster banking solutions.
The key idea behind neo-banks is BaaS, which provides a robust front-end and services ranging from payment cards to segregated customer accounts.
BaaS ensures applications are consistent, scalable, and efficient while taking care of security, performance, and round-the-clock availability. It is an essential component of open banking, which is followed by neo-banks as well.
Neo-banks leverage banking as a service since it reduces the development and maintenance costs, ensuring more profits in a shorter duration and fewer costs. BaaS also helps neo-banks with banking services using APIs.
White-label Payment Cards
Credit is at the heart of customer relationships but is unfortunately secluded to a particular sector of consumers.
BaaS helps formalise credits for the larger, more diverse consumer base, so far largely untapped, quickly and in less time without the hassle of paperwork.
With the help of BaaS, service providers can offer white-label payment cards for their clients. This caters to clients with customised card programs and brands with an additional source of revenue.
Not to mention that helpful intermediaries would benefit banks as well with non-financial businesses and end-consumers.
White-label solutions, together with BaaS platforms, also protect the interests of financial services users when it comes to strict regulations to banking.
In addition, this improved business model avoids extra costs by becoming a part of payment systems and credit/debit card schemes, setting up better IT infrastructure, maintaining strong ties with banks, and developing proprietary banking platforms.
As a result, BaaS provides an exclusive suite of services to offer white-label solutions that foster brand loyalty and revenue.
Identity Verification Services
With the digitisation of customer onboarding and management of financial accounts and payments, the potential pitfall of online fraud and cyber-crime persists.
To combat such vulnerabilities, banks and third-party providers must incorporate intelligent identity verification solutions to maintain customer trust and the security of transactions.
Banking as a service allows brands to team up with specialist BaaS providers to exploit new identity sources and advanced technologies.
All that, without having to build their own Know Your Customer (KYC) solutions and stay ahead of competitors and out of harm as well.
Banks and brands can contact an ID verification service provider that authorises public and private databases for account verification and/or authenticates users’ identities.
Notably, financial institutions can seize broader business benefits by exploiting expert security solutions and biometrics to customer insight, while customers can bid farewell to the lengthy onboarding processes.
Baas for the Future
Today, young BaaS providers are bringing down barriers and bypassing developmental complications to offer new revenue streams, scale up or down businesses, customise product offerings, and enter new markets.
The acceleration of the fintech wave is driven by making the banking industry more economically efficient and accessible, which is possible with Banking as a service.
BaaS helps everyone reap their respective benefits to propel the entire economy forward in today’s interconnected environment.
GLaaS is set to disrupt lending as a service with its ‘embedded finance’ products. Reach out to us at firstname.lastname@example.org today, and we are eager to learn more about your project!