What Is Banking-as-a-Service? (And What it is Not)

The banking sector has undergone a major transformation in the last few years. It has become more digitized and customer friendly. It has been developing new products and building new partnerships with fintech and other non-financial companies to create an extraordinary experience for the customers.

This has given rise to a new model called Banking-as-a-Service (BaaS).

BaaS is an end-to-end process where banks integrate their digital banking services with other non-financials brands through APIs. BaaS is different from traditional banking. Traditional banks have to invest a lot of money in building complex infrastructure. With BaaS, fintech and non-financial companies can leverage the potential of this infrastructure without spending time and money on building it from scratch.Now any company can embed financial services into its offerings using the bank’s licensed and secure infrastructure.

Some examples of BaaS include Uber Money and Apple cards – both of which can be used as credit card alternatives to make payments.

Banking-as-a-Service – In More Detail

Banking as a Service means different things to different parties.

  1. It means innovation for banks: Banks are facing stiff competition from digital-born fintech companies that are more customer-centric and offer better experiences to the customers. They haven’t been able to match with fintech’s hyper-personalized products and offerings despite having licenses. To add to the woes, they are bound by the ever-changing regulatory compliances that make innovation challenging for them. Banking-as-a-Service allows banks to innovate and keep pace with the changing customer needs. Instead of being the direct service providers, they can be the assemblers who will provide the infrastructure and the tools to other companies to offer a superior experience to the customers. In return, they can open a revenue stream by earning fees and deposits from the partnership. It also serves as an excellent opportunity for banks to build a long-term relationship with fintech companies that pose a threat to their existence. They can co-exist instead of competing.

2) It means a new revenue stream and experiences for other companies: Some industries, like eCommerce and travel, have less profit margin. They have to think of new revenue streams to thrive in a hyper-competitive world. That’s where BaaS can help. Both fintech and non-finance companies can deepen their engagement with their customers by making financial solutions such as payments and loans hassle-free. Take Uber Money, for instance. Uber ventured into fintech in a bid to improve customer retention and to gain a competitive advantage. Using an API-based solution like BaaS will also help companies to build their customer. The only challenge to this is that acquiring a banking license can be quite an arduous task. They have to strictly comply with banking regulations that could stop them from innovating. That’s where BaaS can help. It can enable companies to offer more choices and services and open the doors to innovation, grow their customer base, and build a new revenue stream. They can save costs on building infrastructure from scratch by leveraging the bank’s infrastructure using an API.

3) It means a better experience for end-users: While BaaS offers banks an opportunity to innovate and other companies to set up a new revenue stream, the biggest winner is the end-user. The end-users get access to superior experiences, lower fees, and digital-first interactions. Considering how BaaS simplifies the entire digital financial services, the end-users also have the option to choose the best service from the market. They get access to hyper-personalized offerings based on their financial history and behavior, which were not possible with traditional banks. BaaS has not just amped up the competition among financial and non-financial players, but it has also revolutionized the experiences for the end-user.

What Is Not Banking-as-A-Service?

 1)It is not open banking: People often use the terms BaaS and open banking interchangeably. However, both are not similar. In BaaS, non-financial businesses use API to integrate banking services into their services. In open banking, the non-financial services are third-party service providers who use bank’s data for their products. They just provide insights into the bank accounts or trigger transactions. They cannot offer loans or open deposits for the customers.

2)It is not platform banking: BaaS is inverse to platform banking. In BaaS, the customer belongs to the fintech or non-finance company and integrates services of the bank. In platform banking, the customer belongs to the bank, but it integrates services from the fintech companies. The objective of platform banking is to enable banks to retain customers in their platform.

3)The Future Belongs to Banking-as-a-Service:The financial ecosystem has been evolving with digital-first entrants posing challenges to banks. Similarly, fintech and other non-financial companies also face the threat of losing customers and revenue due to increased competition. Customers want the best services and personalized offerings. With an array of options available to them, they may not think twice before shifting to the competitor. Thus, it’s time that digital-first companies and traditional banks collaborate instead of competing to create value for customers. The shifting behavior of customers calls for the implementation of BaaS. It’s time all the parties recognize its value and work together to create a seamless experience for the customer.

Sankhadeep Chakraborty

Sankhadeep heads the engineering arm in Verinite. He has been associated with the BFSI domain from the start of his career. He is a hardcore techie and innovation drives him. He believes in the saying "Nothing is impossible"