A Handy Guide to Banking as a Service BaaS

Higher rates and a possible recession could help banks by presenting a financial headwind for nonbanks now leading the way in implementing BaaS. Banking-as-a-service is among the most talked-about innovations in banking, and also perhaps among the least understood. Latforms like RazorpayX have enabled businesses like Cure.fit, MPL, Dunzo, and more, to make payouts at scale while keeping the costs low. For banks to support these functionalities, they need to put in a ton of investment and constitute the necessary infrastructure. Financial institutions have a clear opportunity to seize revenue growth at a reasonable cost with BaaS. SME loans will grow at a faster rate than corporate loans in terms of revenue.

BaaS provides traditional banks with new customers and enhanced revenue streams. FinTech companies and other providers of the BaaS experience launch small businesses with substantial growth potential, new products, and business models. The BaaS provider that offers this level of service is only responsible for operating the virtual bank “behind-the-scenes” with their API infrastructure.

  • That wouldn’t be possible without partnering with a banking-as-a-service platform; in fact, Veryable had previously tried four other solutions.
  • BaaS is about digital-based banking structures that create and deliver financial services through data sharing, optimized core infrastructure and systems, and specialized innovation.
  • Here are a couple of examples of embedded finance you might use in your everyday life.
  • So while a service like QuickBooks Cash or Square Banking may seem to function as your bank, neither, in fact, is a bank at all.
  • Customers will have direct access to borrow money from businesses using BaaS.

Overall, the United Kingdom , and Australia are early adopters and drivers of approved open banking environments. Due to transparent regulatory conditions allowing 3rd party access of bank data, and clear ownership of an individual’s personal information — these regions will continue to lead the pack globally. As of September 2019, there are 143 financial services providers (monitored by UK’s Financial Conduct Authority, aka FCA) registered for open banking. Over 80% of consumers that would switch financial services providers in the next 3 years already use a banking product from a big tech firm or digital bank. Banking as a service enables the digital delivery of standard financial products and services over the web by specialized providers. Technology firms, banks and financial Institutions can leverage these services to provide a variety of services and experiences under their own brand or in a co-branded manner.

RingCentral supports embedded finance and BaaS

BaaS platforms are already integrating smarter AI-powered capabilities. It’s a matter of time before it is easily available across BaaS solutions. Although FinTechs are in charge, they lack the knowledge and capital to conduct large-scale operations. Over the next few years, technology companies and fintech firms will generate the most commercial loan growth. For example, an airline might provide consumers with one-click loans. They can offer this solution to guarantee that their travel plans are not disrupted.

What is Banking-as-a-Service

The BaaS provider links business brands with banking infrastructure systems via APIs. The BaaS model lets non-bank FinTech and other third-party providers embed financial services in their business model offerings. With the licensed bank or middleman FinTech software company as a BaaS provider, these partners use API integration to connect with a bank’s infrastructure system. The BaaS model creates revenue streams and enables customer sharing for the participants. Banking as a service technology is a digital transformation that embeds multiple types of real-time financial services and products into the business offerings of non-bank businesses. BaaS is also a solution for FinTech companies providing payment services.

Additional Services

Banking-as-a-Service is a key component to open banking, in which banks open up their systems and allow third parties to access their data to enhance their own services. After all, nothing says you need to leave your traditional bank behind. We suggest doing some homework to make sure you know what options are out there and what benefits you may be leaving on the table. Though embedded finance and banking as a service have several things in common, there are important differences, too. Square’s banking services are provided by various FDIC members, including Sutton Bank and Square Financial Services, Inc. QuickBooks Cash banking services are offered through a partnership with Green Dot Bank, member FDIC.

We see six trends in the embedded-finance and banking-as-a-service arena. Understanding and monitoring these trends can help banks, and those who hope to work with on embedded finance, identify opportunities and guard against threats. Through integrating non-banking businesses with regulated financial infrastructure, BaaS offerings are enabling new, specialized propositions and bringing them to market faster. In addition to getting ahead in open banking, legacy institutions that launch their own BaaS platforms are also opening up new revenue streams.

The best way to explain Banking as a Service is by means of an example. You are facing stark competition and you would like to strengthen your customer loyalty. If you could offer your customers, say, a debit card, you could award them loyalty points whenever they pay with their card. Then, each time your customers use their card, they would interact with your brand. By analyzing your customers’ spending behavior, you could understand them better and offer them more tailored services.

Infrastructure as a service (IaaS)

Many of Silicon Valley’s startup tech customers and venture capitalists had far more than $250,000 at the bank. As a result, as much as 90% of Silicon Valley’s deposits were uninsured. Without the government’s decision to backstop them all, many companies would have lost funds needed to meet payroll, pay bills, and keep the lights on.

What is Banking-as-a-Service

Tech-savvy legacy banks can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure. Signature Bank, which provided lending services for law firms and real estate companies, was abruptly closed on Sunday. The F.D.I.C., created by Congress in 1933 to provide consumer deposit insurance to banks, is responsible for maintaining “stability and public confidence in the nation’s financial system,” according to its website. It is the conduit through which the front-end financial solution communicates with the back-end system.

Banking as a Service vs open banking

Services may include checking and savings accounts, credit cards, loans, accounting, expense management, and more. BaaS is a proven model that enables banks and large financial institutions to deploy their core banking infrastructure at scale; however, the current model requires an intermediary. A more reliable and affordable solution would be to have banks build their own BaaS solutions. This would enable companies to plug into the core banking infrastructure without the need for a third-party provider to act as a middleman. Companies can create and sell products to customers directly using this new protocol, rather than using a separate product.

What is Banking-as-a-Service

For example, a firm can incorporate a market-ready robo-advisor into their mobile banking app or website. As a result, customers become able to access investment products from the same bank account while receiving personalized advice. When you make lending and financing products available to your customers, you’re giving them access to funds they don’t already have in their bank accounts. Common forms of lending and financing include credit and charge cards, term loans, revolving lines of credit, cash advances, and invoice factoring. But if you want to offer banking services – you must have a banking license. Firms have long asked for banking services, but they are often too expensive or aren’t compliant with international banking regulations.

Banking-as-a-Service players

Making it work will require new technologies and capabilities, because BaaS is usually distributed to clients via APIs and requires strong risk and compliance management of the embedded finance partner. BaaS lets the brand’s end customer readily obtain banking services at the same source when buying a product or service. Embedded bank services include FinTech payments and getting product financing, loans, and credit cards through a seller’s website. Though they have some differences, embedded finance and Banking as a Service are both emblematic of the power of the digital age. To succeed in optimizing your customer experience, companies have to stay on the cutting edge of emerging technology.

The main types of BaaS solutions

Terry, I think I spent the first year I was in this job trying to figure out that definition. Finastra’s definition is really, banking-as-a-service provides retail and wholesale banking products in context as a service for licensed financial institutions, usually regulated infrastructure, API-driven platform. We really like to use the term “orchestration.” As a BaaS provider, what we do is orchestrate the banking services, connecting banks to fintechs and, through them, to the end consumer in context. They range in size from startups and small businesses to Fortune 500 enterprise companies. These businesses, directly benefiting from BaaS, offer their customer base convenient access to embedded financial services and banking products. BaaS can help them close sales faster without losing pipeline leads, attract new customers, and grow revenues.

As a comparison, the CAGR accounted for 11.8% between 2016 and 2020. Fintech corporations are anticipated to be the leading end-users of BaaS solutions, with a share of around 26%. Regarding company size, small and mid-size enterprises are expected to register a remarkable CAGR of 16.6%.

This is happening because digital financial services are more cost-effective, provide users with a better overall experience, and give them tools they cannot get from traditional banks. Banking as a service, or BaaS, is similar to another type of software product, SaaS or software as a service. Like SaaS, banking-as-a-service providers do not banking-as-a-service offer a full spectrum of services on their own. Instead, BaaS providers use APIs to offer access to a full stack of financial services such as savings accounts, credit cards, accounting software, expense management functions, and more. They leverage their technical capabilities to improve overall functionality and access for end users.

The most immediate concern is that the failure of one would scare off customers of other banks. But bank runs can happen when customers or investors panic and start pulling their deposits. 👀 👀 Did you know that digital transformation in financial services is well underway? Embedded financial products can be a great way to drive acquisition, engagement, and retention.

You’re facing stiff competition and want to grow your customer base. If you could offer your customers a debit card, you’d be able to give them points that they can redeem on your application. Your BaaS provider should significantly help handle compliance and regulation requirements on your behalf, minimizing the number of internal resources you need to maintain them on your own. This guide focuses on the financial services available to platforms through BaaS—beyond payment processing. If you’re interested in embedding online payments, you can read our introduction to online payments and learn how to monetize payments. The UK is leading the open banking movement with regulatory efforts that are reverberating throughout the world.