Banking-as-a-Service
What is Banking-as-a-Service?
Banking-as-a-Service (BaaS) is a financial services model that allows for the delivery of banking products and services through third parties, acting as distribution channels.
As such, it represents a strategic opportunity for both neobanks and non-bank entities to seamlessly incorporate comprehensive banking services into existing product offerings and thus be more attuned to the dynamic needs of modern businesses.
Through the integration of non-banking businesses with regulated financial infrastructure, BaaS empowers the development of innovative, specialized financial propositions and accelerates their market introduction: a recent example of this is the acquisition of the assets of Monese by Pockit, in the UK. Pockit is not a bank, but Monese has many banking products in place already, providing for BaaS services to be made available. In other words, by adopting a Banking-as-a-Service architecture, financial institutions not only position themselves at the forefront of open banking but also unlock new revenue streams.
How Does Banking-as-a-Service Work?
To access a Banking-as-a-Service platform, fintechs, digital banks, or other third parties pay a fee to the (often, traditional) banking entity, which is typically integrated into existing banking systems such as BACS, direct debit, and SEPA. The financial institution then grants access to its APIs, and subsequently, its systems and data. By establishing API connections and webhooks with regulated banking institutions, companies can use various core banking functionalities, including payments, lending, and customer account management.
From there, a non-banking business can leverage this approach to develop novel banking products or offer white-label banking services through its site and application.
It is important to note that all of this is achieved without substantial investment and regulatory complexities associated with building an internal banking infrastructure. This is because Banking-as-a-Service providers act as the backbone thanks to their underlying tech stack and licenses.
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Notable benefits of a BaaS model include:
- Faster time to market: Taking advantage of the banks existing technical and expertise infrastructure means circumvention of traditional financial journeys and getting a faster way to market offerings.
- Better customer experience: By seamlessly integrating banking services directly into their platforms, fintechs and other non-bank businesses can provide their customers with financial services without leaving their preferred app or website. This results in faster, more efficient transactions often at competitive rates, and overall exceptional customer experience.
- Reduced cost: Developing banking infrastructure takes considerable time and resources. BaaS empowers fintechs and other businesses to circumvent these challenges by leveraging the existing infrastructure of partner banks, thus decreasing the capital expenditure required to offer banking services from scratch.
- Expanded revenue generation: Offering banking services presents an opportunity to tap into new revenue streams by attracting a broader customer base that may benefit from accessing financial services without the need for a traditional bank account. Potential revenue sources include transaction fees, subscription models, and interest income, ultimately boosting the company's profitability.
- Innovation and flexibility: BaaS platforms foster a culture of rapid innovation, which means non-bank fintechs and other businesses (renowned for their agility) can swiftly develop and introduce new financial products adjusted to their customers' specific needs. As a bonus, they are less constrained by regulatory or operational burdens (e.g. PRA regulating and supervising financial services in the UK).
- Access to embedded finance: Across the business landscape, BaaS enables the integration of banking services into the core offerings. This embedded finance approach empowers companies to deliver tailored financial solutions that align with what their customers need, thereby fostering stronger customer engagement and loyalty.
Banking-as-a-Service vs Traditional Banking
Whilst both aim to offer banking solutions, BaaS and traditional banks have distinct approaches to providing financial services, most notably in terms of the underlying models and operations.
The general idea behind BaaS is to foster a collaborative partnership between fintech innovators and established banking entities. This means “opening up” services that were historically limited to licensed banks that generally have a centralized structure and control over every aspect of banking operations. Such a synergistic approach empowers a Banking-as-a-Service fintech to deliver enhanced value propositions to its target market segments.
BaaS is also quicker to innovate by leveraging a bank's regulatory compliance framework, which allows the creation of novel financial institutions that prioritize innovative customer service and digital experiences. On the other hand, traditional banks are subject to stringent regulations imposed by financial authorities, which in no small part slow down innovation.
Furthermore, BaaS focuses primarily on a digital-first approach to deliver convenient and accessible banking solutions through mobile apps and online platforms. This contrasts the traditional way of banking that often relies on a more physically oriented approach where branches serve customers, leading to limited availability and flexibility.