What is BaaS?

BaaS, or “banking as a service,” refers to the distribution of banking services by non-bank third parties or non-financial companies (NFCs). BaaS products enable innovative, specialized proposals and speed up their time to market by combining non-banking enterprises with regulated financial infrastructure.

BaaS offerings are quickly gaining momentum as client discontent with conventional bank products rises. The following are some important market statistics:

  • 30% of clients are thinking about transferring banks.
  • 42% of clients have utilized a Buy Now, Pay Later program.
  • 2x ROAA for banks that prioritize BaaS offers

How is BaaS configured?

BaaS providers are mainly concentrating on just one to two stages of the value chain, in contrast to traditional banks who owned the full value chain. Successful BaaS players today tend to align with one of four configurations:

  • Providers offer use of their banking license, and products, operations and/or technology for use by aggregators, other banks, and NFCs. These offering are under strict legal, operational and compliance controls of the Providers.
  • Providers-Aggregators act like Providers, but also couple their own capabilities with other vendors to create a complete “out-of-the- box” solution.
  • Distributors leverage end-customer relationships to offer unique financial services propositions.
  • Distributor-Aggregators enhance the propositions they distribute by adding new products or technology from multiple providers.

How does “Banking as a Service” work?

NFCs have been offering credit cards and/or loyalty programs to the customers for a long time. In the digital era, the relationship between brands, businesses and their customers is evolving and improving at an astounding rate. In order to add value to their products or services, some nonbank organizations already provide integrated financial services to their customers. Examples of these services include bank accounts, credit card processing, lending programs, and others; these offerings are usually strongly tied to the applications, websites, e-stores, or other tools where the end user regularly engages with the brand (example: BNPL, Buy Now Pay Later programs)

Embedded finance, which entails employing banking platforms as a service and using banking APIs to do this, has already enabled technologically cutting-edge multinational corporations like Apple, Uber, Walmart, Samsung, or Amazon to provide financial services to its clients.

How do you integrate BaaS?

Applying a Banking as a Service model starts with a regulated financial institution offering its API to fintechs, digital banks, or other third-party providers who would pay a fee to access the BaaS platform. The API is a specific piece of code developed to simplify interactions between systems. After being given access, they will be able to create and provide white label banking to the end user, which can be any company or brand.

  • Nonbank Businesses: Any firm or brand interested in providing its clients with financial products.
  • Financial institutions/Banks: Businesses with banking licenses that make their API available for rent while collaborating with providers. Often this offering is made through a financial services entity known as a Processor that hosts the technology and connectivity to the networks.
  • The technical entity that serves as a conduit between the bank and the business is known as a fintech or third-party provider.

An opportunity for all players involved

All parties involved have the opportunity to grow their businesses by attracting new customers or by enhancing their current services thanks to the BaaS concept.

“It offers a financial institution the chance to connect with more clients for less money. According to an analysis by Oliver Wyman, the cost of obtaining a customer is typically between $100 and $200. The price can range from $5 to $35 using a new, BaaS technology stack “.

The primary opportunities for each player are listed below.

  1. The empowerment of the consumer or end user

The end user is the one who has more information than anybody else, making them empowered customers who demand seamless and direct interactions with the services or goods they use. In fact, users flock to these ecosystems of multiproduct customer experiences, according to a Mckinsey Institute study.

  1. Once companies become “banks”

On the other hand, brands and businesses may now integrate the way they address customer needs, resulting in the development of more enduring and devoted connections with their customers, which is one of their primary objectives. The average banking customer has a life cycle of 13.5 years, which is longer than most brand loyalty relationships. Therefore, in this context, brands also benefit from growing their range because they ultimately gain more satisfied customers. The embedded finance model also enables all of the aforementioned improvements to occur quickly and at a cheap cost.

  1. Digital banks or fintech companies that offer BaaS

A strategic partnership with banks is important for final product suppliers since banks are crucial in this technological equation. Additionally, it is a fantastic opportunity for them because they may launch new business lines with lucrative margins and use the data to gain a deeper understanding of consumer behavior.

  1. Financial institutions such as banks are regulated

What benefit does software sharing provide for banks? They now have the option to charge nonbank corporations a set cost for access to the BaaS software or to bill them on a recurring basis for each service used. Due to the scalability, ease of implementation, and enormous potential of Banking as a Service, financial institutions now have the opportunity to enter new markets.

The fact that BaaS is categorized as a platform that comes under the Open Banking framework, which makes this model conceivable and unquestionably transforms the financial services industry, is also notable.

Digital platforms and financial services will be connected through banking as a service, changing the corporate landscape for years to come.