Banking as a service, or BaaS, is a solution that allows non-banking firms to offer banking products to their customers through APIs (Application Programming Interfaces).
It’s a system whereby licensed banks integrate their digital banking services into the products of other non-bank businesses. This way, the non-banking firm can offer financial services such as debit cards or mobile bank accounts without having its own banking license.
Do you want to know more about banking as a service and how the system works? You’ve arrived at the right place!
Banking as a Service
Banking as a service simply means providing banking services through a third party. It enables businesses not involved in the banking industry to use regulated financial infrastructure.
In this system, a bank opens up its services to a business, and the business offers these services to the end consumer. Why not go directly to the bank instead of through the middleman firm? The idea is that the firms can provide more convenient services to the end user.
By using regulated financial infrastructure, companies can offer specialized banking products to their customers and make them available sooner. The company already has loyal customers that may not need much convincing to adopt their banking products.
The banking as a service concept has reshaped the traditional view of banking. It’s fostering competition in the banking sector and compelling businesses to offer better services to their customers.
How does it work?
Banking as a service starts when a fintech firm integrates with a licensed bank’s infrastructure and builds APIs to let other firms connect to the infrastructure. A business plugs into the APIs to create products based on the licensed bank’s infrastructure and offer them to their customers.
The fintech firm building the APIs pays the licensed bank for using their infrastructure outright or through a revenue-sharing model. Similarly, the business pays the fintech firm for using their APIs.
Role of APIs in banking as a service
We’ve mentioned APIs several times, but you might not understand the term. An application programming interface, or API, is a system that enables two software applications to communicate with each other.
APIs let your software product communicate with other products without knowing their underlying structure. Think of it as a contractual agreement between two software applications; If product A sends a remote request in a specific way, product B must respond precisely.
APIs enable developers to plug into the features of other software products. It saves considerable time and effort your software team would otherwise have spent coding a banking platform from scratch.
Examples of banking as a service
There are many prevalent examples of banking as a service products around us. One example is the Apple Card. This is a credit card offered by Apple, the company best known for making the iPhone. It’s an alternative credit card that provides a lot of perks for Apple users, such as no fees and cashback when shopping at Apple stores.
Goldman Sachs is the licensed banking provider whose infrastructure supports the Apple Card. Technically, customers are using a Goldman Sachs card wrapped in the Apple brand.
Importance of Banking as a Service
Banking as a service is driving a lot of innovation in the financial sector. It has enabled companies to offer a broad range of financial products with competitive perks.
Before the advent of banking as a service, corporations found it challenging to financial products. The cost of applying for a banking license and developing digital banking applications from scratch discouraged the majority from attempting.
Nowadays, it’s much easier for non-banking firms to offer banking products. There’s no need to get a license or build an app from the ground up. You can just tap into the APIs of banking as a service providers to create a working product with much less effort.
The relative ease has pushed many businesses to offer banking products and is promoting competition in the sector. To stand out, companies offer many perks such as discounts, cashback, loyalty points, and low fees for the end consumer’s benefit.
In summary, financial services are more democratized than ever, thanks to banking as a service.
Benefits of Banking as a Service
Banking as a service offers many benefits for all stakeholders; the banks, intermediary businesses, and end consumers.
- Drives greater adoption: Banking as a service attracts more customers for the banks whose infrastructure power the financial products. The banks don’t have to do much to attract new customers, as the third-party business will take care of that. They can just sit back, relax, and enjoy the new revenue stream.
- Customer Insight: Banks can understand their target audience better by analyzing a third-party banking as a service provider connected to their infrastructure. What features do they use most or use least? What features do they complement or complain of?
- Brand awareness: Offering a digital banking product is one of the best ways to spread awareness about your brand. Financial products tend to see frequent use by customers, so they’ll consistently be reminded about your brand. It’s a strategic way to attract new customers and retain existing ones.
- Increased profits: Digital banking services can generate a lot of income for a business from fees. There’s ample opportunity to make money by being the middleman between a financial institution and an end consumer. Better off, banking products are usually high-margin after accounting for development and marketing costs.
- Better services: Banking as a service has encouraged eager competition in the financial sector, given the relative ease of setting up a banking product. Hence, companies have no choice but to offer better deals and perks to lure consumers. For example, the Apple Card has no annual, over-the-limit, or late fees, unlike a typical credit card.
Considerations when Selecting a Banking as a Service Provider
There are critical factors to consider when choosing a banking as a service provider. They include;
Security is paramount and non-negotiable in the financial sector. You’ll be dealing with customer funds in a world of increasing cyber threats. Thus, pick a provider with a good security reputation. Avoid anyone with a history of security mishaps and errors.
Financial regulators across the globe impose stringent rules that banking as a service providers must comply with. The intention of these laws are to safeguard the sector from malicious actors and protect consumers.
Look for a provider that complies with regulations in the region you want to offer banking services. For example, if you’re in the EU, ensure the provider complies with GDPR laws governing customer data.
Support and Maintenance
No software is perfect. Bugs and errors can hamper your banking product’s function, and when they do, your customers will call you to rectify the problem. Look for a banking as a service provider that provides adequate support in times of difficulty.
Banking as a service has spurred a lot of innovation in the banking sector. We’ve shown you what it entails, how it works, and its relevance in the modern banking industry. Offering banking services can bring a lot of benefits to your business. If you decide to do that, we mentioned some critical factors to consider to help you select the best banking as a service provider.
You may be interested in: What Are API Integrations? Everything You Need to Know