Banking as a Service, Explained: What It Is & Why It’s Important

Lilya Khimchenko

Lilya Khimchenko

CMO

The finance sector is rapidly changing under the influence of technology. More and more financial services appear daily, increasing their global value to $26.5 trillion by 2022.

Banking as a service is one of the means to make financial services more accessible to consumers. Banks enable this by allowing third parties to access their application programming interfaces (APIs).

BaaS is a decent opportunity for banks and companies that want to provide financial services to their customers. The first get more money transfers and their services’ use, and the latter, usually non-banking institutions, attract more loyal customers.

With this in mind, BaaS is a promising solution that will grow from $2.41 billion in 2020 to $11.34 billion in 2030.

Today we’ll discuss banking as a service definition, how it works, and share popular examples with you. Drawing on Arounda’s extensive FinTech expertise, we’ll also make predictions for the BaaS future. So, read on for more insights on this topic from our five-year experience in the industry.

What Is Banking as a Service?

Banking as a service or BaaS is a business model allowing companies to provide financial services usually associated only with banks or financial institutions.

That is, a bank or other financial organization sells its software or its license to third parties. This way, non-financial companies can access applied programming interfaces (APIs) and provide core online banking services, like money transfers, loans, etc.

The best way to understand this definition is through real-life examples. Imagine you own a travel agency. To make your customers’ interaction with your brand easier, you can add a payment function on your website through the available APIs of banking institutions.

How Does Banking as a Service Work?

For the BaaS business model to work properly, there are typically three parties involved, namely:

  • Traditional banks

  • BaaS providers

  • FinTech or non-FinTech organizations

Now let’s figure out what each of these parties does.

Banks own the license required to provide financial services. They guarantee adherence to financial industry regulations and provide a solid financial framework. As a result, these institutions allow BaaS providers to access their infrastructure, i.e., license, server, and communication equipment.

BaaS providers, in turn, act as intermediaries between traditional banking institutions and FinTech or non-FinTech businesses. They use APIs to securely transfer data between these two parties and provide all the necessary tools.

FinTech or non-FinTech organizations interact directly with the financial services’ end consumer. They integrate BaaS solutions into their products to provide a seamless customer experience.

Sometimes a traditional financial institution can act as a BaaS provider. Then banks cooperate with businesses directly. This approach gives financial institutions a competitive advantage in the market, as they do not need an intermediary to deliver their BaaS solutions.

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Banking as a Service vs. Open Banking vs. Platform Banking

BaaS and open banking are concepts that are often confused or used interchangeably. Yet, they’re all about details. So let’s see what the difference is.

BaaS and Open Banking: Similarities and Differences

Banking as a service FinTech is also known as white-label banking. It’s since the provision of financial services by a non-banking company takes place officially through a purchased license. But this does not make the BaaS model equivalent to open banking.

Although open banking and banking as a service have similarities as they provide non-financial institutions with access to their APIs, these concepts serve different goals. 

The BaaS model enables non-bank organizations to integrate financial services into their digital products. In the case of open banking, non-financial institutions only use bank data for their products.

Let’s look at practical cases to understand the difference better. Let’s say you have an app for selling event tickets. You can make it easy for your users to purchase these tickets via BaaS or even allow them to buy them on credit.

It won’t work with open banking, as this model does not provide a full banking license. But you can own a wealth management app and connect it to open banking data. This way, your users will get benefits like up-to-date information about all their transactions within your application.

Platform Banking Explained

Platform banking is yet another story. It’s when traditional banking institutions use FinTech companies’ services to expand their own financial products’ capabilities. For example, banks may integrate third-party AI-driven finance assistants to provide clients with instant support.

That is, platform banking is the complete opposite of BaaS. In this case, the financial institution integrates third-party services into its banking product.

BaaS, Open, and Platform Banking: Brief Recap

Let’s now quickly recap all the above info:

  • BaaS is when third-party companies integrate financial services into their products.

  • Open banking is when third-party companies use bank data for their products.

  • Platform banking is when banking institutions integrate third-party services into their products.

Banking as a Service Examples

Banking as a service has many real-life applications. Use cases for this model go far beyond money transfers and payment options. Let’s look at some BaaS examples in non-banking businesses. Here are a few possible scenarios:

E-Wallets Connected to Banking Accounts

Platforms with a large user base can leverage banking as a business model for various purposes. For example, this is the creation of an electronic wallet through existing banking accounts. As a result, users can make transfers directly on the marketplace without going to their bank’s application or website.

Debit and Credit Cards Issuance

One of the key banking as a service benefits is the ability of non-financial organizations to issue credit and debit cards to their customers. A notable recent example is Apple’s branded credit card.

Loans Offering

Using BaaS, non-bank businesses can issue loans to their customers. For example, such an offer would be an excellent solution for travel or airline companies. Now consumers don’t have to worry about funds for their trips but take a loan and plan their journeys.

Investments Services

Non-financial companies can use banking as a service to offer investment tools to their customers. With their help, clients can develop an investment plan or create an investment portfolio.

Customer ID Verification

Financial technologies also enable non-banking companies to avoid the risks associated with payment failures. Now with BaaS, businesses can verify the payer’s identity before the money transfer starts.

The Future of BaaS and How to Become a Part of It

It appears that banking as a service has a bright future. A growing number of non-financial companies are turning to this business model. And there are several reasons for this.

Increasing Demand Among Customers

First, it is worth considering the increased client need for such services. Modern internet users are very demanding of digital products and appreciate comprehensive, all-in-one solutions. BaaS is just about that. It is the ability to integrate financial services into any application.

FinTech and BaaS Industries’ Growth

We are also witnessing the rapid development of the BaaS market and the FinTech industry in general. Banking as a service will grow by 17% each year in the forecast period from 2020 to 2030. In addition, the BaaS model is almost the only way to enter the market for financial technology startups.

Benefits for Financial Institutions

Another reason BaaS has potential is that traditional banking institutions use this business model for their benefit. Banks receive substantial income from the sale of licenses and commissions charged. Financial institutions also experience high market competition and leverage BaaS to gain an advantage.

Therefore, banking institutions and non-financial businesses should unite. Both parties will benefit, resulting in increased profits and satisfied, loyal customers. Such cooperation will soon likely become the new norm.

You can also become a part of this growing industry by offering effective BaaS platforms for non-banking organizations. Or are you that non-finance organization that needs banking as a services solutions? In any case, you’ll benefit from setting up APIs for your business or offering them to other companies.

Final Thoughts

Banking as a service is a decent opportunity for non-financial businesses. That is how companies can use financial institutions’ reliability and infrastructure to provide financial services to their end customers.

Consumers, in turn, become more loyal to businesses as they receive convenient and instant payment options, loans, and many other banking operations. The BaaS model is a solution that benefits everyone involved.

If you aim to become a BaaS provider or plan to integrate financial services into your digital product, we can help. Arounda gained extensive experience in the FinTech sector, working with startups and established businesses for over five years. That’s why our clients choose us for BaaS solutions. If you want too, don’t hesitate to contact our team.

Lilya Khimchenko
I make sure our clients get the high-quality result from the beginning stage of the idea discovery & strategy to the final digital product.

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