A Comprehensive Guide to Banking as a Service (Baas)

Quick Rundown: With approx. $7 trillion market opportunity, Banking-as-a-Service (BaaS) can’t be ignored. It is empowering countless businesses by embedding financial features into their platforms and delivering a convenient and seamless banking experience. Don’t miss out and read on to discover what exactly BaaS is, its benefits, challenges, top providers, etc.

It might be challenging to differentiate between the various new banking and fintech business models that are appearing on the market due to the rising number of such models. The phrase "banking as a service," in particular, causes many people to continue to scratch their brains. But don't pick at it any longer! In this comprehensive review of the new banking business models, we are here to help you navigate the complex maze of jargon that surrounds them.

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What is Banking as a Service?

In a nutshell, Banking as a Service definition is white-label banking, a solution that enables companies who are not banks to incorporate financial services into the goods they sell. By incorporating digital banking into their operations, for instance, businesses that are not authorized to operate as banks can still provide consumers with financial services such as loans and payment processing. Banks have the option of either developing their own platforms or collaborating with third-party suppliers who offer BaaS solutions in order to make this a reality.

The following is a list of digital products that many of us use in our day-to-day lives and that frequently employ Bank as a service as its foundation:

• BaaS acts as the supporting structure for the creation of financial apps. A well-known example of this type of program is Betterment, which is a financial investment platform.

• The program that processes remittances also makes advantage of BaaS technologies. For example, one of the most successful companies in the remittance industry, Wise (formerly known as TransferWise), has just lately joined the market for mobile banking.

• Without Banking as a Service, it would be hard to create current mortgage software as well as mobile applications for money lending.

The bank is responsible for providing and supporting all of these services, but a third party is the one that really puts them into practice. The question therefore is: why is there a middleman? In addition to that, aren't they required to have a current banking license? Let's break down the model step by step so that we have a better understanding of how it functions.

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How Does Banking as a Service Work?

Typically, you will need all three of the following components in order to have a full experience with BaaS:

• Authorized financial institutions

• BaaS providers

• Fintech Brands

A bank that is also the holder of a license will lend that license to a BaaS provider so that the latter can offer its customers access to the bank's financial products. APIs, or application programming interfaces, are used to facilitate communication between the provider and the bank's infrastructure. The provider then offers various financial solutions that can be utilized by fintech companies. These, in turn, provide their end clients with access to banking functionalities that they can use.

Quite straightforward, isn't it? The following exemplifies the contributions made by each member to the discussion:

Banks create a very secure and well-organized financial framework since they are both mature ecosystems and subject to a significant amount of regulation. They also ensure compliance with the most recent rules governing the industry and serve as a source of vital information regarding customers.

Providers make available to their customers a comprehensive answer for integrating financial services into existing platforms. These are the following:

• User interface design
• Products
• Instruments for risk evaluation and management
• Management of customer accounts

Fintech companies build the capability of BaaS into their products, which results in an effortless experience for the consumer from beginning to end.

A number of banks, having become aware of the current digital and Fintech trends, have begun creating their very own BaaS platforms, which make it possible for fintech companies and other enterprises to gain direct access through APIs. In a market where fresh fintech firms are continuously emerging, an approach such as this gives a competitive advantage for more established financial institutions.

However, it is essential for a firm to secure the highest level of security at every level, regardless of the BaaS solution that it adopts. For additional information, feel free to read our post on the various security options for developing of fintech app.

Banking-as-a-Service (BaaS) Market Size and Forecast

BaaS services are becoming increasingly popular as customer discontent with old products and services continues to rise; the following are some crucial statistics on the current state of the banking as a service market:

• 30% of clients are considering changing their banking relationship.
• 42% of consumers have made use of a "Buy Now, Pay Later" service at some point.
• 2X ROAA for banks that are concentrating on BaaS offers.

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Banking as a Service vs Open Banking vs Platform Banking

Because these terms seem quite similar to one another and because you will be exposed to them, we felt that a brief explanation was necessary. In a nutshell, the following are the distinctions:

• The term banking as a service architecture refers to a business model in which clients interact with a solution provided by a service provider that is integrated into a vendor's product. For example, when you finish buying something on eBay and pay for it with your PayPal account.

• Open banking is a situation in which a non-bank receives the customer's data from a financial institution via an application programming interface (API), but the non-bank does not provide any banking services. For example, when utilizing an application for personal budgeting.

• In the meantime, "Banking as a platform" refers to a digital ecosystem that eliminates the need for a BaaS provider by enabling third-party solutions to interact directly with the infrastructure of a bank. Banks are able to provide their consumers with a greater variety of options by operating in this manner. Such is chatbots or third-party financial fintech services.

Benefits of Banking as a Service

The fact that BaaS is a digitally inventive service is, of course, where the bulk of its value lies. It also makes a lot of sense for player across the board to be investing in technology. The management of a company's financial affairs is an indispensable component of any enterprise, and all parties involved stand to gain major advantages if the process can be simplified. These can also be counted as banking as a service example. Let's take a more in-depth look, shall we?

• The Final Consumers

The user experience can be improved by using a Banking as a Service platform in a number of ways, including increased speed, ease of use, and breadth of choice in terms of available payment methods. Never before in history have purchasers had access to such a wide variety of tools designed to make each and every transaction simple and enjoyable. The approval of loans, for example, may now be completed entirely online, which is especially useful in light of the fact that physically going into a bank is generally not advised.

• Brands/Businesses

Brands that have incorporated finance within their platforms are not only able to win the loyalty of their clients, but they are also able to earn additional revenues from these integrated financial solutions. They are also making significant cost reductions in the infrastructure that is required to support traditional banking services.

• Fintechs

Fintech firms have the unique possibility to deliver their financial solutions under tight schedules and on a reasonable budget without needing to secure a banking license beforehand. This is a significant competitive advantage for these companies. The BaaS layer facilitates the essential flow of data in both directions between the end customers and the banks.

• BaaS Providers

By 2027, it is anticipated that the market for digital transformation in banking platforms on a global scale will reach $8.67 billion. The earnings that can be made from the transaction fees that Banking as a Service providers collect place them in a favourable position for success. Not to mention the fact that the forward-thinking Fintech App ideas that are developed by TPPs are what drive the entire industry ahead.

• Financial Institutions

The implementation of BaaS presents a significant opportunity for financial institutions, particularly banks, to increase their profits. Because of things like the providers' commission fees and the other revenue streams that they are able to tap into because of this forward-thinking strategy. Additionally, the benefits of innovation can assist in overcoming problems caused by legacy systems and securing a better position in the highly competitive market of today. And last, the system's two-way flow of user data provides financial institutions with the opportunity to obtain new insights into the purchasing and investing behaviour of their respective consumers.

Challenges of Banking as a Service

There are many obstacles to overcome while putting a BaaS plan into action. We can count ourselves fortunate that the accompanying solutions clear the path for user-friendly financial goods and solutions.

Let's dive deeper.

• Bringing Traditional Banks Up to Date

The fundamental systems used by the vast majority of traditional banks today are antiquated. They are not compatible with the technologies that are used today. This might be a significant problem when putting the BaaS model into action because it would make it more difficult to integrate third-party services.

Traditional banking systems could benefit from a more up-to-date architecture in the future thanks to Banking as a Service. The exposure of services, goods, and processes such as APIs would be facilitated as a result of this.

• The Shifting Functions of Key Players in the Financial Industry

Recent studies have shown that traditional banking institutions are gradually losing the "customer trust" edge they once held over participants in the fintech industry Given that tech trends for CIOs and CTOs are not being followed. On the other side, numerous technology businesses are expanding their operations into the financial sector because of the high levels of client trust they have earned ( Eg. Apple Card).

In addition to this, BaaS requires working together with several third-party players. The functional capacities naturally share a lot of similarities with one another. In addition, many businesses offer their products under a white label, which is another term for private labeling. This may lead to confusion among final customers.

Keeping all of these considerations in mind, the future of BaaS reveals a significant shift in the obligations of the players. There is a possibility that banks will transition from the function of "maker" to "assemblers." This indicates that they will not restrict their attention to the primary banking services they offer. Instead, financial institutions will assemble value-added services out of the services provided by their business partners.

• Well-Defined API Strategy

It's not easy to open a bank or a business (middleware) using application programming interfaces (APIs). It is necessary to expose the operational processes and business capabilities to their full potential. However, the majority of organizations experience difficulties while developing an API strategy.

When developing a strategy for using an API, the ease of integration should be the primary focus. It should be able to give the highest possible business value while simultaneously minimizing the number of onerous integration factors. It is possible that the worldwide standardization of API approach will be part of the future of the finance industry.

Taking into account everything that could potentially have a role, the BaaS industry does not appear to be slowing off any time soon. It will be fascinating to observe how the BaaS model evolves over the next ten years as a result of the progression of technology.

Top Banking as a Service Providers

As the concept of banking as a service (BaaS) gains traction, new service providers and platforms developed by banks enter the market. While providers of BaaS have a closed architecture, platforms are focused entirely on sharing APIs with their customers. Here are some of the most important participants.

• Fidor Bank
• The Bancorp Company
• SolarisBank
• Treezor

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Build Your Next Banking as a Service Platform with RadixwebBanking as a Service is helping pave the way for a new reality in the fast-evolving field of digital financial services. Building integrated FinTech software solutions that are both functional and efficient is one way for financial institutions, fintech companies, service providers, and brands to create synergy. Everyone will be able to reap their own individual benefits in a world that is interconnected, provided that they rapidly alter their strategy.BaaS providers will be able to attract new clients as a result of the increased customization of financial services to better represent the requirements of customers. The benefit that retailers will receive as a result of improved customer profiling and additional revenue sources is well earned. All that is required of merchants is to cultivate productive working connections with a number of important service providers and to effectively manage those partnerships. Even more clear are the benefits that will accrue to the banking industry as a result of collaborating with other providers and brands in order to reach a significantly larger audience.We are prepared to contribute our time and knowledge to the development of your BaaS solution. Get in touch with us as soon as possible, and we'll talk about your project!