What is Banking as a Service?

In the banking as a service (otherwise known as BaaS) model, the customer is owned by a non-banking financial services provider which integrates its services with facilities from one or more banks. BaaS is the plug-and-play equivalent offering banking and financial services. BaaS means customers are paying for services as they use them, rather than buying applications. Many finance service and banking providers are now embedding financial services into their offerings to enhance the end-to-end journey for their customers.

 

How does banking as a service work?

Banking as a service (BaaS) involves three parties – a Third Party Provider (TPP) which offers a brand of services to end-users; a service provider that supplies modular financial services to TPPs on cost-per-use service; and a registered bank that provides banking functions to service providers, such as payments, back-office operations, risk management, and customer service. Most importantly, the bank is the entity that provides regulatory compliance for the whole BaaS platform.

 

The bank grants access to its systems to a TPP, which means the TPP can use its APIs to interact with customer data. With this access, the TPP can offer banking products and services using its systems.

 

BaaS explained

Built on the concept of software as a service (SaaS), which enables users to subscribe to function-specific services over the internet rather than having to buy and install applications on their computers, BaaS is the plug-and-play banking equivalent that enables users to access financial services over the internet. It typically does this through banks offering up their infrastructure to third-party service providers such as financial-technology firms (fintech), that are offering retail banking services, typically through the use of application programming interfaces (APIs).

 

The list of best online banking platform providers includes new players such as Mambu, 10X, Thought Machine, and FinXact, as well as products from the traditional core platform vendors. These promise to help banks radically modernize and accelerate the benefits through higher developer productivity and the removal of technical hurdles. They can achieve further efficiencies by leveraging cloud-based services, which enable them to deploy new products and scale infrastructure quickly and use development tools that support automation.

 

Third parties can provide various financial services to their customers by building on top of the existing regulated infrastructure of licensed banks. Service providers from virtually any sector can now incorporate the full range of financial services for their customers and for the customers themselves to conveniently access those financial services even if they are not customers of the underlying bank. With BaaS, service providers can simply pick and mix from a range of financial products and then tailor them to the needs of their customers; in doing so, they can create new financial platforms of their own.

Below is a list of best online banking platform providers currently offering products to both banking as a service and banking as a platform customers:

Banking as a Service - list of 172 BaaS companies

Banking as a Service Providers

Banking as a Service Providers that offer the core banking capabilities and the brand that faces the consumer can be different entities. For example, Grab, which began as a ride-hailing service in Singapore, has embedded payment services and its own wallet into its Uber-like app, so it now also provides e-commerce, mobile and point-of-sale payment services through an API-driven platform. For Grab, the Dutch payment company Adyen, with its own banking license, functions as the license holder.

 

It has been projected that BaaS currently produces $29 trillion in the e-commerce market and TPPs are producing solutions that offer customers more choice and greater convenience.

 

This structure is useful for service providers that want to market themselves as being as similar as possible to a licensed bank, with comparable capabilities, offering equivalent services such as current accounts, savings facilities, and debit and credit cards. With BaaS, the payments company offers this range of services without actually having to hold a banking license itself. By engaging with a regulated bank via the BaaS platform, the payments company has the advantage of offering banking products to the public at a lower cost because it saves time and money by not having to obtain the necessary regulatory licenses required to offer certain banking products and services. It can also rely on the technology infrastructure of the bank which frees up time and cost for the payments company to focus on its business strategy.

 

For banks, the benefit is that they can build relationships with the fintech sector, allowing for collaboration rather than competition. As well, by monetizing the BaaS facility, fintech activity becomes a revenue source for the banks. Fintechs also have the flexibility to respond quickly to the changing needs of customers, and so collaboration with them allows banks to continue benefiting from mobility embedded in the platform.

 

Banks have a high cost of maintaining compliance with regulation and despite spending billions, often do not build developer and brand-friendly APIs. It is this gap that the Banking as a Service providers fill. Some banks have already recognized the digitalization trends that have swept across the industry in recent years and as a result, will be better positioned to support TPPs than those that have stuck with more traditional systems and infrastructure, and so will be able to move into the BaaS arena more seamlessly.

 

The benefit for end-customers is that they receive the best of both worlds: the convenience of financial services through an on-demand digital platform and the depth and robustness that come from a licensed, regulated banking institution.

 

BaaS offers a radically different approach to financial services, that dismantles the traditional banking model and places its component pieces into the hands of a wider range of players.

 

Third-Party Provider

As a typical model, BaaS will involve a Third Party Provider (TPP) gaining access to a bank’s systems, which means the bank then allows the TPP to use its APIs to interact with customer data. Once the TPP gains access, it should be able to create and offer banking products and services using its systems. Some of the most important banking functionalities that can be made available to service providers include payments, back-office operations, risk management, compliance and customer service.

 

There are three basic elements involved the banking as a service business model:
Brand: The company providing the services embeds financial APIs into its customer offering;
Service provider: The company that supplies modular financial services to brands as a service;
License holder: Typically, a licensed bank that partners with service providers which in turn enables partner brands to provide compliant financial services.

Banking as a Service vs Open Banking

This has many similarities to the new form of finance management known as Open Banking, but there are distinct differences between the two. BaaS is primarily a platform that exists under the umbrella framework of Open Banking. Open Banking is focused on offering transparency to customers by providing them with information on the various features of different bank accounts and BaaS requires this structure in order to gain the trust and confidence of the customers. One primary difference between BaaS and Open Banking is that the latter’s customers are transacting directly with their own designated banks, whereas with BaaS platforms it is the service provider itself with which customers interact.

 

Platform Banking:

Until very recently, there was only a single general definition of what actually defines banking in terms of how it presents itself to the customers. People and companies dealt with physical banks through face-to-face interactions in bricks-and-mortar branches. Now, with the rapid growth of a new model of banking that is based on digital banking as a platform that interfaces through computers and mobile devices, there is a split, which can be phrased as comparing banking as a platform vs banking as a service.

 

Platform Banking Defined:

Platform banking can be described in terms of the relationship between the bank and the customer, where the bank ‘owns’ the customer and provides all the required services.

 

Banking as a Platform

The platform model is based on connection rather than control. Outside of banking, familiar companies like Airbnb and Uber use this to run scalable, cost-effective operations that connect consumers directly to the services they want.

There is now a driving force that will make every bank, at least to some extent, require a platform model. Starting in 2018, the PSD2 regulations in Europe force banks to open their systems via interfaces for account information, services and transactions. Banks are becoming banking platforms by way of regulation, to which third-party companies have access.

 

In banking as a platform, the bank is seeking to provide services and experiences to its customers through a digital interface over the internet. By either designing and building suitable applications, or engaging third-party software and services technology firms, the bank will provide applications, servers, storage and networking to open its services via the internet.

 

With digital banking as a platform, banks focus on their core functions, which are to deliver products, services and experiences while leveraging their infrastructure, platform and scale. The goal is to gain a foothold in the digital banking sector while reducing development time and cost, and to provide most products and services across a single portal for the customer.

 

Probably the most advanced platform for the banks is the payments platform, which created a change in the way payments are made. It has been responsible for making payments cheap, real-time, fast, and simple enough to complete on a mobile device. Numerous examples of payments platforms abound, with the most prominent being PayPal, Square, and Apple Pay.

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