Banking as a Service (BaaS)
has been built on top of the concept of software as a service (SaaS), which enables users to subscribe to programmes and applications over the internet rather than having to buy them outright and install them on their computers. BaaS is the plug-and-play equivalent offering banking and financial services. Go to see full list of 172 Baas companies
BaaS has rapidly gathered market presence in the past few years as an on-demand service that enables users to access financial services over the internet. It typically does this through banks opening up their systems to third-party service providers such as fintech (financial-technology firms), that are looking to provide retail banking services to end customers.
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.
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.
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 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.
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.
The service provider
that offers 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 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 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 monetising 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 digitalisation 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.
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 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.
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