Digital transformation is making data more accessible across industries, increasing transparency, and improving customer experiences. New technologies allow legacy systems to be opened up to startups and third parties and, in some cases, give consumers direct access to data.
In the financial sector, BaaS platforms have emerged as a key part of open banking, where companies offer more financial transparency options by making their APIs available for third parties to develop new services. Fintechs and digital banks are challenging traditional banking institutions, but legacy banks can use BaaS to turn this potential threat into an opportunity.
What is Banking as a Service (BaaS)?
Banking as a Service (BaaS) is a platform that allows third-party companies and developers to access a financial institution’s core banking infrastructure and services via APIs (Application Programming Interfaces). This enables them to build and offer financial products and services to their customers, such as payments, lending, and account management, without having to invest in and maintain their own banking infrastructure. Banking as a Service is a key component of open banking, which aims to increase financial transparency and innovation by providing more access to banking data and services to third parties.
Understanding the Banking as a Service market
The Banking as a Service market is a rapidly growing financial services industry segment. It allows non-traditional players, such as fintechs, digital banks, and other businesses, to offer financial products and services to their customers by leveraging the infrastructure and capabilities of traditional banks.
This is made possible through the use of APIs (Application Programming Interfaces), which enables third-party companies and developers to access the core banking services of a financial institution. The Banking as a Service model enables these companies to offer services such as payments, lending, and account management, without the need for significant investment in their own banking infrastructure.
This can lead to increased competition and innovation in the financial services industry. With open banking regulations in place, it is expected that the BaaS market will continue to grow as more financial institutions open their APIs to third parties.
Why is Banking as a Service crucial for fintech?
Banking as a Service is vital for fintech companies for several reasons:
Access to core banking services
Banking as a Service enables fintech companies to access the core banking services of traditional financial institutions through APIs. This allows them to offer their customers financial products and services, such as payments, lending, and account management, without having to invest in and maintain their banking infrastructure.
Building and maintaining a banking infrastructure is a costly and time-consuming process. Banking as a Service allows fintech companies to sidestep these costs and focus on developing their own value-added services and customer experiences.
Compliance and security
Banking and financial services are heavily regulated industries. By leveraging the banking infrastructure of traditional financial institutions, fintech companies can ensure compliance with regulations and provide customers with the same level of security and protection as traditional banks.
Faster time to market
Banking as a Service enables fintech companies to go to market faster, as they can leverage the existing infrastructure and services of traditional financial institutions. This allows them to focus on developing and marketing their own products and services.
Increased competition and innovation
BaaS can lead to increased competition and innovation in the financial services industry, as non-traditional players are able to enter the market and offer new and innovative products and services.
The importance of Banking as a Service startups
Banking as a Service startups play a significant role in the financial services industry by providing a platform for non-traditional players to enter the market and offer new and innovative products and services.
BaaS providers mainly concentrate on just one or two stages of the value chain, in contrast to traditional banks that own the full value chain. Successful Banking as a Service companies nowadays tend to follow one of four patterns:
- For use by aggregators, other banks, and non-financial businesses, providers make their banking license, goods, operations, and/or technology available (NFCs).
- In addition to acting as providers, providers-aggregators combine their own capabilities with those of other suppliers to create a comprehensive “out-of-the-box” solution.
- Distributors use their connections with end customers to offer distinctive financial service offerings.
- Distributor-aggregators improve their offerings by including fresh goods or cutting-edge technologies from various suppliers.
Some of the key ways in which BaaS startups are important are the following:
Disruption of traditional banking
BaaS startups are able to challenge traditional banking models by providing customers with more cost-effective, transparent, and accessible financial services.
How AI revamps financial services and banking experiences
Banking as a Service startups are often at the forefront of new technologies and business models in the financial services industry. By leveraging the capabilities of traditional financial institutions, they can develop and offer new and innovative products and services.
BaaS startups increase competition in the financial services industry, which can lead to better products and services for customers.
Greater financial inclusion
Banking as a Service startups can provide greater financial inclusion by making financial services more accessible to underbanked populations and small businesses.
Meeting customer demands
BaaS startups are able to meet changing customer demands by providing digital-first, seamless, and personalized services.
Building a sustainable future
Banking as a Service startups are not just focused on short-term profit but also on building a sustainable future for the financial industry.
What’s the role of Banking as a Service in Europe?
As consumer preferences change and new technologies emerge, more companies are offering Banking as a Service, and new players are entering the European market. It is important for bank executives to take advantage of their position and enter the BaaS market now before they fall behind.
Recent technological developments have led to an increase in demand for Banking as a Service. In order to meet this demand, BaaS providers are offering an API-based suite of banking solutions that can integrate deeply into their partners’ operations, including sharing data and revenues. While many fintechs have been at the forefront of this trend, traditional banks have also begun to take advantage of this opportunity and are increasing their market share.
One example of a bank leveraging partnerships to enter the Banking as a Service space is a leading European bank that formed a partnership in 2020 with an international marketplace in Germany to offer two lending options that are seamlessly integrated into the marketplace platform. Analysts predict this strategic partnership will result in a 30% increase in the value of the European bank.
Another example is a US bank that partnered with a leading technology company in 2019 to launch a fully embedded credit card with no fees, daily cashback, and seamless integration with mobile devices. As a result of this partnership, the bank received the highest customer satisfaction rating in the Midsized Credit Card segment in 2021, according to a McKinsey study.
Best Banking as a Service companies
These are some of the best Banking as a Service providers you can find right now:
Railsr, a London-based provider of Banking as a Service, operates in the U.K., Europe, and the U.S. The company has built its own proprietary infrastructure, which is not built on top of older software, unlike some of its competitors. Railsbank offers a range of Banking as a Service products, including the ability to make fast payments by connecting directly to payment rails and the ability to offer Buy Now Pay Later (BNPL) functionality. The company has been funded through debt and venture capital rounds with notable investors such as Visa and is seeking to raise an additional $100 million in financing in 2022.
Finastra is a Banking as a Service (BaaS) provider that offers FusionFabric.cloud, an open developer platform, and an app marketplace through its FusionStore. Headquartered in London, the company has operations worldwide, including in the U.S. Finastra serves 90 of the top 100 global banks, and has launched Finastra Managed Services (FMS) on Amazon Web Service (AWS).
Marqeta is a provider of physical, virtual, and tokenized credit cards, debit cards, and prepaid debit cards that offer customized rewards, card controls, and customer preferences. Additionally, it serves as a payment processor for many industries, using its modern, embedded, open-API BaaS platform to serve digital bank and non-bank customers. The company has established strategic partnerships with several well-known brands, including Uber, Uber Eats, and DoorDash, to serve as their card-issuing partner.
BBVA is a pioneer bank in the BaaS space. BBVA Open Platform is a BaaS platform serving U.S. and global customers. It was integrated into the Uber app in Mexico, providing Uber drivers and delivery partners with a Driver Partner debit card which allows them to access their earnings, loans, and gas discounts. The BBVA Open Platform, a BaaS system created by the bank, powers digital-only banks and non-bank applications in the U.S.
Open banking vs Banking as a Service
Open banking refers to the practice of allowing third-party companies to access a bank’s customer data and account information through the use of Application Programming Interfaces (APIs). This enables customers to share their financial data with authorized third-party providers, such as fintech companies and other financial institutions, in order to access new and improved financial products and services. Open banking aims to increase competition in the banking sector and provide customers with more choices and convenience.
However, Banking as a Service is a business model where third-party companies, such as fintechs and other non-bank entities, can offer banking services to their customers without becoming a bank themselves. BaaS providers offer a range of services, such as account opening, compliance, and lending, and can use these services to create their own financial products and services.
The concepts of open banking and BaaS are often confused as both involve banks connecting to non-banks through APIs. However, the two models serve different purposes. BaaS allows non-bank companies to integrate full banking services into their own products, whereas open banking allows non-bank companies to access and use the bank’s data for their own products. These non-bank companies are referred to as Third Party Service Providers (TPPs) in the financial industry.
In conclusion, the “as a service” model, of which Banking as a Service is a prime example, is becoming increasingly prevalent in today’s business landscape. BaaS allows non-bank companies to offer a range of banking services to their customers without having to become a bank themselves. This enables them to create more comprehensive and customized financial solutions, which can be integrated into their existing products and services.
The BaaS model is particularly important in today’s data-driven and digital business environment. It allows companies to access customer financial data and use it to create more personalized and targeted products and services while also enabling them to offer digital-only banking services that can help them reach a wider customer base and increase their market share.
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The “as a service” model, in general, enables companies to focus on their core competencies and outsource non-core functions, such as banking, to specialized providers. This allows companies to reduce costs, increase efficiency, and stay competitive in a rapidly changing business environment.
Overall, Banking as a Service is a powerful tool for companies looking to stay competitive and relevant in today’s business landscape. The “as a service” model, of which BaaS is a prime example, is becoming increasingly prevalent and allows companies to outsource non-core functions to specialized providers, reducing costs and increasing efficiency.