Banking as a Service
The fintech space has been a hot sector for a while. It witnessed a doubling in its fundraising numbers to $3.7 billion in 2019, and seems to be continuing on its upward trajectory. While the term itself is a broad label for tech solutions encompassing finance and banking domains, in this era of digital transformation, something called ‘Banking as a Service’ has emerged. Better known as BaaS, it essentially refers to the concept of enabling third parties to connect with the bank’s systems to provide banking services to their customers. The concept is inspired by the term SaaS (Software as a Service), allowing users to subscribe to software products rather than buy them outright.
In simpler terms, third parties, which may be businesses or FinTech companies, would provide banking offerings to their customers by building on top of the existing regulated infrastructure of licensed banks. The connection with the bank’s system is made via Application Programming Interfaces (APIs). This allows financial data to stream between users and banks. Therefore, there are three entities that are involved in bringing an enhanced user experience to the customer:
- The licensed bank which provides the infrastructure.
- The intermediary or the BaaS provider that maps out banking services using APIs. This provides an ecosystem for the FinTech company.
- The FinTech company that builds upon the bank’s infrastructure and customises banking offerings for the customers.
What does BaaS have to offer for businesses?
- The most crucial advantage of BaaS is that fintech companies do not need to spend additional capital and resources building the core infrastructure. This means that they would focus on innovating and enhancing their products for better user experiences. This is particularly useful for startups since they would be able to achieve outcomes with lower capital investment.
- Dealing with complex licensing and compliance can be a hassle for many fintech firms. Partnering with licensed banks can help them overcome some of these regulatory complexities and focus on building great products.
- Businesses can also expand their customer base as they would provide a broader range of offerings and better user experiences. Naturally, this assures higher potential for improved revenue outcomes.
- Allowing third parties to access their platform for a fee can serve as an additional revenue source for banks. As a result, banks would also be able to lower their costs. It’s truly a win-win.
- Another noteworthy aspect is that the demand for personalized banking has been consistently growing. According to Accenture’s 2019 Global Financial Services Consumer Study, one in two people would like to receive personalized financial advice from banks. Migrating to banking SaaS would help both banks and FinTech companies unleash their potential. Businesses will be able to offer personalized experiences to customers, serving essential insights and reports on valuable metrics involving spending habits and customer profiles.
Should you move your business to BaaS?
According to the World Retail Banking Report 2020 by Capgemini and Efma, 70 percent of the customers choose non-traditional options for lower fees, 68 percent for user experience, and 54 percent for speed. Simpler banking options, open banking platforms, and industrialisation have. Therefore, it appears that the time is right to shift to BaaS and consequent improvements in banking offerings.
But this shift does not come without challenges. In developing countries, the market penetration challenges for internet and fintech services, and the state of financial and digital literacy will need to be addressed as technological innovations accelerate. Simultaneously, banks’ tech infrastructure also needs to be on par with the level in developed countries.
BaaS and The Democratisation of Finance
Banking as a Service could play a crucial role in the democratisation of finance. It is not only a solid opportunity for banks to accelerate their digitisation process but can also prove crucial in their long-term growth strategy. Fintech brands can forge lasting partnerships with banks, creating brand value, and pioneering innovations. With increasing digitisation, more stakeholders, and a platform model, the incorporation of BaaS could herald a new banking age. At Salt, where the future of banking meets ease of hands, we couldn’t be more excited to both participate and observe the incoming revolution.