What is Banking As A Service (BaaS)?

What is Banking As A Service?

I recently had a conversation about non banks offering financial products and someone asked, how does this work? If they aren’t regular banks do they have to build the infrastructure, what about regulations and so on. This led to us talking about banking as a service, how it works and some other questions. I had some questions myself so I decided to do some research and find out all about it.

What is Banking As A Service (BaaS)?

Simply put Banking As A Service describes a model in which licensed financial institutions provide access to their systems to non banks or fintechs via APIs. This allows the non banks to offer financial services to their customers.

Let’s look at a simple example, if a supermarket wanted to offer credit cards to their customers, they could partner with a bank to offer those services. They integrate the bank’s systems with their platform using simple APIs and they build their own tools and interfaces for their customers. Oh and API stands for Application Programming Interface and is simply a way for two applications to talk to each other.

So why would a non bank want to offer financial services? Well customer experience for one. They can improve their customers’ experience by providing seamless integration of financial services and products in the customer journey and of course boost their revenue. We are seeing customers increasingly use services from non banks vs banks for things like for loans, buy now pay later (BNPL) vs traditional credit cards so customer behaviour and expectation is definitely changing.

Some other advantages for non banks are:

  • Improved customer loyalty: By offering these services you streamline the customer journey, improve the customer experience and this leads to lower customer churn rates.
  • Reliable services: You no longer have to rely on third party platforms to provide these services so you have full control over the financial services products you provide.

What Does BaaS Mean For Traditional Banks?

In this wonderful new world, what does this mean for a traditional bank? Why would they want to open up their systems to a non bank who could potentially steal their customers? Let’s look at the potential advantages for traditional banks.

  • Increased Revenue: BaaS offers new streams of revenue for banks because the banks can charge the non banks or fintechs for access to their infrastructure and data. For example 43% of banks prefer to work in a model which allows them to charge a fee per API transaction.
  • Cost Savings: With BaaS, banks can benefit from partnerships with non banks as they gain access to a new customer base and can save up to 95% on customer acquisitions costs.
  • Improved Customer Insights: As stated above when a bank integrates with a fintech or non bank they gain new customers and by extension gain access to the new customer’s behaviour such as buying patterns. With this new information the banks can create customised products and improve customer experience.

The Future Of BaaS

The fintech and banking as a service markets have boomed during the last couple of years. Consumers are looking for digital-first financial services and organisations looking to deliver outstanding digital experiences for their customers. Adoption of the BaaS platform within fintech corporations increased at an incredible pace and the amount of funding available is a strong indication this pace is not slowing down anytime soon. In Q1 2021 $22.8 billion raised, through Q3 fintechs raised a record $96.5 billion, and global fintech funding for all of 2021 hit $131.5 billion.

The global banking as a service market size was valued at $2.41 billion in 2020 and is projected to reach $11.34 billion by 2030. Increased use of digital transformation technology in banks and streamlining financial services is accelerating the growth of the global banking as a service market. In addition, improvements in fund transaction services across the U.S. and different developing nations is positively impacting the market growth.

From what I can see the traditional banking business model is not broken, yes the rise of the fintech industry has challenged the old way of operations and meeting customer expectations but there are still opportunities to be had. The traditional banks have the infrastructure but the fintechs have a better handle on what the customer needs. It is time for a new way of thinking, instead of looking at the non banks or fintechs as competitors, maybe view them as partners in this new world.

All that said, I can’t wait to see how the market unfolds over the next couple of years, exciting times!

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Banke Ajayi

Banke Ajayi

Project manager with over 15 years experience. Currently learning about blockchain technology, web3 and building stuff on Solana. Email — contact@bankeajayi.com