Digital transformation is democratizing data to enable greater transparency and better customer experiences across industries. Technology is expanding the possibilities for startups and third parties to access legacy systems and, in some cases, it puts the data directly into consumers’ hands.
Banking-as-a-Service (BaaS) platforms have emerged as key components of open banking, which allows banks to offer financial transparency options for their customers by opening their APIs for other companies to develop new services. Fintechs and digital banks have disrupted traditional business models in the banking space, and by moving into the BaaS space, tech-savvy legacy banks can turn this looming threat into an opportunity.
What Is Banking-As-A-Service?
Banking as a Service (or BaaS) refers to a model by which licensed banks integrate their digital banking services with products published by other nonbank businesses. By doing so, a non-bank business can offer digital banking services to its customers, such as mobile bank accounts, debit cards, loans, and payment services, without having to acquire a banking licence.
By implementing Banking-as-a-Service, almost any business can become a banking provider with a few lines of code. Therefore, BaaS is also sometimes referred to as white-label banking, since the banking services are provided through a non-bank’s branded product.
Top Use Cases
Card Payment And Processing
The impending changes to 3DS2 and the increased Visa and Mastercard fees have made merchants look elsewhere for cheaper payment processing.
The BaaS model allows companies outside of the financial sector to add branded payment services to their product portfolios. The services allow firms to offer white-labelled debit cards, which result in increased brand loyalty and a better understanding of customer behaviour. BaaS can enable merchants to accept direct bank transfers as a form of payment through an Open Banking framework. Direct bank transfers cost a fraction of what credit cards cost, don’t result in chargebacks, and take place in real-time.
Regulations are tightening to reduce fraud and identity theft, so companies must implement more sophisticated methods of verifying identities. The benefits to companies of partnering with a specialist BaaS provider include avoiding the burden of developing a KYC solution on their own and staying up-to-date on new regulations. They can, instead, use a bank’s KYC API to enable customers to verify their identity quickly and affordably.
As eCommerce becomes increasingly competitive, the only way to stand out is by building a strong relationship with your customers. A lending platform is an opportunity for merchants to provide broader services to customers, while also generating more revenue. Typically, this is useful for retailers selling big-ticket items like travel and eCommerce. Through a consumer lending BaaS API, these companies are able to provide on-platform financing to merchants. The bank underwrites and funds the loan, helping the merchant convert big sales.
BaaS allows brands, merchants, and almost anyone to set up their own neobank for their customers. Startups have long considered BaaS the ideal medium to re-invent all aspects of banking by creating neobanks. Using Banking as a Service, these firms provide customers with everything from a payment card to a segregated customer account. Entrepreneurs in other banking verticals, such as currency exchange, deploy BaaS to disrupt notoriously fee-ridden services.
In a number of countries, open banking regulations have already begun to take effect, showing that the financial services industry will soon become dependent on shared data and infrastructure. The tech-savvy legacy banks that create their own BaaS platforms can not only take advantage of open banking before their competitors but also monetize their platforms to generate new revenue streams.