Banking as a Service: Meaning, Examples, Benefits and Future

Through the use of BaaS, financial institutions can offer their services more efficiently. So far in 2020, theBanking as a Servicemarket was valued at $356.26 billion. This number is expected to climb to $2,299.26 billion by 2028, at a CAGR of 26.33%. In the past, introducing banking functionalities would have cost millions of euros, demanded a dedicated team and involved years of regulatory approval. With BaaS, it can be completed with smaller capital, in a few months, and with just an API. One of these financial innovations is “Banking as a Service”, a term that has caused many heads to be scratched.

The BaaS model begins with a fintech, digital bank, or other third-party provider paying a fee to access the BaaS platform. The financial institution opens its APIs to the TPP, thereby granting access to the systems and information necessary to build new banking products or offer white label banking services. Furthermore, a lot of fintech players are targeting small businesses as their potential customers. They provide user-friendly online banking services and affordable loans to them.

How does BaaS work

BaaS could be a cheap methodology for businesses of all sizes to use blockchain technology. BaaS can permit enterprises to get blockchain provider’s services at the lowest price to develop blockchain apps. OpenPayd provides you with accounts services fit for the digital world. A combination of virtual IBANs, assigned to each of your customers/suppliers/affiliates, and multi-currency accounts enables you to accept payments and make payouts in local currencies. These days, if you want to start a business, you can pretty much just start a website and open your virtual doors. But the thought of starting a bank still seems a bit daunting.

Ownership Services

It also adds valuable revenue streams, better client profiling, establishes relationships, and manages them efficiently. Digital financial service is the new landscape, and Banking as a Service providers & startups are the backbones that pave the way for a new reality. Organisations like PSD2 and Open Banking Working Group are promoting open banking and the use of API across the banking infrastructure. In fact, banks have to make their APIs public to be compliant with the new rules in a lot of geographies. By integrating with banks, businesses can leverage that trust to increase their customer base. No wonder 77% of banks aim to invest in open banking initiatives for their commercial customers.

How does BaaS work

They are also saving big on the infrastructure necessary to accommodate legacy banking services. Many banks, sensing the current digital trends, started offering their own BaaS platforms that enable direct access for fintechs and other businesses through APIs. Such an approach creates a competitive advantage for these more traditional financial institutions in a market where novel fintech startups emerge constantly. A bank as a license holder lends its license to a BaaS provider and grants access to its financial products.

Features of OpenPayd’s BaaS

The Hyperledger violoncello system could be a distributed computing platform that helps folks manage and use blockchain systems with efficiency. Banking-as-a-Service describes an ecosystem in which licensed financial institutions provide access to their services to non-financial businesses, generally through API integrations. A full-stack neobank is a standalone bank that can operate independently from any other bank.

  • They also don’t have to worry about forgetting a transfer or missing a payment on a loan.
  • A bank as a license holder lends its license to a BaaS provider and grants access to its financial products.
  • It operates functioning such as bank accounts, transactions, KYC checks, or payment cards easily accessible through APIs.
  • Companies typically keep the revenue, return it to their customers in the form of rewards, or some combination thereof.
  • As Global Head of Sales, Kevin is responsible for leading i2c’s business development initiatives and cultivating strategic alliances across North and South America.

In many cases, partnering with a bank requires building a lot of back-end banking technology yourself. Embedded finance comes in many forms; some of the most common are credit and charge cards, term loans, and revolving lines of credit, cash advances, and invoice factoring. We expect that lending will emerge as a primary source of revenue for tech companies in coming years.

Financial Services

While by Type segment is altered to an Percent CAGR throughout this forecast period. The Global Mobile Backend As A Service Sales market is anticipated to rise at a considerable rate during the forecast period, between 2022 and 2028. In 2021, the market is growing at a steady rate and with the rising adoption of strategies by key players, the market is expected to rise over the projected horizon. The above factors will help you decide and select the right blockchain as a service solution according to your business requirements.

How does BaaS work

While each of these players should have access to banking data, privacy and security are paramount to keeping these consumers happy. Barbara is currently a financial writer working with successful B2B businesses, including SaaS companies. She is a former CFO for fast-growing tech companies and has Deloitte audit experience. Barbara has an MBA degree from The University of Texas and an active CPA license.

Growth of Fintech Industry

This usually involves verifying the customer’s authenticity and screening for potential money laundering. It is a legal requirement, and companies might have to provide clients with a copy of their KYC documents. In addition, firms might need to conduct regular KYC checks to ensure that client’s information is up to date. If you run a business, you probably don’t have the resources to maintain your own KYC system. The provision of banking processes as a service using an existing licensed bank’s infrastructure with modern API-driven platforms. The most typical process is similar to that described in the process above.

Alternatively, a third-party Banking as a Service provider, working with banks, offers the BaaS platform to FinTech and companies in other industries, embedding financial services for their customers to use. Using banking-as-a-service, you build many different payment methods into your product; these include ACH, cards, wires, and book transfers. Your customers will expect some kinds of payments (e.g., ACH, transfers between accounts at the same bank) to be free, but it’s possible to charge for others (e.g., wire transfers, push-to-card). For example, say a technology startup arranges to pay for a tech subscription using their AngelList Stack account. Although AngelList makes bank accounts and payments available to their customers, they’re not a bank. So AngelList collects those instructions from their customers and passes them along to their bank partner.

Global Payments

In fact, ecosystem companies have 2x revenue in comparison to other companies. Moreover, businesses get their hands on a lot of customer insights when they integrate with banks. Hence, it can help customers build innovative and customized services for solving specific issues. For instance, automatic reconciliation for small and medium business transactions.

Advantages of BaaS for Non-Banks and Fintech Players

When you break the BaaS ecosystem down, it’s easy to see how it streamlines the customer’s journey from beginning to end, and that is a strategic way to earn customer loyalty. Banking-as-a-Service Embed financial services in your platform or product. Are the APIs and solutions on offer authored by the company or owned by third parties? This question will become important as the partnership matures. We’ve listed only a few of the most successful BaaS providers and platforms on the market. So here are some recommendations on how to make the right choice.

Rather than using their personal card, they decide to apply for a business credit card to purchase new equipment and supplies. Fintechs integrate the BaaS functionality into their products, creating a hassle-free end-to-end customer journey. Creating modern mortgage software and money lending apps would also be impossible without Banking as a Service. In some cases, BaaS serves as a backbone for financial app development. Betterment, a popular investing app, is an example of such an application.

Advantages and disadvantages of using BaaS

Digit, oriented in San Francisco, California, helps users with their finance app for better clients’ understanding and management of their money. It analyzes every user’s unique needs and offers a digital solution that makes investing and saving more accessible than ever. It provides its features to design clients’ SMB applications in several coverages, together with payments options, online lending, insurance, investment services, cryptocurrencies, and many more. It’s an open banking-as-a-service platform with features of various payment options, management, KYC, and KYC assessment procedures, account origination, card issuance, and many more. Green Dot assists a business with account opening, card issuing, payment processing, fraud prevention, and regulatory factors that allow partners to innovate and launch groundbreaking financial solutions.

Meanwhile, Banking as a platform is a digital ecosystem that allows third-party solutions to work directly with the bank’s infrastructure without a BaaS provider. This way, banks can give their customers a wider choice of options. Founded in 2009, this German company went as far as creating its own BaaS platform. It runs on a proprietary OS and is a cloud-based modular system.

Facilitating online payments also helps SaaS 2.0 platforms generate more revenue—in addition to charging for monthly subscriptions, they can also charge customers for access to payment processing. Boasting $6.2 billion in assets and an annual combined processing volume of $232 billion, The Bancorp started as a branchless bank and is now a leader in digital financial services. The company provides private-label blockchain-as-a-service (BaaS) definition banking and technology solutions to non-bank businesses. It has held the number one position in prepaid card volume in the US for eight consecutive years and specializes in institutional banking and commercial lending. Brands that have adopted embedded finance on their platforms are winning the loyalty of their customers and earning additional profits from these integrated financial products.

Financial institutions in the banking industry are licensed and regulated. These regulations include Know Your Customer , anti-money laundering , OFAC sanctions lists, and data privacy and security. For Banking as a Service to function as expected and banks to remain in regulatory compliance, RegTech should be part of the BaaS process. Now it’s time to decide how you’ll bring your product to market. Working directly with a bank requires investing considerable resources and can take up to two years.