Meaning and Concept of Banking as a Service or BaaS

Banking as a Service
Karan Singh
| Updated: Sep 30, 2022 | Category: Digital Banking

Banking as a Service or BaaS is a new FinTech innovation that is enabling FinTech& Bank Collaborations. In the past few years, the banking sector has gone through somewhat of a transformation. With FinTech players joining the market, this transformation or change has become invincible. Financial services are evolving or changing in a way that they are creating new products, opportunities, channels, and partnerships. Banking as a Service or BaaS plays an essential role. In this write-up, we shall discuss the meaning & concept of Banking as a Service or BaaS.

What is BaaS or Banking as a Service?

It’s an end-to-end approach that facilitates FinTech Companies & other 3rd party organisations to associate with a bank’s system employing APIs. This helps organisations build innovative financial services upon the provider bank’s regulated infrastructure while enabling open banking services.

BaaS is the provision of banking products & services through 3rd party distributors. Through integrating non-banking businesses with regulated financial infrastructure, Banking as a Service (BaaS) offerings are enabling new, specialised propositions & bringing them to market faster.

Different Factors Influencing BaaS

While FinTech is growing & revolutionising the way financial services work today, there are some key factors that influence BaaS:

  1. The digital transformation & mobile-first approach that has ascended over the past years has significantly influenced BaaS.
  2. Banking regulations have seen a great evolution that has further promoted healthy industrialisation growth.
  3. Banks are trying hard to catch up to the speed of FinTech Companies or Banks are partnering with FinTech Companies to innovate financial services.
  4. SMEs & Start-ups are starting to leverage easier & effective business banking.
  5. The business architecture of banking is developing to a much more modern system that is inclusive of newer tech & methodologies.

Benefits of Banking as a Service or BaaS

Following are the benefits of Banking as a Service or Baas:

  • Benefits of BaaS for Banks:
  • Increased Revenue Streams
  • Initiative to Save Money
  • Increased Customer Insights
  • Benefits of BaaS for Non-Banks &FinTech Players:

Non-Banks & 3rd party suppliers have limited access to client details & banking capabilities. Moreover, not everyone has the resources necessary to maintain legacy systems & comply with regulatory laws. Most firms cannot afford to get a Banking License because it will take attention away from their core business. The speed to market & product innovation will suffer significantly as a result. The Banking as a Service comes in help in this case; it allows individuals &FinTech Companies to sidestep Banking Licensing Rules by interacting directly with a bank. Financial Start-ups may get off the ground much quicker without having any deal with the IT infrastructure of the bank.

  • Benefits of Banking as a Service for End-Customer:

BaaS promotes financial services competition by permitting non-banks to provide fundamental banking services. As an outcome, innovation is pushed further and customers have access to more user-friendly products. Moreover, it leads to increased financial transparency. The primary focus of 3rd party players is customers’ individual pain areas. For instance, a FinTech Company may only focus on business payouts. A Neobank, on the other side, might concentrate on making the process of lending money to customers as simple as possible. This aids them in focusing on the task rather than worrying about getting a Banking License & everything it entails. As a result, a personalised financial solution is created. This solution would be easy to use, relevant & appealing to today’s increasingly tech-savvy customer base.

How Does BaaS Work?

Banking as a Service or BaaS allows[1] 3rd party organisations to draw off the existing banking services via APIs that communicate between banks & 3rd parties. These APIs allow the use of such banking services by programmers, developers &FinTech Companies, and other non-financial companies. This allows them to build their features as a layer on top of the existing banking services. In other words:

  1. Bank of Financial Institution, which is a Banking as a Service platform, opens its APIs;
  2. Individual or FinTech Company pays to use BaaS;
  3. Individual or FinTech Company builds innovative financial services using APIs.

Future of Banking as a Service or BaaS

Following are the reasons why BaaS has grown at an exponential rate in past years:

  1. Customer Demand: Customers want integrated financial services is the first & most evident factor. After all, customers are becoming tech-savvy. The need of comprehensive, user-friendly financial products will only increase.

Users or customers are searching for seamless experiences also, and these merged experiences are referred to as ecosystems in the commercial world. In simple words, an ecosystem is an end-to-end solution that removes the need for the customer to use any additional services to complete their purchase. In fact, ecosystem companies generate 2 times the income of other businesses.

  • Regulatory Requirements: Open banking & the usage of APIs across the banking infrastructure are being promoted by organisations like PSD2& Open Banking Working Group (OBWG). In many nations, banks are required to make their APIs public to comply with new legislation. This measure is to maintain strong competition in the banking industry. On the other side, Traditional banks will face competition as a result of the open API. As a result, to assure customer happiness, banks must adopt the BaaS model. Integrating with FinTech Companies & non-banks allows businesses to gain access to cutting-edge technology to meet customer demands.
  • Growth of FinTech Industry: All around the globe, FinTech is booming. India has an 87% FinTech acceptance rate as compared to a world adoption rate of 64%. For their product offering, FinTech companies need to integrate with banks.
  • Banking Revenue: Recent reports, however, suggest that banking income or revenue and profitability may be on the slide in the predictable future. Traditional banks must maintain profitability to stay in business. Associating with non-banks can help them generate new income or revenue sources & expand their product offerings. They will be able to serve a huge number of customers & meet their technological requirements. Collaborations with businesses that have highly extensible business plans would be the most profitable.

Challenges Faced by BaaS

Today, traditional banks are modernised and most traditional banks’ basic systems are outdated. They do not work with today’s advanced technologies. This can be a huge concern when implementing the Banking as a Service or BaaS model because 3rd party integrations will be hampered. Traditional banks would benefit from updated design in the future of BaaS, and this would help expose goods, services, APIs & processes.

The roles of players in the Finance Sector are changing. As per the study, traditional banks are gradually losing their customer trust advantage over FinTech businesses. On the other side, many tech businesses are entering the financial sector because they have a high level of customer trust. Moreover, BaaS requires collaboration with 3rd parties. There are a number of overlaps in operational capabilities, which is to be expected. Moreover, many businesses utilise white-labelling to market their products or goods. Customers may become confused as a result of this.

Considering these considerations, the future of Banking as a Service or BaaS tells an essential shift in player obligations. Banks may be averted as assemblers rather than manufacturers. This suggests that they will not be only focused on their core banking services. Banks will instead package the services given by their partners as value-added services.

It takes a lot of effort & time to establish a bank or a business using APIs. Operational processes & business capabilities should be exposed to their full potential. However, most businesses face challenges while developing an API strategy. The effortlessness of integration should be the main goal while developing an API strategy. It must be able to facilitate maximum business value while keeping integration to a minimum. Global API strategy standardisation could be a part of the future of the finance industry.

Taking into account all vital elements. The BaaS Industry is displaying no signs of slowing down. It will be interesting to see how the Banking as a Service model evolves over the next decade as technology upgrades.

Conclusion

BaaS will bring together finance and digital technology platforms to change the shape of economies & most sectors for years to come. BaaS is an excellent opportunity for financial institutions to capture new revenue growth at a low cost. Also, Banking as a Service business is scalable & agile, making it mainly suitable for entering new markets & then expanding.

Read our Article:Complete Guide on Embedded Finance for Fintechs in India

Spread the love
Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

 

Related Articles

Operationalization of digital currency
| Date: Nov 11, 2022 | Category: Digital Banking

RBI Notification on Operationalization of Digital Currency

One of the main functions of the Reserve Bank of India is the management of currency in India. It also operates in India's production, designing and overall management of money....

Read More

ARTICLES

Hi! My name is Akanksha! Let's talk.