Digital transformation has become unavoidable across industries to obtain a higher level of customer satisfaction. And this growing need for transformation paves the way for new technologies. Banking As A Service, or BaaS, has successfully introduced itself to aid the problems all account holders face, along with bringing transparency in the financial services through its Application Programming Interfaces (APIs) for third parties.

What is BaaS or Banking As A Service?

BaaS, or Banking As A Service, is a model where banks provide APIs and digital banks, third parties like payment gateways, other fintech companies, etc., can connect to the bank's systems through the APIs. With the BaaS APIs, non-banks can integrate with banks and offer banking services to their customers. BaaS is an end-to-end approach to open banking services for a wide range of customers.

Examples

Some popular BaaS examples are:

• Goldman Sachs + Apple = Apple Card
• Solaris Bank
• Bankable
• ClearBank

What Does BaaS Offer? How Does Banking As A Service Work?

The BaaS platform collects a fee from fintech, digital bank, non-bank, or third-party (whoever wants to access the service). In return, it allows the parties to offer a new range of products or services by integrating with the banks.

In short, Banking As A Service allows non-banks to introduce digital banking services without having a bank license.

The workflow of BaaS is like the following:

1. A licensed bank allows access to all its functionalities through API and charges a fee
2. A non-bank pays the fee to access the data and functionalities and develops new products accordingly

Who Are the Key Players?

The key players in the BaaS platform are:

1. Bank (traditional or new age bank)
2. Banking As A Service (BaaS) platform
3. Non-bank

Here, banks carry the license to offer core banking services, while the BaaS platform carries the software through which banks and non-banks communicate with each other and users.

The BaaS platforms act as API-based middleware, and non-banks plug into it to offer banking services to end users.

Use-cases of Banking As A Service

There can be a diverse use case of Banking As A Service, which includes the following:

1. Online banking services
2. Loans
3. Investments
4. Credit and debit card services
5. KYC

Also, in marketplaces and eCommerce platforms, BaaS has wide usage.

Advantages and Benefits of BaaS

Banking As A Service (BaaS) benefits banks, non-banks as well as end users. Check the table below to understand it more precisely:

Benefits for bank	Benefits for non-banks	Benefits for end users
Higher revenue by bringing more users	Hassle-free and fast integration to reach the customers with innovative solutions	Innovative products at the fingertips
Technical development at a low cost – no need for separate investment; banks get benefits from the partnership with the BaaS	No trouble in getting bank licenses – no development and maintenance costs needed	Greater satisfaction of the customers
New customers and new insights for further growth	Easy winning customers’ trust	Seamless banking services without visiting a bank

Hence, Banking As A Service is a steal deal for all three parties, and all of them can enjoy its advantages and benefits.

Challenges: The Roadblocks to Implement Banking As A Service

Even though there are certain benefits of Banking As A Service, implementing it can be a problem because of the following reasons:

1. Incompatibility of banking systems with the latest technologies
2. End user's reliability on third parties more than banks
3. Issues during API strategy creation

However, advanced banking architecture, changing the role of banks to enable third parties to offer white-label products, and global standards for API strategy can resolve the problems from the grass-roots level. Currently, banks are partnering with non-bank fintech companies to bring more innovative solutions, which will also clear the roadblock.

Banking As A Service vs Embedded Finance, Banking As A Platform (BaaP), and Open Banking

Banking As A Service is often taken similarly to Open Banking, Embedded Finance, and Banking As A Platform (BaaP); however, these are not the same. The primary differences are:

Banking As A Service allows customers to use the services of licensed banks in third-party apps (other than bank branches or their websites). These banks provide APIs through BaaS providers, and non-banks, fintech companies, etc., can directly integrate these APIs into their products. It shares complete access to financial information with non-banks to embed banking services so that the end users can use these services anywhere.

Embedded Finance is the process by which non-financial businesses conduct financial transactions to maintain customer journey flow.

Banking As A Platform is where licensed banks integrate services from non-bank and fintech companies so that account holders can enjoy a diverse range of products/services. It is just the opposite of BaaS.

Open Banking only shares customer data. It is basically a set of rules that decides how customer data will be shared through API. Here, non-banks access the data, provide account insights, and trigger payments. Open banking is a broad term, and it makes BaaS possible.

Why Banking As A Service Is Growing So Much?

The prediction says the global BaaS market will reach $7 trillion by 2030. The prime reason behind such a rapid growth of Banking As A Service is the Increasing Demand of Customers. Customers want almost all banking services on their smartphones. To meet the demands, non-banks are ready to bring more innovative solutions, so they will need a BaaS platform to integrate with banks.

Along with that, the growth in the fintech market is another reason why BaaS has no sign of ceasing. As obtaining a bank license is not always possible for these companies, they depend on the BaaS to get integration with the banks to meet the demands of their target audience.

Also, banks are open to BaaS because of regulatory requirements. Non-banks bring new revenue streams to the banks to top it off. So, being open to BaaS actually helps the banks to scale their business. 

How to Choose the best BaaS provider?

In order to choose the right BaaS provider, check

1. Reliability of the BaaS provider
2. Product coverage
3. Time and cost

End Words

BaaS is undoubtedly the need of the hour because the Indian market is now witnessing a customer-centric approach instead of a product-centric approach. So, there is no second thought that there will be more partnerships in the future as both banks and non-banks will depend on each other to remain relevant to customers. Hence, BaaS will become more powerful. In India also, BaaS will gain momentum slowly, just like the visible spike came in digital transactions a few years back.