Business relationships are constantly evolving and becoming more sophisticated, particularly in the digital age. Some nonbank companies have already integrated financial services into their products or services to increase their added value.
Among these financial services are bank accounts, credit card payment, lending systems, and others; all of which are closely related to apps, websites, eCommerce sites, and other tools in which end users engage with brands. This concept is referred to as Banking-as-a-Service or BaaS.
A Banking as a Service model involves a regulated financial institution opening its API (specific code created to ease system interactions) to fintech companies, digital banks, and other third-party vendors who pay an access fee. With access granted, the business can develop and offer white-label banking services to its clients, which could be any business or brand.
Accordingly, the three main players involved with the Banking-as-a-Service model are:
- Non-bank businesses: The company or brand that offers financial services to their clients.
- Financial institutions/ Banks: Companies with banking licenses that rent out their APIs to other companies.
- Fintech/ Third-party providers: A technological company that markets and provides financial products to bridge the gap between the business and the bank.
Banking-as-a-Service: The New Era Of Financial Services
All parties involved in the BaaS model have the opportunity to either enhance their existing offerings or grow their businesses by capturing new customers. The main opportunities are as follows:
- Empowering The End User or Consumer: With increasingly more information available to end-users, they are becoming empowered clients who demand integrated and direct experiences with the products or services they consume. Research indicates that customers are flocking to these multiproduct customer experiences, often called ecosystems.
- The Emergence of Banks from Brands: Brands and companies can now meet customers’ needs in a more integrated and long-term way, thus building more loyal and long-term relationships with their users, which is one of their main goals. Therefore, brands also gain by extending their portfolio, resulting in a stronger reputation and more satisfied customers. The embedded finance model furthermore makes all of the above gains available at a low price and with little delay.
- Fintech or digital banks, the BaaS providers: Developing strategic alliances with banks becomes essential for suppliers of the final product in this technological equation. The opportunity also offers them the assurance that new lines of business can be opened at attractive margins, as well as a deeper understanding of consumer behavior based on the collected data.
- Banks or Financial Companies as Regulated Institutions: Banks have a new opportunity to charge non-bank companies a regular fee for accessing the BaaS software or to charge them for each service they use on a pay-as-you-go basis. Moreover, Banking-as-a-Service now has the ability to enter new markets, since it is scalable, straightforward to implement, and offers significant potential.
The reality is Banking-as-a-Service will connect digital platforms and financial services to revolutionize the business world for decades to come. Besides, it is also noteworthy that BaaS falls within the Open Banking framework, thus making it viable and is certainly a defining moment in the financial services sector.