BaaS: The future of Banking

January 25th, 2023

If you’re in the Fintech industry, you’ve probably already heard the term ‘Banking as a Service’ thrown around, but what is it?

Simply put, it’s a disruptive technology that is changing the face of the banking industry by allowing non-banking entities to offer financial services.

Let’s take a look at what BaaS is, how it works, and some of its use cases.

What exactly is Banking as a Service?

Banking as a Service, otherwise known as BaaS, is a digital financial model that allows non-financial companies to offer services similar to financial institutions without the need to obtain a banking license.

By using BaaS, companies can easily integrate banking services into their platforms to improve customer experiences and broaden their service options.

These companies will partner with financial institutions to offer a variety of banking and financial services. BaaS allows businesses to provide services like payment processing, account management, lending, and more by utilizing the infrastructure and regulatory compliance of partner banks.

According to Deloitte, 42% of customers have used a Buy Now, Pay Later service, while there is a two-fold increase in the return on assets for Banking as a Service offering.

How does Banking as a Service work?

Application Programming Interfaces (APIs) are the cornerstone of BaaS, allowing non-bank businesses to access the banking infrastructure and services of licensed banks.

For example, if you start a pre-packaged meal delivery service, incorporating BaaS will allow you to easily collect regular payments from clients for revolving orders, and apply for a loan all from the same account.

It eliminates the hassle of opening multiple bank accounts, filling in endless paperwork, and waiting for approval for a business banking account.

Is BaaS considered a form of embedded finance?

In the fintech industry, BaaS and embedded finance are closely related. Banking as a Service can be seen as a type of embedded finance.

Embedded Finance

Embedded finance means integrating financial services into non-financial platforms, such as payment processing, Automated Clearing House (ACH) access, or wire transfers that are integrated into the software.

For example, it could be paying for a ride in a ride-hailing app or using "buy now, pay later" options at a retail store. The goal is to make financial tasks easier and more integrated into everyday life.

Banking as a Service (BaaS)

BaaS is a specialized part of embedded finance. It involves licensed banks teaming up with non-banking companies. They provide the necessary technology for these companies to offer banking services like accounts, loans, and payments. This lets businesses add services to their financial products without needing to be a bank themselves.

What about Software as a Service?

Software as a Service (SaaS) is a software delivery model in which a software application is hosted by a third-party provider and made available to customers over the Internet.

SaaS is similar to Banking as a Service in that it allows businesses to access a service without having to build and maintain it themselves. However, SaaS refers specifically to software, whereas BaaS refers to banking services.

How does BaaS work for platforms?

Platform banking is when banks provide customers with access to third-party financial services such as insurance, investments, and payments. It goes beyond traditional banking by offering a wide range of financial products.

This differs from BaaS, which focuses solely on an integrated bank as a service. Platform banking is more comprehensive, including a variety of financial solutions beyond just banking services.

Is open banking the same as BaaS?

No, open banking is distinct from BaaS. Open banking is a regulatory framework that gives customers the ability to securely share their banking data with third-party financial service providers such as fintechs.

This provides access to a larger range of financial services. In contrast, Banking as a Service is an integration of banking services into the products of non-bank businesses.

The BaaS value chain

As opposed to pre-BaaS days when traditional banks owned the entire banking supply chain, today’s BaaS players are enabling new, specialised propositions and are helping fintechs bring products to market faster.

In the Banking as a Service model, there are several key players involved in the value chain:

Providers

BaaS providers are licensed banks that offer their services to non-bank businesses through APIs. These can be traditional banks or challenger banks.

Aggregators

BaaS aggregators are companies that bring together the services of multiple BaaS providers and offer them to non-bank businesses as a single solution.

Distributor aggregators

Distributor aggregators are companies that work with BaaS aggregators to distribute the BaaS offering to a wide range of non-bank businesses. This is one of the areas we specialise in at Integrated Finance.

Distributors

Distributors are companies that offer BaaS services to their customers on behalf of BaaS providers or aggregators.

As opposed to the traditional banking model, where banks own the entire banking supply chain, the Banking as a Service model allows for specialised propositions and helps fintechs bring products to market faster.

Legacy banking institutions can leverage their existing infrastructure and expertise to take advantage of the banking-as-a-service (BaaS) model and turn an encroaching technology-based threat into a business opportunity.

BaaS market outlook

The BaaS market is expected to see significant growth in the coming years. According to a report from Deloitte, the global BaaS market is expected to reach $12.7 billion in revenue by 2024, growing at a CAGR of 45.7% from 2019 to 2024. The report also predicts that the Asia-Pacific region will see the highest growth rate, with a CAGR of 49.6%.

Who are the main BaaS providers in the UK?

Railsr

Known for its innovative account and payment solutions, providing a seamless financial experience for customers. Integrated Finance, when used with Railsr, allows companies to add extra features like:

Just-In-Time (JIT) funding and sweeping configuration toggle/ tool (aka virtualisation);
Ensure redundancy and eliminate the risk of de-banking by any banking provider;
Easily add, switch, migrate and remove banking providers without the need to build integrations from scratch;
Manage and extend the capability of all account-related financial business operations with access to a decoupled ledger system.

Currencycloud

A top provider of cross-border payments and foreign exchange services, enabling you to enhance your platform with international capabilities. By integrating Integrated Finance with Railsr Currencycloud, businesses can easily include extra features like:

Just-In-Time (JIT) funding and sweeping configuration toggle/ tool (aka virtualisation);
Ensure redundancy and eliminate the risk of de-banking by any banking provider;
Easily add, switch, migrate and remove banking providers without the need to build integrations from scratch.

ClearBank

ClearBank offers top-tier core banking infrastructure to support your BaaS requirements. Pairing Integrated Finance with ClearBank enables companies to incorporate extra functionalities like:

Utilise a pre-certified integration that removes the need for self-certification and conformance testing;
No need to host and integrate Hardware Security Module (HSM) services to conform with the bank's security requirements;
Ensure redundancy and eliminate the risk of de-banking by any banking provider;
Easily add, switch, migrate and remove banking providers without the need to build integrations from scratch;
Manage and extend the capability of all account-related financial business operations with access to a decoupled ledger system;
Access a flexible API for automating credit and debit transactions across multiple client accounts.

Modulr

A modern platform provides a wide range of financial services for you to personalize your Banking as a Service (BaaS) offering. Integrating Integrated Finance with Modulr enables companies to include extra features like:

Just-In-Time (JIT) funding and sweeping configuration toggle/ tool (aka virtualisation);
Ensure redundancy and eliminate the risk of de-banking by any financial institution;
Easily add, switch, migrate and remove banking providers without the need to build integrations from scratch;
Manage and extend the capability of all account-related financial business operations with access to a decoupled ledger system.

LHV

A reputable European provider offers advanced banking solutions ideal for extending services beyond the UK. By utilizing Integrated Finance with LHV, companies can access additional features like:

Access a single API for issuing EU & GB IBANs, eliminating the need to build multiple workflows for each jurisdiction;
Utilise a simplified JSON-based integration to consume banking services vs handling multiple messages in XML format;
Ensure redundancy and eliminate the risk of de-banking by any banking provider;
Easily add, switch, migrate and remove financial services without the need to build integrations from scratch;
Manage and extend the capability of all account-related financial business operations with access to a decoupled ledger system;
Access a flexible API for automating credit and debit transactions across multiple client accounts.

What are some examples of BaaS?

Here are a few examples of Banking as a Service in action:

B2B payments platform

Utilising the Integrated Finance infrastructure, the B2B payments platform gained access to built-in banking integrations and financial technology modules saving them valuable development time and cost. iThe company was able to go live in 90 days with dedicated bank accounts to digital ecommerce retailers, centralised safeguarded accounts and customised fund flows - all managed through an intuitive backoffice for operational excellence.

By adopting a banking as a service ecosystem, the embedded B2B payments company successfully launched its product to a variety of financial service providers serving online ecommerce vendors rs. Some of the financial operations the company was able to take advantage of from day one were: customised transaction and settlement flows, financial orchestration and merchant cash advance.

This example demonstrates how the banking-as-a-service ecosystem can empower B2B financial businesses to address costly and complicated technical hurdles. By leveraging Fintech infrastructure, businesses can focus on their core activities and experience rapid growth without the need for intricate infrastructure development.

Embedded finance product provider

An embedded finance product provider specialising in international trade for importers and exporters faced challenges when traditional financial institutions were unwilling to serve these niche markets, restricting access to crucial services like opening bank accounts, payment services, and FX transactions.

In pursuit of a solution to build an MVP and launch the product the company faced building internally all the technical components needed to issue accounts, facilitate, manage and process cost-border transactions in a compliant way. For a Fintech startup, spending high up-front costs would have meant runway burn and business closer in the short-run.

Through a pre-built integration with an FX BaaS provider and a native core banking system, accessible via the Integrated Finance infrastructure, the company could issue multi-currency bank accounts and streamline cross-border and FX transactions. This enabled the Fintech startup not only to launch its product but also to optimise operational costs. Consequently, they could redirect funds that would have been spent on complex financial technology towards building a superior product.

BaaS benefits to Fintech businesses

BaaS offers several key benefits to Fintech businesses, namely:

Allows Fintechs to offer a range of financial services to their customers without having to obtain a banking licence.
Enables Fintechs to bring products to market faster.
Allows Fintechs to focus on their core competencies and leave the management of banking infrastructure to the licensed banks.
Can generate additional revenue streams for Fintechs.

Getting started with BaaS

BaaS is here to stay and, as we've gone over in this article, it's changing the way businesses offer new products to their customers.

If you are a business looking to leverage the power of BaaS, contact us. Our team are experts in the digital banking industry and can help you go from contract to product launch in record time.

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