With the digital age transforming the financial services arena, new business trends and technical advancements have come to the forefront. Banking as a service (BaaS) is one such solution that allows both incumbents that strive to become digital as well as start-ups to remain competitive.
Established banks have been using Banking-a- a-Service to streamline their processes, migrate from legacy systems, and develop new customer propositions quickly. For their part, start-ups value BaaS for its ability to reduce operational costs and get to the market efficiently.
What is Banking-as-a-Service?
Banking-as-a-Service (BaaS) is an all-encompassing mechanism that connects fintech start-ups and other companies to a bank’s system through APIs. These services build on the infrastructure of the bank’s provider to enable new banking offerings. As a result, partnering with banks can help fintech and non-banking organizations launch their products and introduce them faster to the market, without spending a great deal on expensive infrastructure and re-inventing banking services.
Fintech’s perspective on Banking-as-a-Service
A three-step process is involved. Initially, fintech companies or third-party organizations pay for access to a BaaS platform (whether via monthly fees or by paying for services as they are used) to create their own products and features on top of the existing banking infrastructure. Following the provision of APIs, the bank providing the service grants access to fintech companies.
Consequently, fintech companies or another third-party provider (TPP) can leverage these APIs to create new fintech products and launch new financial services such as digital lending, payments, and account management.
In that regard, here’s how third-party companies benefit from leveraging BaaS for their business:
- Simplified business operations as banking services are incorporated into the company’s platform.
- With none of the hassle of building and maintaining a banking infrastructure, operating costs are reduced.
- Superior customer experience leads to better customer acquisition and increased loyalty.
- Faster time-to-market since a banking product doesn’t have to be built from scratch. Access to the BaaS platform can solve major development issues.
- Complying with numerous regulations is a heavy burden for companies entering the financial services industry. A third-party company can take on this burden by partnering with banks and other BaaS providers with a banking license.
There’s no denying that leveraging Banking-as -a-Service is a necessity for any bank or fintech start-up looking to stay competitive, expand its market share, and drive innovation in the financial services industry. Thus, it comes as no surprise that the global digital banking platform market is expected to reach $8.67 billion by 2027.
Despite being disruptive by nature, BaaS does not serve as a disruptor. Rather, it reinforces the financial services market, making it more innovative and customer-centric, providing the basis for effective collaboration among industry players.