Banking-as-a-Service. Back to Basics.

Back to basics is a blog series focused on defining and discussing some of the key terms used in modern-day banking.

Banking, which has traditionally been a closed off and exclusively vertical industry, is undergoing a massive transformation and part of that involves opening up and granting external parties access to data, functionality and customers. While this may seem like an uncompetitive move, many banks are moving to a more open way of working and it is these banks that embrace this change and partner with external providers that stand to capitalize most on new revenue streams and reach new customer bases.

What is Banking-as-a-Service (BaaS)?

According to Medici, “Banking-as-a-service (BaaS) is an end-to-end process where third parties – FinTech, non-FinTech, developers, etc. – can access and execute financial services capabilities without having to develop them organically.”

BaaS involves banks providing third parties with access to core systems and functionality so that they can integrate digital banking and payment services into their own products. From a bank’s perspective, it involves embracing a more modular way of working and allowing an ecosystem of fintechs and software providers to connect to the bank through APIs.

These third-party providers can offer products and services that drastically improve a customer’s experience with the bank and the service provider. By partnering with service providers and fintechs, banks can help them to manoeuvre through the regulatory mind field that exists in the financial services industry. Banks can provide access to licensing, regulatory support and other functionality that would traditionally be difficult to get access to and would usually involve time-consuming processes.

BaaS Vs open banking

The term Banking-as-a-Services is often interchangeable with open banking as both involve sharing something that belongs to the bank with external parties; however, they are actually two distinct concepts. In the case of open banking, the bank provides access to third party providers to its existing customer data through open APIs. The bank is usually encouraged to do so by government mandates or initiatives for example Europe’s PSD2 legislation.

In the case of BaaS, the bank provides access to specific banking capabilities such as payments, onboarding, and lending, allowing non-bank companies to connect users outside of the bank’s customer base to access its banking services.

What are the benefits for banks of offering baaS?

New revenue streams
Banks need to navigate more competitive markets and find ways to drive profits while keeping costs low. Creating a BaaS platform and allowing third-party providers to access it for a fee can inject fresh revenue into the bank. Revenue models include recurring fees, setup charges or revenue sharing agreements.

New customer bases
External providers may potentially have huge customer bases that are currently not bank customers. By providing BaaS to third parties, banks can reach new customer bases without a huge cost, which can lead to the beginning of a new, potentially profitable, relationship between the bank and the customer.

Improve customer experience
BaaS allows banks to integrate external parties’ products and services into their own offerings allowing them to provide their customers with an end-to-end customer experience without having to build new products.

What are the benefits for third-party providers of using BaaS?

Faster speed to market
By accessing a bank’s functionality, third-party providers can bypass some big development hurdles and go to market much quicker than if they chose to build their own functionality from scratch.

Overcome regulatory complexities
One of the biggest obstacles for third-party providers’ intent on providing financial services products is dealing with complicated regulation and compliance. By partnering with banks, they can circumvent this by piggybacking onto the banks’ licensing agreement.

Traditional banking models are being challenged and modern banks will need to become modular and platform-based in order to effectively collaborate with players in the financial services ecosystem. BaaS has emerged as an innovative and revenue-driving business model that banks can adopt in order to reach new customers and improve the end-to-end customer journey. BaaS will play an important role in the future digital transformation of banks and stands to have a lasting impact on a banks’ future growth.

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