Banking as a Service – all you want to Know

Today, GenZ customers value convenience and instant gratification, and one thing they despise the most is going to banks. And it’s not just children who find traditional brick-and-mortar banks annoying and unpleasant; adults and the elderly share this opinion as well. Nowadays customers demand a variety of services from banks, such as advanced identity and credit protection, data security for valuable digital assets, automated financial advice for money management, and virtual assistance for managing finances. However, recently there have been situations where certain creative fintech have piqued their interest. For instance, the fintech start-up Sofi offers career counseling and attractive interest rates on refinanced student loans, solidifying its reputation as helpful financial services.

But, how can banks keep up with all the new digital possibilities that appear every day? Thus, understanding Banking as a Service holds the key to finding the solution. Let’s get started to develop a better understanding of the meaning, purpose, benefits, and future scope of the BaaS.

What is Banking as a Service

BaaS is a comprehensive strategy that enables fintech firms and other third-party organizations to leverage APIs to establish a connection with a bank’s system.  In addition to facilitating open banking services, this aids firms in developing innovative financial services on top of the regulated infrastructure of the provider bank. It makes it possible for a traditional bank to connect with customers via online channels. This facilitates open banking services while facilitating businesses in constructing cutting-edge financial services based on the regulated infrastructure of the provider bank.

In simple words, banks carry out several extensive functions such as funds management, payment processing, and money transfers, among others, so to support these functions, banks need substantial investments in order to construct a suitable financial infrastructure. To overcome bottlenecks created by the processes and sophisticated infrastructure, fintech startups, and non-bank organizations have started attempting to establish financial services in collaboration with banks as opposed to building these kinds of financial services from scratch.

 How does Banking as a Service work

Through APIs facilitate communication between banks and third parties, whereas Banking as a Service enables third-party organizations to access existing banking services. By using these APIs, fintech businesses, programmers, developers, and other non-financial businesses can utilize these banking services. As a layer on top of the current financial services, this enables them to build their own features.  In layman’s terms-

• BaaS is paid for by a Fintech company or an individual.
• Banks/financial institutions that use BaaS platforms make their APIs available.
• Using these APIs, fintech businesses and individuals create cutting-edge financial services.

Benefits

• Innovation- By allowing non-banks to offer financial services for their customers BaaS promotes financial services innovation for their customers further enabling financial transparency and user-friendliness. Third-party providers focus on unique client issues, providing customers with a frictionless, personalized financial solution that meets customer expectations.
• Collaboration- Collaborating with third-party players helps banks understand customer preferences, purchasing habits, and financial needs, enabling tailored offers for consumers.
• Personalization- Banks can use BaaS platforms to focus on multi-channel marketing, reducing spending dependency and reaching more customers. By collaborating with third-party players, banks gain insights into customer preferences and can create customized offers, leading to more customer interaction and better responses to personalized offers.
• Increased Sources of Revenue- BaaS enables banks to share data through API transactions, enabling open banking and new revenue streams. Most of the banks prefer charging fees per API transaction, benefiting from fintech and tech companies’ innovation, speed, and customer trust.
• Cost-Saving Measure- Ready-made solutions from BaaS help banks generate revenue and reduce costs by reducing technological development, enabling partnerships with third parties, and enabling further investment and profitability forecasting.

Here’s a small graphic representation of the benefits apart from the ones mentioned above. They are self explanatory.

Types of BAAS

BaaS usually involves three major players-

1. Traditional or New Age Banks- – Banks possess the license for carrying out bank operations and they disclose their primary banking operations to BaaS providers. Banks provide Infrastructure as a Service (IaaS) such as servers and communication hardware, to core-banking services. These services can be on-demand and non-fintech, with traditional banks like Goldman Sachs and ICICI Bank offering core banking services. New-age banks, like Solaris Bank, offer IaaS services on-demand.
2. Banking as a Service Platform- The Banking as a Service (BaaS) platform enables secure data communication between traditional banks and fintech companies, providing a “middleware” layer. These platforms offer decomposed banking services, such as card issuing, personal financing, easy lending, and payouts, without the underlying bank infrastructure.
3. Fintech Services Online Platform- Fintech services are integrated into products by non-fintech companies or fintech companies, who interact with end-users on the BaaS platform. Fintech companies, like Early Salary, use the platform for user onboarding, loan disbursal, and payment collection.

BAAS- Future Opportunities & Growth

BaaS has allowed conventional banks to develop relationships with both emerging companies and the most prominent fintech companies, as well as to just offer a source of income. In terms of its growth, research conducted by Future Market Insights has predicted the BaaS platforms to grow at a CAGR of 15.7% globally reaching around $12.2B by the year 2031.

Several nations including India have started developing open banking regulations in light of the expansion of BaaS services indicating that the fintech sector is moving towards a period where information and technical infrastructure are moving towards fulfilling customer expectations. In terms of its scope in India, the study published by Stellar market research shows that the size of the India Banking-as-a-Service (BaaS) market was worth $8.74B in 2020 and is expected to grow at a rate of 13.2% between 2021-2027 projecting the revenue to reach around $ 20.82B.

Likewise, BaaS services have become an emerging trend with platforms like RazorpayX which has enabled start-ups such as Cure. fit, MPL, Dunzo, and others to accept payments at scale while keeping lower prices. Also, several BaaS and rival banks have enabled other non-financial businesses to access their APIs in their attempts to find new sources of income.  It makes it easier for traditional banks to maintain and keep up with the innovations other fintech businesses are doing. Legacy banks who have developed their own BaaS platforms will not only hold additional advantage against their rivals in the open banking space but will also unleash a new revenue stream by monetizing their platforms.