The Rise of Banking as a Service
The Banking and Finance sector has always been the most cautious about the quick adoption of digital technologies and innovations. Sensitive data and security issues, as well as the performance of complex operations, kept banking institutions away from providing online services for a long time. Customers had to visit banks’ brick and mortar facilities and spend hours in long queues to handle various operations.
The first online banking service was launched in 1997 by Sumitomo Bank and since then major banks started implementing online banking services. Banks are constantly improving their services and creating secure and effective mobile apps that allow them to perform all kinds of banking operations within seconds excluding the necessity to visit financial institutions.
However, in the time of global digitization banks moved further and started providing Banking as a service (BaaS). Companies that use Banking as a service are becoming a new norm today. Many countries are already considering the banking regulations that will define the rules of client-bank digital interaction.
It’s clear that the digital financial services industry is only set to grow. Allied Market Research predicts the growth of Banking as a service and Open Banking will reach $43.15 billion by 2026 at 24.4% CAGR. And Business Insider Intelligence experts say that the banking-enabled SMEs and retail revenue will rise from $700 million in 2018 to $2billion by 2024 only in the UK.
To keep the leading positions in today’s digital trends, many banks start their own BaaS platforms. This allows them to establish close partnerships with FinTech companies that help these banks to become mainstream and open sources to additional revenues.
The most successful blendings of BaaS FinTech providers and retail banks that have started their own BaaS platforms are SolarisBank, Bankable, Treezor, Cambr, ClearBank, and others.
Apart from purely BaaS platforms, there are also the banks that rely on BaaS solutions and provide B2C services such as Starling Bank, Fidor Bank, BBVA, and many others.
Google announced they are going to partner with banks to check their consumers’ accounts, Apple starts its own credit card brand with special offers and Facebook incorporates Venmo in its payments tools with a more robust data collection.
Let’s have a more precise look into the specifics of Banking as a Service and explain how it works.
What Is Banking as a Service?
Banking as a service (BaaS) is a process when a bank provides seamless integration with its IT systems through open API, smart contracts, and distributed ledger technologies.
Banks are providing various fintech and non-fintech organizations with their back-office services like Amazon or Google lease their infrastructure services.
Bank as a Service allows any business to integrate all the financial instruments it needs into its business processes, completely customizing the bank for its purposes.
This practice eliminates the necessity for organizations to build their own banking apps while saving time and money on the development from scratch.
Here are examples of the services that BaaS provides today:
- Card processing and payments
Non-financial companies can use Banking as a service to add payment functionality to their platforms or apps. This way non-financial companies can lower their operating costs as they don’t need to develop and maintain their own banking infrastructure.
- ID verification
With BaaS platforms it’s easy to plug into banks’ KYC (Know your customer) systems. They help fast identify and verify customers’ identities before processing payments and prevent fraud or money laundering.
- Credit arrangements
Various retail sectors like eCommerce, Travelling and Booking, and others can provide an opportunity to open a loan by using a special BaaS API. Formalizing a credit online saves time and helps to avoid paper routine.
- Enhanced customer experience
Different companies can integrate their services into one and provide their clients with a smooth customer experience. Besides that, such service blending helps banks to grow their customer bases by providing BaaS services to companies from various niches.
- Online banking services in an app
Some FinTech companies can provide personalized banking services like spendings accounting or even start their own online-only banks which can offer all the services a customer can receive in a brick-and-mortar facility.
How Does BaaS work?
BaaS is a complex system that needs to be secure and reliable, involves strong authentication and data protection measures, and complies with the banking laws of the user location.
There are several ways on how to connect to BaaS:
API-based BaaS stack
Software developers use Application Programming Interfaces (API) to connect their digital solutions to BaaS platforms.
API-based BaaS stack includes a three-layered structure:
- Infrastructure-as-a-service (IaaS) includes traditional licensed banks that provide common financial operations.
- Bank-as-a-service is a layer that goes above traditional banking. It represents a software layer with a number of services that are customized for various FinTech startups and other financial companies. This layer ensures that the data travels between a traditional bank and a FinTech company.
- FinTech ecosystem layer includes the companies that interact with end-users. They receive users’ data and requests on performing financial operations and send all these to BaaS layer platforms.
Cloud-based BaaS stack
Another way to use banking in your web application is to tap into secure widespread Cloud services.
Some tech companies obtain their own banking licenses and can operate as regular financial institutions. These companies don’t need to rely on traditional banks anymore. Therefore, they redefine their BaaS stacks, turning them into Cloud solutions. For example, Amazon Web Services having a banking license can provide its users with IaaS and server hardware infrastructure.
Amazon can go even further and turn its platform into Banking-as-a-platform (BaaP) or FinTech Software-as-a-service (SaaS) facilities. It means that now any company can benefit from Amazon’s banking platform by plugging into its infrastructure and using banking services on demand. All these results in the virtualization of traditional banking services and ensure their seamless and quick implementation in any web application.
BaaS platforms are the future of banking and finance industry development. By blending BaaS and FinTech solutions banks and brands that rely on banking obtain great opportunities for business development, improvement of their customer services, and innovative experiments.
Besides that BaaS platforms help to develop strong brand recognition and establish trustful relationships with their customers while reducing development costs and reducing the time for bank operations.