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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.

However, the growing competition for clients and the necessity to keep pace with innovations have urged many banks to turn to digital transformation.

Banking as a Service (BaaS) is one of the quickly growing trends that banks and financial institutions successfully implement to reach wider audiences. BaaS unlocks new opportunities for banks and non-financial institutions, allowing them to blend their services into high-quality digital solutions that effectively cater to the needs of the most demanding customers.

In this article, we’ll uncover what Banking as a Service is and explain how many banks and non-financial institutions can benefit from implementing BaaS solutions.

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.

What Is Banking-As-A-Service?

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 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 routines.

  • 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.

The History of BaaS

The banking and finance sector digitization has always been going slow. This is mainly caused by sensitive data security issues. Nevertheless, with the development of digital technologies and cyber security strengthening, banks and financial institutions started adapting them first for improving their inner workflows and calculations and later to provide a better customer experience.

The first online banking service was launched in 1997 by Sumitomo Bank. However, the mass adoption of online banking started only in the 2000s. For example, Statista says that in 2007 in the UK 32% of people used online banking services whereas in 2022 the figure has risen to over 90%.

Banking and financial institutions’ digitization hasn’t stopped only at providing online services through tailored financial applications. Today, banks have moved further and begun to offer Banking as a Service (BaaS). It works similarly to white labeling when a business takes products manufactured by third-party companies, puts its brand label on these products, and sells them as their own. But, this time, instead of products, companies use banking services. They add the services to their platforms or applications with the help of APIs to improve their customer experiences, e.g. offering special debit cards with a point-credit system for each purchase, providing loans to buy the company’s products, and much more.

BaaS started with the facilitation of online payments on other non-financial platforms. Embedded online payments have opened new revenue opportunities for many online platforms and gave impulse to the development of e-commerce platforms.

Currently, BaaS is growing further and the number of banking services provided via BaaS has increased tremendously. They can be: providing special loans and discounts to the businesses that use the BaaS of a particular bank, personal loans to non-financial platform clients, simple payment processes, checking and saving accounts, wealth management, overdraft services, credit and debit cards, compliance with regulatory requirements, and many others.

Banking-As-A-Service Industry Outlook

BaaS services are gainin