Customers today - be it individuals or businesses - are being offered innovative financial services within the platforms that are most familiar to them. Thanks to banking as a service or BaaS, access to financial products has gone beyond the four walls of the bank, and into the hands of those who need it most. Here we delve deeper into what it entails, its scope and the gap it addresses.

What is Banking as a Service? 

To best understand banking as a service, consider this: A local store manager, XYZ, faces stiff competition and seeks to strengthen customer loyalty. He offers customers a debit card - and each time customers use said card, they interact with XYZ’s brand and gain loyalty points. XYZ leverages the data generated to analyse customer spending behaviour. This, in turn, allows XYZ to offer customers tailor-made services.

This is banking as a service, where licensed banks directly tether their digital banking services to products belonging to separate, non-banking businesses. As a result, non-bank businesses, such as the store managed by XYZ, can offer its customers banking services. These range from debit cards and loans to mobile bank accounts and payment services. These non-bank businesses aren’t required to acquire a banking license of their own. 

With BaaS, FinTech companies along with third-party organizations gain access to a bank’s system with the aid of APIs. Organizations can then create innovative financial services with the aid of the bank’s regulated infrastructure.

Why Banking as a Service is Relevant and who benefits from it

There exist a number of ways by which non-banking organizations can enhance their customer experience and boost revenue by offering their own banking services. Yet, should these banking services be offered, governments across the world would require organizations to hold banking licenses. Owing to the systematic relevance held by banks in the economy, obtaining such licenses would be difficult. Not only does it call for a vast amount of capital, but it also requires compliance with strict regulations. Such regulations cover money laundering, deposit protection and banking secrecy among others. Set against this backdrop, the relevance of banking as a service becomes clear.

Simply put, BaaS enables almost all forms of businesses to become banking providers with just a few lines of code.

The Need for Banking as a Service

Banking as a service is needed for a number of reasons, of which the more prominent ones are:

• Customer Demands: One of the primary drivers of BaaS is the demand for integrated financial services. As customers become more tech-savvy, they demand financial products that are all-encompassing and user friendly. Customers are drawn to integrated experiences often referred to as “ecosystems” within the realm of business. Such ecosystems offer end-to-end products such that customers needn’t look to another service in order to tie up their buyer’s journey. Ecosystem companies are known to boast twice the revenue in comparison to others. It is, therefore, no surprise that financial offerings make up a key component of such ecosystems. 

• Banking Revenue: Although banks serve as the foundation for FinTech players, reports indicate that the banks’ current revenue and profitability models may not hold in the near future. Continued profitability is a must in order for traditional banks to continue to be serviceable. By integrating with non-banks, they can derive the revenue they need and grow their products. Businesses with greatly scalable business models can prove to be most profitable in this regard. 

Advantages of Banking as a Service

Banking as a Service offers lenders and businesses the opportunity to collaborate and provide better financial services to consumers. With careful planning and a solid understanding of the process, it can be a highly beneficial partnership for all the parties involved.

• Faster time to market : BaaS enables businesses to offer financial services to their customers without having to invest in building and maintaining the infrastructure themselves. This speeds up the time to market, allowing businesses to offer new products and services more quickly and efficiently.

• Reduced costs : The biggest advantage of Banking as a Service is that it eliminates the need for businesses to build and maintain their own financial infrastructure, which can be costly and time-consuming. This can lead to significant cost savings too over time.

• Greater flexibility : Businesses can offer tailored financial services to their customers, rather than relying on a one-size-fits-all approach. This enables greater flexibility and customization and allows businesses to differentiate themselves from competitors.

• Improved compliance : BaaS providers are responsible for maintaining compliance with relevant regulations, which can be a complex and time-consuming process. By partnering with one such provider, businesses can offload this responsibility and ensure compliance without having to invest significant time and resources.

• Enhanced customer experience : With BaaS integration, businesses can offer a seamless, integrated financial experience to their customers. A more streamlined and enjoyable experience increases customer satisfaction and loyalty.

How does Banking as a service work?

Here’s a simple step-by-step breakdown of how Banking as a Service (BaaS) works. As a lending business owner, you must know these to get started:

1. A third-party business (e.g. a fintech startup) integrates with a bank's APIs to access its banking services.

2. The third-party business then uses these services to offer its own financial products to its customers, such as payment processing, lending, or account management.

3. The bank charges the third-party business for the use of its services, typically through a transaction-based or subscription-based pricing model.

4. The third-party business is responsible for handling its own customers' data and maintaining compliance with relevant regulations.

How BaaS ties up with B2B Credit 

With a USD 1 Trillion market potential, the banking as a service model has heavily equipped business-to-business (or B2B) transactions. This also explains why only a quarter of B2B transactions are still done via cheques. Pain points that exist within B2B payments are being addressed by FinTechs that offer Embedded Finance APIs which allow platforms catering to businesses to offer customized credit in context.

For example, platforms serving MSMEs - e.g. retail tech and B2B E-commerce - can offer credit in-context to merchants on their platform. Embedded Finance enables lenders to leverage platform data to offer MSME businesses customized, short-term loans with tailored repayment plans. Platforms can also offer merchants Buy-Now-Pay-Later payment solutions at checkout, thus boosting Average Order Value and enhancing Customer Lifetime Value. Merchants can select a payment schedule that works for them and repay the amount with little to no interest.  

Banking as a Service Examples

By partnering with a BaaS provider, businesses can focus on their core competencies, while providing a better customer experience. Take a look at some of the most popular applications and examples of Banking as a Service:

1. Payments processing: One of the most popular applications of BaaS platforms is that they enable businesses to offer payment processing services to their customers, without having to build and maintain their own payment infrastructure. Hence, businesses can process payments quickly and efficiently, while providing a seamless payment experience for their customers.

2. Lending: Offering lending services to customers without having to invest in building your own lending infrastructure can be done with the help of a BaaS platform. This allows businesses to offer loans extremely easily, hence accelerating the process and enhancing customer experience.

3. KYC (Know Your Customer) compliance : BaaS providers can offer businesses access to their KYC compliance infrastructure, which can be a complex and time-consuming process when done manually. By partnering with a BaaS provider for KYC compliance, businesses can save time and resources, while ensuring compliance with relevant regulations.

4. Account management : With access to a BaaS provider’s account management infrastructure, businesses can offer their customers a seamless account management experience. This can include features such as balance inquiries, transaction history, and account statements.

5. Fraud prevention : Keeping customers’ hard-earned money safe is a priority for banks and financial organizations. With access to fraud prevention infrastructure by BaaS providers, businesses can better protect their customers from fraudulent activity. This can include features such as real-time fraud monitoring, fraud detection algorithms, and risk-scoring models.

Conclusion 

FinBox brings every aspect of the lending lifecycle - contracts, integrations, workflows - into a low-code platform. Our simplified, developer-first APIs are designed in collaboration with experts from financial institutions, so your business can start offering financial products as early as three weeks.