What is Banking-as-a-Service And Why is It Trending?

The fundamental changes in commerce and the switch in consumer behavior forced businesses to develop more technological solutions. Switching to digital opened new possibilities for companies to improve customer experience and seamlessly introduce the financial side into it. Nowadays, SMEs and  startups no longer interact directly with conventional banks since most of their financing needs can be fulfilled by logging into their e-commerce or accounting platforms. Frequently these platforms aren’t operated by banks. Such operators offer customers seamless, convenient, and easy-to-use financial products through a partnership between banks and technology companies. The coexistence between commerce and financial providers is possible due to the Bank-as-a-Service (BaaS) model. The introduction of this approach allows SMEs to provide real-time financial services and automate this process. Future Markets Insights predicts that the global BaaS platform market will reach  $12.2 billion in 2031. No wonder so many companies are interested in adopting this model. 

What is BaaS?

Banking-as-a-Service (BaaS) uses application programming interfaces (APIs), enabling non-banking businesses like retailers and  e-commerce  companies to offer financial products to their customers. Financial services like loans, payments, product financing, credit cards, and digital wallets are available to end users without additional visits to another bank’s website. Embedded financial services can be co-branded or implemented as white-label banking (so they don’t display the bank’s branding). Speed, ease, and cost of payments are of utmost importance to SMEs. Many studies and reports demonstrate how high costs and lengthy payment delays seriously obstruct their growth plans and daily operations.

Embedded Finance vs. BaaS

Banking as a Service (BaaS) is often referred to interchangeably with Embedded Finance. Although BaaS shares many similarities with embedded finance, it differs in practical ways, since BaaS is the framework around which Embedded Finance is built. Embedded finance provides consumers with end-to-end service by incorporating BaaS as financing for other products or services. In essence, BaaS is crucial to support the structure of embedded finance. Other differences between BaaS and Embedded Finance can be classified in terms of use, order, and functionality. 

Layers of BaaS

While working with BaaS you should keep in mind that different bank-as-a-service providers have different sets of services. They can have multiple layers of services, and the client can choose to adopt a couple of layers or a single layer into their business. It depends on the needs of the company. Among the basic layers are: 

▪ User Interface

▪ Fraud as a Service 

▪ Regulatory as a Service 

▪ Data as a Service 

▪ Payments as a Service    

▪ Core Systems as a Service 

▪ License as a Service 

Future belongs to BaaS 

The financial sector is rapidly changing, and BaaS is changing with it, offering more options for non-bank entities and attracting new consumers. Banks, fintech companies, and service providers are actively using this model, creating new financial solutions. By introducing more options and expanding networks, they once more prove that the future belongs to BaaS. So how can the BaaS model provide novelty to the products, and what benefits does it give to entities? 

API infrastructure providers expand the network. Instead of partnering with one peculiar bank, you have more options to cover your specific needs. With more options, available clients can get additional benefits and functionality. For example, an online payment processor can enlarge their clients’ services with loans, fraud detection, or issuing cards to better serve their end-users needs. A professional service can help clients, from picking the most suited vendors to building customized fintech solutions based on the provided API. 

Another trend that is occurring in BaaS is new technological incorporation. Trending technologies like Artificial Intelligence, data analytics, and blockchain possess unique features. By implying these technologies to your product, you may get brand-new offers: autonomous money, smart depositing, enhanced AI fraud detection, and so on. First-generation APIs were designed to provide customers with basic financial functions. Still, the next generation will leverage emerging technologies to provide customers with advanced functions.

On the outcome we receive: 

▪ Seamless integration: Financial applications are usually complicated with different components, resulting in multiple integrations. This model takes away the pain of integrating various software.

▪ Simplicity of choice and comparison: Aggregating all vendors into a marketplace will allow end customers to quickly compare the service offering and price and pick the most suited solution for their needs.

▪ Modular in nature: By grouping each service (KYC, AML, etc.) into modules, the end-user can select only those services they want.

▪ Reduced risk: Compliance, security, fraud, and data are the most significant issues financial institutions deal with daily. The use of different vendors reduces the risk of exposing “all information” if there is a breach.

Conclusion

We are convinced that BaaS is a facilitator of changes in the financial world. This model allows financial institutions, non-bank entities, and service providers to capture new sources of revenue and attract more consumers. BaaS business is scalable and agile, making it particularly suitable for entering new markets and then expanding. If you are ready to set up your own  fintech product, don’t hesitate to reach us. 

Proffiz aligns with your business needs, building modern and comprehensive  products as the best fintech software solutions provider and increasing the growth of the fintech industry and beyond!