What is Banking As a Service and How is it Different From Open Banking

An FDIC-insured bank lends its license to a BaaS provider and grants access to its financial products. The provider communicates with the bank’s infrastructure via APIs and delivers financial solutions for fintechs to use. https://globalcloudteam.com/ Those, in turn, give access to banking functionality to their end customers, allowing fintechs to integrate BaaS functionality into their products, providing a safe yet ingenious approach to old fintech solutions.

• Also, according to Future Market Insights, the worldwide BaaS platform market is increasing at a CAGR of 15.7% and is predicted to reach $12.2 billion by 2031.
• The cost of acquiring a customer is typically in the range of $100 to $200, according to Oliver Wyman analysis.
• This neobank has already served more than 10,000 businesses- helping them process payroll using Opfin, paying expenses using a Corporate Card, and paying business vendors in real-time using the underlying payouts layer.
• 70 percent of the IT budget in European banks is aimed to keep bank operations running and only 30 percent to introduce new services or improve processes.
• Open banking refers to the process by which banking institutions share customer information with third party providers with the account holder’s explicit consent.

Banks with a forward-thinking product strategy, mature application design, and scalable technological infrastructure may move quickly toward the long-term aim of establishing a microservices-based architecture. On the technology side, they will need to update development approaches, pursue process automation, experiment with rapid prototyping and maintain the APIs themselves. All these ingredients ensure the right kind of environment — one where third parties can integrate and test their apps in a sandbox, and then easily move to production.

RazorpayX: A Successful Use Case of India’s Neobanking Platform

Lastly, the system’s two-way flow of user data and information gives new insights into their customers’ buying and investing habits. Fintech startups get the unique opportunity to implement their financial solutions within tight timelines, on a reasonable budget, and without obtaining a banking license. The BaaS layer provides the necessary two-way data flow between banks and end customers. To top off this expensive banking-as-a-service and challenging process, they would have to also face significant regulatory hurdles. Stride handles all the back-end transactions such as providing the debit card, managing the money flow through the driver’s account, and maintaining regulatory requirements. Yet on the front end, the drivers handle their banking activities via Lyft’s website or mobile app and have virtually no interaction with Stride bank.

Open banking has seen widespread regulatory support, with PSD2 , CMA , and UPI enabling the release and sharing of data by banks in a secure, standardised form. Starling Bank, the UK-based neobank, launched a BaaS service named “Starling as a Service” in 2018. Opening up its APIs, Starling has enabled other challenger banks, such as Ditto, to launch using its licence and platform.

PSD2’s AISP Services: Possibilities in the Dutch market?

The team is focused on building fully automated processes, providing nearly invisible infrastructure to end users, and creating a global digital ecosystem for customers to build their own scalable banking products. Banking as a Service is important because it improves the end customer experience by providing comprehensive BaaS solutions as partnered ecosystems. BaaS provides traditional banks with new customers and enhanced revenue streams. FinTech companies and other providers of the BaaS experience launch small businesses with substantial growth potential, new products, and business models. When you first start providing embedded finance services to customers, you may start with only one service, such as cards. As customer demand grows, you may want to provide access to additional services, such as financial accounts.

For distributors, it is an opportunity to open new revenue lines at attractive margins and gain a much deeper understanding of consumer behavior through financial data. To fight back, some incumbent financial institutions are spending billions of dollars to digitize their existing business models. But it might be more effective for them to start up new models – that is, BaaS – by embedding their products in other platforms. Financial management apps are prominent TPPs that benefit from open banking. They aggregate information from all of your different bank accounts into one application, enabling you to better oversee your finances.

Redesign of staff training, process, and documentation for a platform model will likely be necessary as well. The key thing to remember though, is that different to BaaS providers, the TPPs are not able to perform banking services , as they don’t hold full banking licences themselves. They are simply repurposing account information from your existing bank accounts to provide insights or trigger transactions. Your BaaS provider should significantly help handle compliance and regulation requirements on your behalf, minimizing the amount of internal resources you need to maintain them on your own. This guide covers the basics of BaaS for software platforms in the United States (the financial services and products covered here work differently in Europe and Asia-Pacific). You’ll learn why you should embed financial services in your product, how to evaluate BaaS solutions, and how Stripe can help.

Solutions

Developers can extend platform functionality using APIs, while the platform itself manages data exchange and oversees authentication, as well as ensuring compliance. Driven by regulation, the advent of open APIs will upend the status quo by allowing third parties to act as alternative distributors and offer a new range of products. As the delivery of financial services changes, incumbent banks are being forced to consider alternative models — Banking as a Platform is one of these options.

“The key question incumbents must ask themselves is whether banking is a destination or an enabler? As an enabler, banks can go beyond their products/ services and embed themselves within customers’ lives, paving the way for ecosystem banking,” says Christopher Young, Director, Financial Service Strategy, Adobe. Banking as a Service describes a model where customers interact with the service provider’s solution integrated into a merchant’s product. An example of such relationship can be seen when completing an eBay purchase by paying with your PayPal account. To see banking as a service in action, consider the bank account and debit card that Lyft offers to its drivers.

The benefits of embedded finance

Today, most platforms are considered part of the “SaaS 2.0” generation, which facilitates online payments for their customers—marking their first step into embedding financial tools into their product. This feature has become table stakes for platforms; without embedding online payments, platforms have a much harder time competing in the market. Facilitating online payments also helps SaaS 2.0 platforms generate more revenue—in addition to charging for monthly subscriptions, they can also charge customers for access to payment processing.

Then, each time your customers use their card, they would interact with your brand. By analyzing your customers’ spending behavior, you could understand them better and offer them more tailored services. Embracing the new developments in financial technology and services, the Banking-as-a-Service stack can be redefined in analogy to the Cloud stack.

These services ensure a secure yet fast process approval which helps the banks to focus on customer personalization and improving overall banking experience. Banking as Platform is an end-to-end on-demand service, which is provided over the web. The process involves moving the banking services to subscription-based platform services hosted over the web.

Figure 1. Surveyed US consumers’ willingness to use platform banking services

In fact, many banking platforms will use the open banking operational model. This means that the banking platform uses open APIs that enable third-party developers to build applications and services around the financial institution. In a way, open banking allows for more platform banks to exist since they can be built with more collaboration with the remote banking community. Utilising this strategy, the third parties, such as fintechs, digital banks, or other non-bank business’ can build their own products based on the foundations provided by the bank – integrated via APIs. These regulations include Know Your Customer , anti-money laundering , OFAC sanctions lists, and data privacy and security. For Banking as a Service to function as expected and banks to remain in regulatory compliance, RegTech should be part of the BaaS process.

The study underscores that the market is estimated to grow at a CAGR of 9.8%, earning revenue of around USD 1,485.5 million by the end of 2028. Banking as a platform is a digital ecosystem that allows third-party solutions to work directly with the bank’s infrastructure without a BaaS provider. Convenience, speed, and a wide selection of payment options are only some of the perks that BaaS platforms provide to the consumer experience. Never in history have buyers been equipped with more fintech tools for transaction and payments solutions. The end-user is able to receive more and more information and therefore are becoming empowered clients who demand integrated and direct experiences with the services or products they consume. Legence could afford to provide the customers the platform services like CSI CRM, mobile banking platforms, and connected baking platform at cheaper costs than many of their competitors with the help of CSI’s tech experience.

Since the providing bank has all of the regulatory permissions to offer banking services, BaaS users can integrate them without having to go through burdensome regulations themselves. ClearBank is notably the UK’s first new clearing bank in 250 years, and aims to transform the clearing bank experience and create a new level of open competition and transparency in the UK market. Its technology stack transforms the ability for financial institutions to provide current accounts to their customers, resulting in faster, more efficient payments, and financial inclusion. Banking as a service is a model that allows virtually any business to offer financial products and services to their customers by partnering with a licensed bank. Despite this, financial institutions are uniquely positioned to use the BaaP model to provide both a network of innovative products and services and the trustworthiness of a long-standing institution.

With Banking as a Service, customers don’t need to seek these financial services or products separately through a traditional bank’s website, mobile app, or branch location. BaaS is based on an API software connection between banks and non-banks, including FinTech companies. BaaS providers seamlessly embed financial services in the online interactions of brands and their customers. Platform banking is not restricted to retail financial services—it does apply in the institutional context as well, whether for corporate customers or buy-side firms. FXall, an electronic, foreign exchange trading platform, offers access to over 180 liquidity providers.4 While FXall is a third-party platform, it illustrates the potential of platforms in the institutional markets as well.

Speed to market

It was one of the pioneers in using banking as a platform, and many local banks have followed their approach. Platformification, as it is called, offers customers more services, unique customer experiences, and a slew of benefits, including convenience, greater choice, and often better pricing. Adopting an API-fueled, platform strategy brings with it many organizational and technical challenges. Organizationally, banks will need to create multidisciplinary teams, redesign customer experiences and reshape business architecture. Although open banking has many similarities to BaaS , the purpose is different. BaaS enables firms to offer banking products, while open banking gives access to data.

What is Banking-as-a-platform(BaaP)?

Transitioning to a genuine microservices-based architecture, like with any large-scale technology transformation efforts, necessitates considerable commitment in both resources and time. Platform banking requires a foundation based on micro-services architecture. Customers control the data they create, and they have the authority to direct banks to share it with those they trust, according to the principle of open banking. Open banking is gaining momentum worldwide with PSD2 , CMA , UPI and many similar initiatives being undertaken elsewhere. These regulations seek to open the financial sector to competition, stimulate innovation, reduce costs, increase transparency and empower consumers.

This can provide crucial insights into customer patterns and help fintech companies better personalize their financial products and offerings. The second layer represents the “Bank-as-a-Service layer” that maps out banking services customized as an ecosystem for fintech companies to deliver products to end users. This part of the stack sends data back and forth between the bank and fintech, through the BaaS provider as an intermediary. Examples of top-rated BaaS providers include the non-banks, Railsbank, Finastra, and Marqueta, and the bank, BBVA. Third-party BaaS providers improve the user experience through their BaaS platforms. For a financial institution, it is an opportunity to reach a greater number of customers at a lower cost.

Size and Performance of European Banks: Can small…

Regulated banks and financial institutions with licenses securely link to a non-bank entity’s embedded financial services through an API , enabling seamless communication. The customer doesn’t need to go to a different bank website to get financial services, including loans, making payments, product financing, credit cards, or digital wallets. Founded in 2016, solarisBank’s business model lets customers seamlessly integrate financial services into their offerings through modern RESTful APIs.