Banking as a Service (BaaS) – Top 3 Reasons for the Rising of it
After the covid pandemic, fintech businesses and online banking are touching every banking value proposition. In reality, according to the most recent research, Open Banking and Banking as a Service will reach USD 43.15 billion by 2026. The phrase “Banking as a Service,” in particular, has many people perplexed. Here, we are going to give you detailed information on Banking as a Service. So, let’s get started:
What is Banking as a Service?
By interacting with banks via APIs, banking as a service, or BaaS, enables non-banks to provide core financial services to their clients. Non-banks such as fintech and even non-fintech companies create products on top of the infrastructure used by traditional banks.
For Example, if you have a retail store like “Reliance” or “Walmart”, We can give your customer a debit card. With this card, they can buy anything from your store. They don’t have to use their bank card or cash anymore. This allows you to strengthen your customer’s trust. Every time they use the debit card which you provide to your customers, relations between your business and customers are getting stronger. With this service, you could analyze your customer’s behaviour and provide better service according to it.
There are many ways for non-banking sectors to give their customers their banking service for improving their customer’s experience and gaining more revenue. But when you want to provide banking services, you need to have a banking license according to every government bank in the world. A license of this kind is also challenging to obtain because of the systemic importance of banks to the operation of the economy. In addition to substantial capital requirements, obtaining a license necessitates adherence to stringent rules regarding, among other things, deposit protection, money laundering, and banking secrecy. Banking as a Service can help in this situation.
A proper description of Banking as a Service (BaaS) is where licensed banks can add their digital banking service to the product of other non-banking businesses. This is how a non-banking business such as a retail store will provide their customer banking services such as debit cards, loans, mobile bank accounts, and payment services without having any banking license.
So, with BaaS, practically any company can start offering financial services with just a few lines of code. Due to the fact that banking services are provided through a non-branded bank’s product, the term “BaaS” is also frequently used to refer to “white-label banking.”
How does Banking as a Service Work?
For Fintech businesses, Banking as a Service offers amazing and flourishing opportunities to deliver their customer’s banking service flexibly. Without significant capital needs or financial licenses, the BaaS solution providers have proven their ability to offer banking services using APIs that can be established and delivered quickly. And APIs refer to the digital banking framework. These APIs support usage of banking services by non-banking businesses, fintech businesses, and developers. It gives that power to control the banking services if you want to add any layers to existing banking services like non-banking companies need to pay for using BaaS, BaaS platforms use APIs and non-banking services offer banking services through APIs.
Benefits of Using BaaS
- BaaS assists organizations in generating more revenue by facilitating cross-selling opportunities due to API-driven facilities. In actuality, 43% of banks like operating under a strategy that enables them to impose a fee for every API transaction.
- In terms of innovation and speed, fintech and IT companies are in the lead. Banks, on the other hand, have access to enormous funding capacity as well as the trust of their customers. Both sides can find novel revenue-generating strategies together.
- Businesses may compartmentalize business logic and data with BaaS, which speeds up the development of new apps.
- Using their APIs and those of third parties, businesses may innovate considerably more.
- Using API ecosystems when developing goods and services can significantly expand the customer base. A bank gains new clients by working with a third-party participant. Additionally, they learn about the tastes of the customers. their spending patterns and financial needs, for instance.
Banks can now make tailored offers for their consumers using this newly acquired knowledge. After all, individualized offers are more likely to elicit a response from 80% of clients. They can also use multi-channel marketing in a more focused manner. This can aid them in lessening their need for above-the-line expenditures.
Banking as a Service Players
There are three major players in the playground of BaaS:
- Fintech or non-fintech company
- Banking as a Service Platform
- Traditional or New Age bank
Here, we are going to tell about what these players do and how they do it, so here we go:
1. Fintech or non-fintech company
Fintech companies like Paytm, and Razorpay or non-fintech companies interact with users and customers directly. These businesses are mainly the customers of BaaS platforms. Their customers are connected with their banking service through the products. The BaaS platform is typically plugged into by fintech and non-fintech companies to offer financial services to their clients. Fintech services must adhere to its rules because they are offered over a BaaS platform.
2. Banking as a Service Platform
The Banking as a Service (BaaS) platform offers the software necessary for secure data transfer between a traditional bank and a business or fintech firm. This layer is sometimes referred to as middleware or the layer for “banking as a service.” Fintech companies or businesses are always connected with BaaS platforms. Some BaaS platforms have a license to control as a bank. The BaaS platform is built using APIs. Consider it as a back-end that houses different Fintech startups and non-bank companies. To ensure secure operation across the domain, the BaaS layer needs to be constantly monitored. Secure authentication is additionally crucial.
3. Traditional or New Age Bank
The physical infrastructure, also known as the “Infrastructure as a Service” (IaaS) layer, is provided by the banks. These are the fundamental infrastructure services, such as the hardware for servers and communications. Banks have the licenses necessary to provide core banking services. They give BaaS suppliers access to their main banking system.
These IaaS services might now be on-demand and unrelated to fintech. For instance, after launching an app, servers can be rented through Amazon Web Services (AWS). IaaS services are also available for on-demand rental from conventional banks.
Top 3 Reasons for the Rising of BaaS (Banking as a Service)
There are 3 main reasons that BaaS platforms emerging on the scene, which are mentioned below:
1. User Demand
2. Outgrowth of Fintech Companies
3. Banking Revenue
1. User Demand
This is the most important reason for the rise of the BaaS platform. Users always want to go for a quick and short process. Today everyone is becoming a tech intellectual. BaaS is the best way to involve users in digital banking services. Additionally, customers want integrated experiences. Business expertise refers to these integrated experiences as “ecosystems,” which are simply end-to-end products that eliminate the need for the client to use any additional services to complete their buyer’s journey. In actuality, ecosystem companies generate 2 times as much income as other businesses.
For example, if you have a grocery store, you can offer your customers a debit card for shopping ability. Better client experiences and greater loyalty will result from this. The most significant benefit is that it will establish an ecosystem so that your consumer won’t need to look for another solution to meet their financial needs.
Additionally, several fintech companies are focusing on small enterprises as possible clients. They provide them with reasonable loans and user-friendly online banking services. However, when dealing with traditional banks, 70% of small and medium-sized firms (SMEs) find it difficult to meet their financial needs.
2. Outgrowth of Fintech Companies
Fintech companies are growing so quickly, that now India has an 87% rate of Fintech companies. Integration with banks is necessary for fintech companies to sell their products. As we previously stated, most businesses cannot afford to obtain a bank license. A banking license’s capital requirements and compliance standards make sure of that. The outcome? The BaaS model now serves as the sole entry point for fintech companies into the market.
3. Banking Revenue
We are aware that bank integrations are crucial for fintech firms. Recent reports, however, predict a potential drop in banking income and profitability in the near future. For traditional banks to remain in operation, profitability must continue. They can expand their product offerings and establish new revenue streams by integrating with non-banks. They will be able to assist more clients and meet their sophisticated technological needs. Collaborations with companies that have a highly scalable business plan would be the most profitable.
Challenges of Banking as a Service
1. Issues with traditional banks
Yes, the core systems of traditional banking are overrated. They are still facing issues with modern technologies. This might be a major problem when putting the BaaS paradigm into practice because it would make third-party integrations more difficult. Modernized bank architecture would be a part of banking as a service in the future. This would make it easier to expose services, goods, and operations like APIs.
2. API Strategy
A bank or business (middleware) opening using APIs is no easy task. The business competencies and operational procedures must be optimally exposed. However, most businesses encounter difficulties while developing an API strategy.
The simplicity of integration should be the key objective while developing an API approach. It ought to be able to maximize business value while minimizing the onerous integration requirements. The globalization of API approaches may be part of the financial sector’s future.
Taking everything into account. The BaaS industry is still growing. In the coming ten years, it will be interesting to examine how technology development affects the BaaS paradigm.
3. Losing Customer Trust
According to research, suddenly customers’ trust is moving toward Fintech companies from traditional banks. Many tech companies are going for the Banking as a Service platform with their high customer support. Additionally, BaaS involves working with third parties. Naturally, there are many functional capability overlaps. Additionally, many businesses use white labelling while presenting their product offerings. This may perplex final consumers.
Taking these into consideration, the future of BaaS indicates a significant change in player obligations. Banks may stop being solely focused on their primary banking services and instead take on the role of “assemblers” as opposed to “manufacturers.” As value-added services, banks will instead combine the services provided by their partners.
The effect of BaaS will only expand as the consumer wants, expectations, and technologically enabled capabilities rise. Most banks will need to completely embrace BaaS if they want to maintain their digital relevancy, maintain market share, and maintain industry presence. We hope this article will help you to understand BaaS better. If you want to know more, then keep your eyes on our website.