Banking as a Service (BaaS) technology is a digital transformation that integrates various real-time financial services and products into the business offering of non-bank businesses. An example is the most effective way to explain BaaS. Think for a moment that you are the airline’s manager. Given the intense competition you face, you want to increase consumer loyalty. For example, If you could provide your clients with a debit card, you could give them rewards points each time whenever they use their card to make a purchase. Your clients would then interact with your brand each time they used their cards. This way, you could better understand your clients and provide them with services that are more suited to their needs by studying their purchasing patterns.
Or what if you could provide online loans to your consumers for their airline tickets right on your website? This way, your customers could finance their holiday without ever having to interrupt their customer journey. You could increase the number of flight tickets you sell which can directly influence how much money your customers spend. In business, a loan also represents much deeper customer interaction with more touchpoints than just a single sale.
There are a number of ways non-banks can increase consumer satisfaction and revenue by offering their own financial services. However, practically every country in the world mandates that you have a banking licence if you wish to provide banking services effectively. But such a licence is challenging to obtain because of the systemic relevance of banks to the functioning of the economy. Acquiring a licence imposes not only significant capital requirements, but more importantly compliance with strict regulations on money laundering, banking secrecy and deposit protection. This is where BaaS comes in.
The term ‘BaaS’ refers to a business model in which authorized banks include their online banking solutions right into the offerings of other non-bank companies. In this manner, a non-bank company, like your airline, can provide its consumers with digital banking services like mobile bank accounts, debit cards, loans, and payment services without having to obtain their own banking licence.
Your customer can access banking services through the website or app of your airline because the bank’s and airline’s systems are connected via Application Programming Interfaces (APIs) or webhooks. Your airline only serves as an intermediary and doesn’t really handle the customer’s money, therefore it is exempt from all of the regulatory requirements that banks must meet.
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’. In Europe, BaaS market is expanding vigorously. Banks like Solarisbank, ClearBank, RailsBank, and Starling Bank are prominent BaaS players in Europe’s expanding market. Established banking behemoths on the other side of the Atlantic are also introducing BaaS projects alongside their current offerings, like BBVA in the US.
BaaS need to get regulated?
Experts think that licensing and regulation of financial institutions in the banking sector is important. Know Your Customer (KYC), anti-money laundering (AML), OFAC sanctions lists, and data privacy and security are a few of these requirements that need to be carried out. RegTech, a class of software applications for managing regulatory compliance must be incorporated into the BaaS process for it to work as intended and for banks to continue to be in compliance with regulatory requirements. RegTech also aids in the detection of online fraud.
The BaaS is mostly used by Neobanks, these are online-only banking platforms without physical locations or a banking licence. ‘Challenger banks’ are another name for neobanks. These neobanks are non-bank FinTech firms with a focus on particular facets of banking, such as checking and savings accounts and the issuance of credit cards rather than loans.
What is the BaaS model?
The BaaS concept enables third-party providers (TPPs) and non-bank FinTech companies to incorporate financial services into their product offerings. These partners employ API integration to connect with a bank’s infrastructure system, using the licenced bank or middleman FinTech software business as a BaaS provider. The players in the BaaS concept can share customers and generate revenue streams.
Examples of top-rated BaaS providers
Top-rated BaaS providers include the banks BBVA and the non-banks Railsbank, Finastra, and Marqueta. They provide global and BaaS-embedded finance services. Through their BaaS platforms, third-party BaaS providers enhance the user experience.
The United Kingdom, Europe, and the United States are all served by London-based BaaS provider Railsbank. Contrary to its rivals, Railsbank built its own proprietary infrastructure that doesn’t rely on old software stacks. Railsbank connects directly to payment rails to expedite payments while providing a range of BaaS offerings. Railsbank provides the Buy Now Pay Later (BNPL) feature. Railsbank, which has raised tremendous amounts of money in debt and venture capital rounds from investors like Visa, is looking to raise an additional $100 million in funding this year.
Through its FusionStore, the BaaS provider Finastra offers FusionFabric.cloud, an open developer platform, and an app marketplace. With its worldwide headquarters in London, Finastra also has offices in the United States. According to recently released data, Finastra serves 90 of the top 100 banks in the world and has introduced Finastra Managed Services (FMS) on Amazon Web Service (AWS).
Marqueta provides personalized rewards, card controls, and client preferences via its real, virtual, and tokenized credit cards, debit cards, and prepaid debit cards. Marqueta serves digital bank and non-bank customers across a variety of industries utilizing its cutting-edge, embedded, open-API BaaS platform, which is also a payments processor. Through strategic alliances, Marqueta serves as a card-issuing partner for Uber, Uber Eats, DoorDash, and other well-known companies.
BBVA is a cutting-edge pioneer bank in the BaaS industry. A BaaS platform serving both domestic and international consumers is through BBVA Open Platform. In Mexico, the Uber app incorporated BaaS from BBVA. A Driver Partner debit card is provided by the BBVA Uber app for Mexico. It makes it possible for delivery and Uber drivers to earn money, access loans, and get gas discounts. Bank-created BaaS platform BBVA Open Platform powers digital-only banks and non-bank applications in the United States.
Future trends for BaaS
BaaS is expected to grow with increased adoption across industries, more FinTech companies and applications, modernized banking systems, more connections between providers and non-banks, and new financial services like Buy Now, Pay Later.
BaaS is growing extremely fast and is predicted to reach $7 trillion by 2030. The BaaS platform market is also expected to reach $12.2 billion by 2031 with a 15.7% CAGR.
The global BaaS market is predicted to reach USD 74.55 billion by 2030 due to the increasing integration of digital services in the financial sector and the expansion of financial services worldwide. Improvements in fund transaction services in the US and emerging nations are also contributing to the growth of the industry. Dock, a Brazilian fintech business, recently acquired BPP Payment Institution SA to improve their digital banking and payment services in Brazil.
BaaS has emerged as the dominant market force, driven by the rise of digital financial services and the adoption of cloud-based platforms, allowing companies to enhance customer experiences and large enterprises to bolster customer service.