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The banking as a service model has already won many admirers in the FinTech industry and beyond. On the threshold of a new development era of technologies, speed, convenience, and solution customization are the main attributes of a business, bank's system, open banking etc.

So let’s find out its main principles, examples, and trends!

What Is Banking Software?

A modern bank is like a financial products store. The client can choose the desired item from the bank offers that best suit the target customers.

Despite clear business models, this approach is rapidly becoming obsolete under the pressure of modern technologies: banks learn to provide back-office financial services to the clients like Amazon and Google and rent out their banking infrastructure (license, payment processing, card issuance, compliance) instead of creating or buying it for other players.

The costs of maintaining and upgrading infrastructure are growing, and for some startups and digital banks, they even look unbearable. Therefore, taking a ready-made solution from a market player (BaaS provider) becomes much easier.

Such a banking software model is a top trend in various industries. Its name is Banking as a Service.

This new business model tool is growing rapidly and transforming the banking industry and financial services.

Banking as a Service (also known as BaaS) model is an innovative B2B service for a financial institution to rent out their infrastructure. BaaS banking allows a company to provide financial services without organizing its own bank or acquiring an existing one. BaaS providers make the life of financial institutions and non-bank businesses easier. With the proper open banking and BaaS platforms, clients can experience all the benefits of platform banking.

According to the statistics, the global banking as a service market size was equal to $2.41 billion in 2020 and is expected to reach $11.34 billion by 2030, with a 17.1% CAGR.

What Is Baas Principle of Operation?

The benefits of using as-a-service models and embedding financial services have been felt by fintech businesses and large financial and technology companies - both customers and those who provide services. Open banking ensures lower fees and higher conversion rates.

Many companies have focused their efforts on developing a BaaS space - such as Wirecard, Lemonway, and BBVA. For example, the BBVA Open Platform will allow a bank to offer a wide range of BaaS products and services through the API of companies that want to offer financial products to their customers but do not want to become a bank. Non-bank businesses can embed financial services into their traditional business models and get new ways of growth.

The BaaS business models involve an almost seamless integration of the IT systems of the company and the bank using open API interfaces, smart contracts, and distributed ledger technology. All necessary data is transmitted via standard secure protocols in real-time. This way, SaaS companies, and other providers organize new ways of customer experience.

Management is carried out through a separate application that "supervises" a specific area of activity - trade finance, cash management, payments service, cash collection, factoring, embedded finance, etc.

In the traditional scheme, when the internal processes of the client company are not interfaced with the systems of financial institutions, the bank's services are provided strictly centrally. In contrast, BaaS banking provides the option to embed financial services, i.e., customer's infrastructure is connected to the bank's infrastructure through modern technologies.

BaaS usually involves three major players:

  • The Bank: Traditional banks or New-Age financial institutions
  • BaaS Platform (BaaS provider)
  • The client: FinTech or non-FinTech company willing to integrate FinTech services into the product.
BaaS model


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What is BaaS principle of operation?

BaaS is a fundamentally new level of implementation of the cloud concept, where the client - which can be both a business from a bank to a startup and a company from the non-financial industry - is provided not with technological capabilities but with full-fledged business functions in a subscription model.

If a licensed bank is a client in the BaaS model, it receives a cloud-based core system with a product catalog - an automated banking system with basic loan and deposit products. If a fintech company becomes a client, it will already have to rent an automated banking system with a banking license and operations on behalf of an operator or payment bank.

The BaaS adoption can also provide gateways to payment systems, including fast payment services and even financial reporting as a service. But the main trend that is gaining popularity is the fintech marketplace.

Within such BaaS adoption, automation of marketing and risk analysis, underwriting, and billing for partnerships with non-financial organizations, as well as KYC / AML as a service, can be provided. BaaS provider creates new ways of tracking and managing funds for financial institutions and non bank companies.

Banking as a Service - Examples

Banking as a Service enables an organization to integrate all the financial services it needs into its business processes, fully customizing the bank. Instead of the traditional "banks - clients" system, the company's employees get at their disposal the tools they need in their processes and financial services, built into the usual information systems.

In fact, BaaS providers offer a new model of the banking ecosystem, particularly in satisfying customer demand, increasing customer engagement, and boosting digital transformation. Mainstream adoption of banking as a service will streamline global revenue streams, prevent money laundering, and provide more value to businesses.

Let’s consider the examples of top businesses using BaaS:

Uber. Having a BaaS partnership program with Barclays and Green Dot, Uber enables drivers to deposit, track, and manage funds. New drivers and delivery partners receive the Uber debit card when registering. Cardholders can immediately cash out their trip earnings and use the cash-back rewards at various shops, f.e., Exxon and Advance Auto Parts.

A reconsidered platform banking and customer journey frees up new revenue streams and transforms traditional banking services.

Uber Money

Shopify. SShopify Balance uses Stripe to optimally embed SME bank account (run at Evolve) into the eCommerce platform. The key benefit is the non bank management dashboard aimed at financial data analytics and controlling physical and virtual debit cards and relevant offers. Also, sellers using a Balance account get faster access to revenue processed by Stripe. Such embedded financial products improve customer engagement due to additional financial services.

Shopify Baas Experience

Apple Card. Similar to Uber, Apple employs BaaS to attract more clients into the Apple ecosystem. Apple has partnered with Goldman Sachs to keep further tech-savvy generations engaged with their adored smart device. Apple Card serves as a retail-facing credit card, provides the Wallet App with bill payment features, and assists clients in establishing healthy money habits.

Apple Card BaaS Experience

Why Does Your Product Require Baas?

Increased demand for BaaS beyond FinTech

The technology initially demanded among FinTech startups is now gaining popularity among Big Tech firms and beyond. Synchronized processes reduce the costs of a b2b consumer of banking services: for example, in the case of a supply chain, transaction costs can be at the level of 2-10%.

Also, a consistent, instant approval system based on smart contracts increases the turnover of funds, simplifies financial services, allows you to optimize the payroll (since it simply requires fewer people to service), and makes business processes more predictable.

Search for a new revenue approach

Expecting the declines in banking revenue and profitability, financial organizations are actively looking for alternative revenue and product growth channels. Channels with scalable business models and stable IT capital flows (e.g., distribution models and embedded finance) are extremely profitable and have become reasonable banking as a service trend.

Increased transparency

The development of a regulatory environment requires the adoption of new BaaS solutions. For example, PSD2* and open banking contribute to banking APIs and universal access promotion. The need for new requirements compliance (usually achieved through IT modernization) encourages some banks to consider improved BaaS companies models to benefit from tech builds. Even beyond regulation, Plaid and other aggregators modify client expectations for data and account information portability, which boosts and enhances IT modernization processes and the BaaS experience.

Client demand for integrated experiences

Integrated experience means combining the best features and expertise of market leaders. This critical trend is present in many industries: clients strive for clear, universal, and direct experience, such as embedded finance. The excellent proofs are Walmart’s building of a financial-services offering with FinTech investor Ribbit or Ikea’s decision to purchase 49% of its banking partner. Licensed banks can ensure a greater customer experience.

Independence incentive

By implementing BaaS in a competitive environment, a corporate client is protected from falling into dependence on a vendor or the bank itself: he has the right to write business logic and, in general, an application for working with banking services on his own, order their creation from the bank itself or an outsourced contractor.

Main Trends of BaaS in 2024

As we move into the future, banking as a service (BaaS) is becoming an increasingly popular way to access financial services. By 2024, the BaaS market is expected to be worth $19 billion and to include many different BaaS providers offering a wide range of services and financial tools. Licensed banks must consider the main trends for the next years.

The focus of the digital transformation is shifting inwards, thereby supporting the bank in its core tasks.

What BaaS trends will we observe this year? The new innovation course will:

  1. Holistic: Digital projects are no longer considered individually but integrated into the overall company's strategy. Banks no longer rely on isolated solutions but combine the individual parts into an "island chain." Pay transparency is easier than you can imagine.
  2. Straightforward: Thanks to the accumulated experience of many digitization projects, the banks can now standardize consistently and make your bank account more transparent. This also means reducing complexity, ensuring regulatory compliance, and consistently automating processes.
  3. Cooperative: In order for banks to assert themselves at the customer interface and, despite the above-mentioned waiver of special cases, to set sufficient competitive differentiating aspects, products, and services are put together in a modular manner. Similar to automotive engineering, various configuration options offer the desired variety of variants.
  4. Dynamic: The rapid reaction to the Corona crisis has shown that even large institutes and businesses can demonstrate remarkable flexibility quickly. In the future, the question will no longer be about working from home or an office tower but about new decision-making and management systems.

These BaaS trends will form the market this year. In addition to increasing competition and stricter regulatory requirements, the increasingly serious shortage of skilled workers is also forcing banks to act quickly. Many institutions still ignore demographic change, although it is already difficult to fill vacancies. FinTech companies should pay attention to the different factors to grow in 2024.

Banks are therefore forced to consistently digitize. Institutes with a high degree of digital maturity and product-wide automation processes are role models here. Even complex securities transactions are already largely digitized and standardized by these industry pioneers.

Because customer demands are constantly increasing: Instead of a self-contained ecosystem, young customer groups, in particular, expect multi-service platforms or embedded finance solutions that enable a simple customer experience. FinTech companies invent new ways of rendering payment services and additional services that generate more revenue. Platform banking or own Baas platforms? Everything depends on your needs.

Conclusion

BaaS is a fundamentally new level of implementation of the cloud concept, where the client - which can be both a startup and a company from the non-financial industry - is provided not with technological capabilities but with full-fledged business functions in a subscription model.

Banking products have become more valuable. To successfully integrate banking as a service solutions and embedded finance into your product, businesses must rely on experienced IT engineers. Axon provides expertise in Banking as a Service projects and can help you in mastering new technologies!

We create unique financial management and banking software that addresses your bottom line. So don’t hesitate to boost your business!

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