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 business attributes.
So let’s find out its main principles, examples, and trends!
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 the clear habitual model, this approach is rapidly becoming obsolete under the pressure of modern technologies: banks learn to provide back office 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, they even look unbearable. Therefore, it becomes much easier to take a ready-made solution from a market player. Such a banking software model is a top trend in various industries. Its name is Banking as a Service.
Banking as a Service (also known as BaaS) model is an innovative B2B service for banks to rent out their infrastructure. BaaS banking allows a company to provide financial services without organizing its own bank or acquiring an existing one.
According to the statistics, the global BaaS 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.
The BaaS model involves 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. Management is carried out through a separate application that "supervises" a specific area of activity - trade finance, cash management, cash collection, factoring, etc.
In the traditional scheme, when the internal processes of the client company are not interfaced with banking systems, and the bank's services are provided strictly centrally. In contrast, BaaS banking provides that the customer's infrastructure is connected to the bank's infrastructure through modern technologies.
BaaS usually involves three major players:
Banking as a Service enables an organization to integrate all the financial instruments it needs into its business processes, fully customizing the bank. Instead of the classic "bank-client" system, the company's employees get at their disposal the tools they need in their processes, built into the usual information systems.
Let’s consider the examples of top companies 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.
Shopify. Shopify Balance uses Stripe to optimally embed SME bank accounts (run at Evolve) into the eCommerce platform. The key benefit is the 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.
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.
The technology initially demanded among FinTech startups is now gaining popularity in other areas. 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, allows you to optimize the payroll (since it simply requires fewer people to service), and makes business processes more predictable.
Expecting the declines in banking revenue and profitability, financial organizations are actively looking for alternative revenue and product growth channels. Channels having scalable business models and stable IT capital flows (e.g., distribution models) are extremely profitable.
The development of a regulatory environment requires the adoption of new elements. 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.
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, embedded, and direct experience. 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.
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.
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.
To successfully integrate Baas into your product, you must rely on experienced IT engineers. Axon provides expertise in Banking as a Service projects and can help you in mastering new technologies!
We can create unique financial management and banking software that addresses your bottom line. So don’t hesitate to boost your business!