Banking-as-a-Service (BaaS), the growing sector within Fintech, is fueled by the open banking movement that encourages banks through regulation and initiatives to open access to their data and application programming interfaces (APIs) to third-party providers. The banks that are embracing these policies have the advantage as they stand to gain more from monetizing their APIs and partnering with fintechs than those that do not. BaaS is changing relationships across the industry, shifting banking and opening new doors for fintechs who can get to market faster than ever.
What is BaaS?
Imagine you own a distribution company and you want to offer your drivers a branded debit card for their personal expenses when they’re driving and off-the-clock. With BaaS, the distribution company can offer banking services like debit cards without having to be a bank. According to Business Insider, “BaaS is an end-to-end process that allows fintechs and other third parties to connect with banks' systems directly via APIs so they can build banking offerings on top of the providers' regulated infrastructure.” BaaS makes it possible for shared digital-based banking relationships between banks, fintechs, and companies.
There are three types of players in BaaS today:
- Retail banks that also offer BaaS - Banks that open their systems and APIs to third parties.
- Pure BaaS providers - Digitally-savvy banks that only offer BaaS services.
- BaaS platforms - Fintech platforms that offer companies access to traditional banking services via API.
What is Open Banking?
Banking-as-a-Service and Open Banking are often used interchangeably because both involve the use of banking resources by third parties, but they are quite different. With Open Banking the bank is following regulations and initiatives like Europe’s PSD2 legislation to open access to their data and APIs to third-party providers. In the case of BaaS, the bank is selecting specific capabilities and allowing non-bank companies to permit non-bank customers to use those services.
How does BaaS work?
BaaS has become the defacto standard for bringing banking products to market quickly. The process begins with the bank charging the third-party provider a fee to access their BaaS platform. They then open their APIs to the provider effectively granting them access to the systems and information needed to build their own banking services.
Financial institutions that launch their own BaaS platforms now are jumping ahead of competitors and opening new revenue streams including monthly fees or fees for services used.
What is the industry outlook?
Open banking regulations are spreading to other countries worldwide signaling that shared data will become the norm going forward. Banks that take a step beyond just complying with regulations to create their own BaaS platforms will be at an advantage competitively as they unlock new revenue streams.
