Over the years, the FinTech industry has proven itself to be one of the most dynamic sectors of the global economy. Once again, it surprises with a pivot that can change customers’ habits and drive new streams of revenue. It’s called “banking as a service” (BaaS) and it stormtroops through the market. What is it? Can you participate in the trend?

Banking as a service

What is banking as a service?

This Star Wars reference lets you think of it as white-label banking. It’s a situation where you have resources to sell to other companies to use them as their own. If you run a bank or an open banking FinTech company and you have services, licenses, or technology to offer, other companies may buy a portion of this resource pool or all of it. Then, they can offer banking products under their own brand.

There are two major types of BaaS providers: FinTech companies specialized in BaaS (like Starling Bank or Marqeta for example) and traditional banking institutions that offer their infrastructure to FinTech firms (like JPMorgan Chase or BBVA).

How is BaaS different from open banking?

Banking as a service is not like open banking. The difference is that BaaS is a financial service model that falls into the open banking category. Essentially, it’s a strategy for banks, FinTech firms and other brands to go hand in hand and provide an integrated banking experience to customers. 

With BaaS, third parties utilize application programming interfaces (APIs) to access at least some functionalities that already exist on the traditional banks’ side. They can tap into it and offer modified (simplified, enhanced, or just different) services.

Open banking is more like a framework that allows the BaaS model to exist. It gives market guidelines on how third parties can access, process, and use consumer data. The idea behind it is that consumers are ultimate owners of information about themselves. Driven by politically established regulations, open banking encourages the market to be more open (pun intended) and competitive.

The whole case for open banking (and partially BaaS too) is to give people choice, control, and empower them to control and use their money in a whole different way. Get an easy loan. Ensure the house or a bike with a penny on a dollar, compared to traditional banking. Manage finances and even invest from the comfort of their own favorite armchair. It’s making old and sometimes inefficient services simple and affordable. 

BaaS – meaning and opportunities

Why would any traditional bank want to lend its infrastructure, licenses, and technology to a newcomer that steals its client base? That’s exactly the thing – it’s not necessarily a steal. It’s a business opportunity that benefits both parties:

  • Traditional banks get a new revenue stream because FinTechs have to pay them for access.
  • FinTechs have access to advanced technology and years of experience that otherwise would be impossible to develop, or extremely costly .
  • Both parties have a mountain-top view of their customers.
  • Financing for FinTechs becomes significantly easier – investors look at them with a more favorable eye.
  • Market entry level for FinTechs is lower.
  • Traditional banks can learn from FinTechs – clients, partners, and competitors at the same time.

You can think of it as Samsung manufacturing displays for Apple. Both companies fight to death making their own and distinctively different smartphones. At the end of the day, it’s nothing more than business. You need product A and access to product B. I can sell you that and together we can fight over C.

How banking as a service impacts the market and the consumer?

If you wonder how many FinTech companies there are in the world, the answer is: a lot. Like really a lot. Like competition is the name of the game a lot. So much in fact, that we can put together two numbers for comparison.

There are over 1600 FinTech companies in the UK alone. This is one of the major financial technology hubs and markets in the world. The number of FinTech startups from 2018 to 2021 worldwide can be counted in thousands; just look at this chart from Statista.

That level of competitiveness spawns innovations. In UI/UX design, pricing models, explaining complicated issues like data and the relation between spending and saving. Even in identity verification which even now involves a form of documentation. With API development and integration, companies can connect with a traditional bank and simply download and process information. That’s easy.

Digital engagement will be crucial. Companies like Monzo or even Apple, offering credit cards, will have a slight problem. How can you market a credit card when all you have to do to pay for something is to use your thumbprint or face? Companies will have to figure out ways to encourage people to interact with their application in a whole new way. It’s not even about tapping here and there for the wanted outcome. It’s about an overall customer experience

Banking as a service and banking as a platform

We can spot interesting BaaS examples all over the place. In card payments, identity verification, lending, and more. There are also neobanks that take innovation to a whole new level. And they are successful with it. 

Karat targets content creators and influencers by offering them a dedicated credit card. Pockit focuses on the unbanked in the UK. Toast is laser-focused on restaurants and their loan needs. Hammock wants to serve landlords. Green Dot combines offers for a debit card, mobile banking technology, and tax refund processing.

Banking as a service has become a platform. For new and interesting services, for customer experiences, and business models. To talk about a model BaaS stack, we have to consider three major factors:

  • A license holder: a licensed bank that partners up with providers and rents its license as a service
  • A service provider: a company that supplies modular financial services to brands
  • A brand: the company that wants to embed financial services into their offering and therefore enhanced business model

And that last part is the key. Nowadays, virtually every company can become a bank. All you need to do is to have an idea for a product, a partner that can supply digital transformation services, and a little bit of luck to break through the market. 

Banking as a service suddenly becomes banking as a platform in a certain way. A fairly recent FinTech Connect report shows that the main priority for some of the FinTechs is to survive. It’s the case for 1 out of 10 surveyed companies. Yes, FinTech as an industry is regaining markets and investor’s trust but there are still some major threats out there. 

For example, previously mentioned increased competition and innovations. Firms that can’t pivot and deliver something extra, can become obsolete in months. That’s why BaaS becomes a platform for necessary experimentation.

Don’t miss out on the change

The business model of traditional banking is broken. Net interest margins have been downsized by growing FinTech competition and low-interest rates. The unexpected rise of the FinTech industry as a whole forced established banks to run the very costly infrastructure that can’t sustain a shattered value chain. IT, regulatory and compliance costs further squeeze already small profits. Galloping changes and customers’ expectations shifted the market from physical to digital, leaving banks with branches that are, in many cases, obsolete.

All of this puts traditional banking in a corner. With FinTechs at the helm but without the necessary experience and money to run large-scale operations. Traditional banking has what it takes, FinTech has what the market needs. Sometimes the only way to fight is to actually cooperate. If you have a FinTech startup, think about the BaaS model. And about a reliable partner that can help you through, for example, team augmentation.