What Is Banking as a Service? Disruptive Business Model Explained
With the widespread adoption of banking software across multiple industries, the demand for banking as a service (BaaS) is rapidly growing. Increased penetration of technological advancements, such as blockchain, artificial intelligence (AI), and online banking also give an enormous boost to the market. Thanks to BaaS platforms, both financial and non-financial organizations address a variety of challenges, automating numerous tasks, improving customer engagement, and cutting down expenditures.
In the wake of COVID-19, the use of BaaS has surged and the trend is expected to stay after the pandemic ends. According to Future Market Insights, the banking as a service market size is projected to rise from nearly $2.8 billion in 2021 to around $12.2 billion by 2031, progressing at a compound annual growth rate (CAGR) of 17.7% during the indicated period.
As a comparison, the CAGR accounted for 11.8% between 2016 and 2020. Fintech corporations are anticipated to be the leading end-users of BaaS solutions, with a share of around 26%. Regarding company size, small and mid-size enterprises (SMEs) are expected to register a remarkable CAGR of 16.6%.
In this article, fintech experts at Surf will consider the main advantages and types of banking as a service, as well as compare BaaS with other models. But first, let’s have a brief look at the BaaS definition to get a clear understanding of this practice.
What is Banking as a Service?
BaaS is a model that aims to ensure the execution of financial service—for instance, carrying out digital transactions, issuing loans, or opening bank accounts—delivered online via tech devices. The primary objective of BaaS is to complete a service in a timely and speedy fashion.
BaaS platforms emerged as a key component of open banking, in which banking as a service providers—licensed financial institutions—grant access to their application programming interfaces (APIs), so that companies can develop new systems or white-label software. With BaaS, businesses can also complement existing products.
This way, BaaS solutions contribute to improved financial transparency and reduced time to market when building fintech mobile and web apps. The most popular monetization strategies are charging a monthly fee for the use of a BaaS system and requiring a specified price for each service offered.
Examples of pure banking as a service companies are Solarisbank, Cambr, Treezor, 11:FS Foundry, and ClearBank. Well-known BaaS suppliers with B2C operations are BBVA, Starling Bank, and Fidor Bank. Now, take a look at the key advantages of BaaS software.
The key benefits of banking as a service platforms
1. The possibility to increase revenues
By providing BaaS solutions, it is possible to increase revenues and improve customer engagement. According to PYMNTS, US lenders that deliver banking as a service platforms to their business customers managed to generate between 200%–300% higher returns on assets compared with other banks.
For instance, Amazon was able to earn over $1 billion in 2019 through the integration of BaaS into consumer and merchant financing. Many other famous companies employ BaaS solutions, too, including PayPal, Apple Pay Cash, EasyCorp, Shopify, Walmart, and Uber.
2. There is no need to get a banking license
Using BaaS platforms, businesses and institutions avoid the need to get a banking license, which may take more than a year. Furthermore, acquiring a license generally requires significant capital investment. Additionally, companies have to ensure compliance with regulations on data security, legitimization of income, and deposit protection.
3. Reduced costs and time to market
With banking as a service, organizations do not have to create fintech applications from scratch. They can also incorporate BaaS offerings into existing operations. For example, retail stores, restaurants, e-marketplaces, healthcare facilities, and airlines can enable online payments while fintech firms can receive the possibility to issue loans. As a result, businesses cut time to market and software development expenses.
The main types of BaaS solutions
Banking as a service providers offer a range of solutions that can be integrated by either financial and non-financial organizations into their platforms.
BaaS covers various areas that include:
- Credit and debit card processing
- Account management
- Digital transactions
- Online banking
- Credit financing
- Customer support
- Product management
- Risk assessment and management
- Investment/accounting/wealth management robo-advisory
It is worth noting that BaaS also comprises the two large verticals: regulatory technology (regtech) and compliance as a service (CaaS). Representing a subcategory of fintech, regtech aims to standardize regulatory processes while improving transparency. The principal objective of regtech is to digitize manual processes like reporting and compliance, for instance, in the field of Know Your Customer (KYC) requirements.
Acting as a cloud service level agreement (SLA), CaaS assists organizations in achieving conformance with security, national, or industry-specific standards. By outsourcing compliance management activities to a professional third-party vendor, CaaS helps businesses and institutions increase efficiency and save costs.
The difference between BaaS and open banking
As both open banking and banking as a service implies connecting with third-party application programming interfaces, these models are often confused. However, open banking and BaaS have entirely different purposes. For instance, in BaaS, companies integrate fintech solutions into their own products or processes.
Open banking allows organizations to access data for enhancing rendered services and minimizing risks. For example, a financial institution can use the information about customer credit history, insurance packages, and personal data to make proper loan decisions while not compromising data privacy.
It is also possible to aggregate transactional data from multiple user accounts to provide consumers with a full picture of their finances. At the moment, open banking is among the top fintech software development trends.
Banking as a service and platform banking
In platform banking, finance companies employ systems delivered by other fintechs to complement existing offerings. For example, a firm can incorporate a market-ready robo-advisor into their mobile banking app or website. As a result, customers become able to access investment products from the same bank account while receiving personalized advice.
Therefore, in banking as a service, businesses and institutions integrate BaaS platforms provided by licensed financial organizations into their solutions. By comparison, platform banking means that a bank uses solutions from other fintechs to offer them to its customers.
Successful companies that use banking as a service
1. Shopify Balance
Shopify Balance employs Stripe—an online payment gateway—to incorporate small business bank accounts into an e-commerce platform. The primary features involve a management dashboard that allows merchants to make insights into the financial business health, as well as virtual and physical debit cards. With this BaaS solution, vendors get faster access to revenue processed by Stripe.
2. LendingClub Bank
LendingClub Bank, formerly Radius Bank, is a fintech company that pioneered issuing personal loans online. Representing an online financial community, LendingClub connects creditworthy borrowers with investors. Headquartered in the US, the organization allows small businesses to open accounts in less than 15 minutes.
When implementing this functionality, LendingClub partnered with fintech firms, such as Marqeta — to enable card issuance, Treasury Prime — to utilize lifecycle APIs, Alloy — to deliver KYC and Anti-Money Laundering (AML) services. To date, Lending Club has raised $392.2 million over 15 rounds.
Based in the UK, Trustshare is a financial technology startup that provides escrow infrastructure as a service. Established in 2020, the organization lets customers easily integrate a white-label platform into marketplace apps.
Employing this BaaS platform, vendors can accept payments, track the status of their funds, as well as handle KYC and AML services. Consumers, in their turn, can deposit money with their cards or bank transfers.
Many businesses can leverage a BaaS solution offered by Trustshare to create digital marketplace platforms, for instance, luxury brands, food delivery services, ridesharing companies, online educational institutions, and healthcare facilities. By now, Trustshare has managed to attract $4.2 million during two rounds.
Coming up with many benefits, banking as a service enables both financial and non-financial companies to cut down expenses, reduce time to market, and ensure a better customer experience. With BaaS solutions, it is possible to avoid the complex and time-consuming process of obtaining a banking license.
Delivering products and services in a highly competitive landscape, businesses across a variety of sectors can gain a competitive advantage by integrating BaaS platforms. Thanks to BaaS, organizations can create new systems faster and digitize existing processes, which is especially important during disruptions such as the COVID-19 crisis.
If you are thinking about building a banking app, you are welcome to contact our team. We will soon get back to you and help address all issues. To protect your intellectual property, our software experts are ready to sign a non-disclosure agreement before project discussion.