How does Banking as a Service BaaS work? How does it differ from traditional banking?

Fintech startups get the unique opportunity to implement their financial solutions within tight timelines, on a reasonable budget, and without having to obtain a banking license. The BaaS layer provides the necessary two-way data flow between banks and end customers. Remember the old days when you had to go to the bank, talk to an actual person to withdraw cash, and then use it to pay at a store? Today, most stores are online, banks are on our phones, and customers can access a variety of banking services without leaving home.

How does BaaS work

This especially applies to big banks that have acquired smaller banks and have multiple outdated cores, inefficiently connected to each other. But BaaS can also work on things that aren’t designed for a mobile environment. For example, an app provider faced significant negative press after a tool it made for the Democratic caucus in Iowa was defective. A BaaS might save you embarrassment like this, as you could spend more time testing and perfecting code before it launches. And you’ll be building on technology that hundreds of companies that came before you have already tested. It’s no surprise that Banking as a Service APIs are the heart and soul of the model.

Instead, they offer their as-a-service banking solutions to brands by using modern APIs that access an actual banking system at a partner’s secure and regulated infrastructure—the licensed bank. These fintechs are often specialized in one area of traditional banking, focusing on payments or loans or even retail accounts—really, any number of the traditional financial services that banks offer. In short, Banking as a Service (or white-label banking) is a system that allows non-bank businesses to embed financial services into their products. For example, companies that are not licensed banks may offer loans or payment services to customers by integrating digital banking into their systems. To make this possible, banks can either create their own platforms or work with third-party providers offering BaaS solutions. This is typically the user interface and the digital elements that create the overall customer experience for the end consumer.

As new innovators constantly enter the banking industry, the landscape is constantly changing. To stay on top of industry developments and to hear our thoughts on them, keep watching this space. Tech-savvy legacy banks can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure.

Banking-as-a-Service and How it Works

Banking-as-a-Service gradually became a centerpiece in the process of banking and fintech modernization, digitalization, accessibility growth, and user experience improvement. New challenger banks have pushed the European fintech scene towards the development of Open Banking, where Banking-as-a-Service is a core module in the microservice-based architecture. Particular promotion was given to the OpenX standard, where BaaS providers are an integral core component. This licensed digital bank from Germany provides a BaaS platform that encompasses an array of modular banking APIs. Among other offers on its website, the company advertises a comprehensive solution for creating a fully-fledged neobank. It has over 60 corporate clients worldwide and has raised more than €160 million in funding.

  • Fintechs integrate the BaaS functionality into their products, creating a hassle-free end-to-end customer journey.
  • As a result, it can considerably reduce the amount of risks that may need to be addressed if it had been developed in-house.
  • Thus, the concept of BaaS is also known as white-label banking, as the banking services are delivered via the branded product of a non-bank.
  • BaaS became a foundation for quick and easy deployment of new financial services by fintech startups or corporate money management systems for large enterprises.

The company provides private-label banking and technology solutions to non-bank businesses. It has held the number one position in prepaid card volume in the US for eight consecutive years and specializes in institutional banking and commercial lending. This facilitates in building innovative and highly-relevant, customer-led digital solutions such as virtual assistants, financial robo advisors, and so on. Such digital solutions attract customers and result in higher engagement with your financial services, increasing your customer base and retention rate, while reducing costs. Blockchain-as-a-service is the third-party creation and management of cloud-based networks for companies in the business of building blockchain applications.

What is BaaS? Banking as a Service Explained

Those, in turn, give access to banking functionality to their end customers. Businesses that have integrated finance into their model are performing better and gaining customer loyalty and earning profits from the financial products embedded on their platforms. They can also reduce the costs required on the infrastructure needed to house legacy banking services. BaaS is an end-to-end strategy that integrates various service providers into one single detailed procedure for completing a financial service in a timely and efficient manner.

How does BaaS work

Are the central point of the model, and the benefits of the system depend on the solutions it offers for daily operations. Established BaaS providers have a list of APIs at their disposal that covers anything related to finance. Fintech startups have the opportunity to execute their financial solutions within a short duration, at a cost-effective budget, and do not need a banking license to do so. The consumer experience can be enhanced with ease, speed, and a wide array of payment methods, by using BaaS solutions. Each transaction can be made hassle-free and pleasant with tools that were not used before.

How does banking as a service BAAS work?

BaaS brings numerous banking capabilities to financial firms that deal with accounting, corporate finance, and SME lending that gives businesses an opportunity for better services and choices. The products that are built by the third-party providers cater to the market requirements and customer demands, focusing on enhancing the customer experience. The dynamic backend for the user and their company is handled by the BaaS provider. Portfolio+ offers innovative, mission-critical solutions to banks and financial institutions.

Organizations are busy creating optimal customer experiences by building industry-leading fintech products across various industries, making banking and financial services a limitless opportunity. Banks leverage the benefits of API to enable data sharing with fintech and developers. This will further help the third-party partners to develop enterprise digital solutions like mobile payments, P2P lending solutions, digital wallets, and many more for the customers. Also, with these kinds of advancements, banks need to accept their role as active participants and not owners always for the end-to-end user experience.

By leveraging i2c’s digital banking and payments technology, both Apto Payments and Evolve Bank are able to launch programs reliably and cost-efficiently, with faster speed-to-market and innovation cycles. Ultimately, the licensed bank’s regulated infrastructure and banking license ensure compliance with financial regulations. The landscape of digital financial services is changing rapidly, and Banking as a Service is paving the way for a new reality.

Importance of BaaS:

Not to mention the fact that the innovative solutions that TPPs create propel the entire industry forward. Money storage, remittance, and payment processing are some of the functions of banks. For banks to provide these functions, they must invest heavily and build the appropriate infrastructure. The processes, together with the complicated infrastructure, result in congestion.

Creating modern mortgage software and money lending apps would also be impossible without Banking as a Service. Be informed if they are blockchain-as-a-service (BaaS) definition owned by third parties or by the company. You should look into the reputation of the provider by checking the reviews and testimonials.

How does BaaS work

Simply put, BaaS makes it easier for brands to do business with partners. The core audience for BaaS is aimed at customer-centric organizations that want to enhance their customer journeys through flexible, reliable, and seamless payment solutions. The real beauty of BaaS is the product is relatively easy to buy as compared to owned systems and developers don‘t even have to speak with a salesperson.

Fidor Bank

An API is a type of technology that opens up the connections between computers or computer programs enabling them to share and transfer data. We’ll explain what banking as a service is, provide a basic overview of the banking as a service ecosystem, and explain why it’s so vital in the banking business today. A good example is the best way to explain Banking as a Service. You are facing fierce competition and want to strengthen your customer loyalty. If you offered your customers a debit card, you could offer them loyalty points whenever they paid with it. Whenever your customers used their cards, they would be interacting with your brand.

They expect empathy towards their problems and require an immediate solution. Financial services are quite personal, affecting everyday lives. When your business can actually solve the customers’ pain points and resonate well, establishing a connection with them, you get to win their loyalty and retention.

How to choose a BaaS provider

Thanks to Banking as a Service , merchants can integrate features like payment processing and financing directly into the customer journey. By offering top-notch services to third-parties, banks with the help of BaaS can create a good value in terms of fees and deposits. Also, BaaS offers banks a transformation legacy that helps them to change their traditional stack to a modern, cloud-based tech stack. Earlier, third-party financial software providers would offer APIs to their clients to meet the individual business needs by adapting to the software.

We allow you to settle in multiple currencies, as well as receive automated spot pricing via a single API. With Swiss digital tools to make every part of your process more human. The Banking-as-a-Service receives the request, matches Anna’s contact with an IBAN, checks Alex’s account on whether it has enough funds, and whether the transaction is within the account’s limits. Once it is sure, it sends a request to the back-end, and here the serious business has begun. But serverless applications react to events, and they can run on any machine connected to the internet. Anything a company could offer “as a service” ends with “-aaS.” You’ve likely seen many terms just like this.

BaaS is one burning topic of the fintech industry and before we discuss how it’s going to help businesses, let’s discuss all the advantages of BaaS. While fintech is evolving and changing the way financial services are delivered, a few essential factors have contributed to the rise of BaaS. Once the request is sent by the fintech to access the BaaS platform, the financial institution opens its APIs to the third-party provider.

Why Does BaaS Exist?

This enables the fintech to access the systems and information that helps in building new banking products and solutions. Banking-as-a-Service describes an ecosystem in which licensed financial institutions provide access to their services to non-financial businesses, generally through API integrations. Platform banking is often used by banks as a defensive measure to avoid losing their customers to savvy fintechs.

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