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As the competition in the payment system is riling between the traditional and challenger banks, reshaping the core systems and technologies of traditional banking is long overdue, as a result of which the term Banking as a service (BaaS) is being discussed a lot.
The global banking-as-a-service market was valued at USD 19.65 billion in 2021 and is expected to expand at a Compound Annual Growth Rate (CAGR) of 16.2% from 2022 to 2030, proving it to be an excellent opportunity for businesses.
The article discusses the concept of Banking as a Service and how it is reshaping the banking industry.
Banking as a Service BaaS is a provision of complete banking processes such as deposit accounts, loans and payments. It enables the users to access the banking services with a new outlook and UI like a developed fintech model. This is achieved with the help of a specialised vendor or service provider through partnering with the banks allowing any brand to embed financial services into its customer services.
There are 3 major operating parties in the Banking as a Service Ecosystem, which are
The financial institutions are the license holders offering their regulated and compliant financial products for the facilitation of the BaaS Services.
These organisations provide the software or the API to allow the embedding of the financial services provided by the financial institutions.
Distributors are the organisations that embed their services with the help of the above-mentioned players to provide the same to the end users, i.e. the consumers.
The key drivers of Banking as a Service are –
One of the most important factors responsible for the growth of Banking as a service is the customer’s demand for integrated experiences. BaaS enables data sharing to third-party providers facilitating innovative and highly relevant customer-led digital solutions like financial Robo advisors and virtual assistants, which result in cost reduction, better retention rate and higher engagement in financial services.
Banks use the APIs to allow data sharing with developers and fintech, which can help the third party develop digital enterprise solutions like P2P lending, digital wallets, mobile wallets etc. In this scenario, the banks need to acknowledge their role as active participants rather than mere owners of the final user.
The rising trends of the payment services directive cater to the promotion of universal access. The sudden need to comply with these trends through its modernisation is driving the banks to consider BaaS for regrouping costs or taking advantage of tech build.
The notable fall in banking revenue and profitability have compelled financial institutions to search for alternate sources of product growth and revenue generation. BaaS being a lucrative and sustainable option for the same has seen tremendous demand by financial institutions resulting in the developingthis trend.
Though banking-as-a-service is still evolving, it can be broadly classified into three different categories as per the engagement model between the three stakeholders.
Challenger or traditional banks that follow the B2C approach also offer their servicesand products as APIs to third-party players such as FinTechs, who utilise it to build innovative service propositions.
The white-label platforms create such products and services that the reseller can rebrand. Companies with or without a banking license offer APIs on a white-labelled platform to allow FinTech companies to provide specific banking services or fulfil compliance requirements (such as identity & verification. In the absence of a license, these companies partner with licensed banks for compliance, ledger maintenance, and other backend rails.
Neobanks are financial institutions that provide financial services through a digital platform. These new banks deploy the BaaS platform that acts as a distribution and onboarding channel for the traditional bank.
Banking as A Service is used in the following cases –
Banking as a Service / BaaS allows the fintech and non-fintech companies to offer online banking rather than focusing on the licensing requirements, which enables these companies to shift the entire focus to improve their services. Such technology and user-friendly financial products act as alternatives to the traditional banking system and ensure faster access to funds and easy tracking of transactions without any hidden fees for such services.
The companies can add top-level payment services to their financial products through debit and credit cards with the help of BaaS. Businesses enhance their customer base by providing low-interest rates on this payment method which is beneficial for the customer and the company.
The travel and eCommerce industry generates huge revenues through selling big-ticket items. A consumer lending BaaS API can help the firms in providing- platform financing. This process allows the bank to finance the loan and help the merchant convert big sales. The trend of Buy Now Pay Later (BNPL) is quite prevalent in this sector.
Another use of the BaaS model for the banks is helping customers automate finances and investing assets. The service helps the customers get personalised investments with low-cost index funds together with automatically rebalancing the portfolio that is in line with their investment plan.
Bank account verification can help in reducing payment transfer failures. BaaS platforms can help fintech/non-fintech businesses verify their beneficiary’s bank account before starting the payment process. This can be done in the case of bulk payment transfers across different payment modes like net banking, UPI etc. help in avoiding Payment transfer failure, which can be a reputational risk for an organisation.
Banking as a Service contributes towards increasing the revenue of the business by integrating financial services into the current offerings of the business. The Buy Now Pay later service is expected to enhance the revenue for over 50% of the embedded finance market by 2026
Banking as a Service doesn’t necessarily require licenses, infrastructure and other elements as most of it is handled by the banks resulting in the reduction of the initial investment costs, and the funds can be utilised for the development and marketing of those products and services. The saved time can lead to an early launch of the product and services.
The banks share a very strong bond based on trust with their customers. The companies can leverage this to get better customer insights which can help the business introduce innovative and customised services for its clients.
The financial institutions already have banking licences. They can generate huge revenue through fees and deposits by offering their services to third Parties with the help of banking as a service ( BaaS). It also helps financial institutions by providing a transformation legacy allowing the financial intuitions to change their traditional stack into a modern cloud-based tech stack.
Banking as a Service offers numerous opportunities to financial companies dealing in corporate finance, accounting, and SME lending that provides better services and choices to the business.
The non-financial companies, including the e-commerce and the travel industry, enjoy streamlined revenues with the help of Banking as a Service which enables the companies to get important information about consumer behaviour and spending patterns, providing them with an edge over their competitors.
The end users, i.e. customers, get a wide variety of choices in terms of financial services with the help of banking as a service leading to greater competition resulting in lower costs and better customer experience.
The significant difference between open banking and Banking as a Service lies in the extent of the embedding of the data and the critical roles played by them.
Open banking is just limited to the sharing of customer data, whereas Banking as a Service involves the integration of banking services in the product offerings of a non-financial services company to provide the core banking services to the customers irrespective of the core business of the company.
Even though the COVID-19 pandemic has drastically impacted the traditional banking system, it has also helped the digital banking sector to gain rapid acceptance. Meanwhile, Indian Fintechs are prospering in touching almost every banking value proposition with the help of the emergence of the trend of Banking as a Service.
Read our Article:Digital Banking Transformation – Future Path of Banking