Introduction to Banking As a Service
Banking As a service or BaaS allows non-banks to offer core financial services to their customers by integrating with banks via APIs. Non-banks (like fintech and even non-fintech businesses) build products on top of the traditional banking infrastructure.
Let us say you own an online ticketing platform like BookMyShow.
Naturally, you want to increase sales and boost customer loyalty. So, here’s what you decide to do:
- Offer customized cards to your customers.
- Loyalty points for each purchase
- One-click loans for upcoming shows.
- Cash backs
We might think it is easy to achieve the above.
Offering banking services to customers comes with a lot of strings attached. In fact, We need to have a banking license or other related licenses for offering banking services like depositing and lending assets.
For Example, you need:
- PPI (pre-paid instrument license) for issuing pre-paid cards.
- NBFC license for offering loans for upcoming shows.
Above licenses are hard to obtain from government.
How does Banking as a Service work?
BAAS allows third-party organizations to draw off of the existing banking services through APIs that communicate between banks and third parties. These APIs allow the use of these banking services by fintech companies, programmers and developers, and other non-financial companies.
This allows them to build their own features as a layer on top of the existing banking services. In simple words,
- Fintech company/individual pays to use BaaS
- Bank/financial institution which is a BaaS platform opens its APIs
BaaS usually involves three major players:
- The Bank: Traditional or New-Age
- Banking as a Service Platform
- Fintech company or non-fintech business that wants to embed fintech services into their product.
Banking as a Service vs open banking
The BaaS model is often confused with open banking since both models involve the use of APIs to communicate among banks and fintech companies. But in reality, both models serve completely different objectives.
Banking as a Service: Businesses integrate complete banking services into their products
Open Banking: Businesses use only data for their products
What are the factors influencing BaaS?
- While fintech is growing and revolutionizing the way financial services work today, there are a few key aspects that have led to the emergence of BaaS.
- Banks are trying to catch up to the speed of fintech companies. Or, banks are partnering with fintech companies to innovate financial services
Startups and SMEs are starting to leverage easier and more effective business banking. - The digital transformation and mobile-first approach that has soared over the recent years has played a phenomenal role in influencing BaaS
The business architecture of banking is evolving to a much more modern system that is inclusive of newer tech and methodologies.
Challenges of Banking as a Service:
- Modernizing Traditional Banks.
- Well-defined API strategy.
- Changing Roles of Players in Finance Industry.
Finally, Banking as a Service (BaaS) is reconfiguring the banking value chain, opening the door to disintermediation and enabling new sources of growth.
