What is Banking as a Service?
The relationship of brands and businesses with their customers is changing and improving at a dizzying rate especially in the digital world. Some nonbank companies are already offering integrated financial services to their users in order to increase added value to their products or services. Some examples of these financial offerings are bank accounts, credit card payment, lending system, and others; all of them that closely related to the apps, websites, e-shops or tools in which the end user interacts regularly with the brand. This is what is called Banking as a Service (or BaaS for short).
Some of the most technologically advanced global companies such as Apple, Uber, Walmart, Samsung or Amazon are already offering financial services to their customers thanks to embedded finance, which means using Banking platform as a Service and banking APIs to make this happen.
Banking as a Service, the future of financial services?
Many already bet on Banking as a Service as the future of financial services, some even argue that will change the Fintech industry (which will play a strategic role), and also the global market in numerous ways. That is the main reason why Strands has teamed up with Tearsheet to publish ‘Banking as a service guide 2021’. The guide focuses on the US market and it aims to organize and explain the exciting Banking as a Service space and also includes profiles on some of the newer BaaS platforms.
In addition, Banking as a Service allows brands to launch their own financial products (also called ‘white-label banking’) in a faster and less expensive way and also keeps them from having to acquire a banking license, which banks already have and that is one of the reasons they play a key role in this environment.
How does BaaS work and how is it implemented?
The process to apply a Banking as a Service model begins with a regulated financial institution opening its API (specific code created to simplify interactions between systems) to either fintechs, digital banks or other third-party providers which will pay a fee to access the BaaS platform. Once the access has been granted, they will be able to develop and offer white label banking to the end client who can be any business or brand.
To sum up, the three main players involved in the Banking as a Service model are:
- Nonbank businesses: The company or brand interested in offering financial products to its customers.
- Financial institutions/ Banks: Companies which possess banking licenses and open their API to rent it out partnering with providers.
- Fintech/ Third party providers: The technological company which acts as a bridge between the bank and the business by developing and offering the financial product.
An opportunity for all players involved
"For a financial institution, it is an opportunity to reach a greater number of customers at a lower cost. The cost of acquiring a customer is typically in the range of $100 to $200, according to Oliver Wyman analysis. With a new, BaaS technology stack, the cost can range between $5 and $35".
Let’s see below the main opportunities for each player:
1. The end user or the consumer empowerment
It is the end user who increasingly has more and more information and therefore they are becoming empowered clients who demand integrated and direct experiences with the services or products they consume. In fact, according to Mckinsey research, users are flocking to these multiproduct customer experiences, known as ecosystems.
2. When brands become banks
On the other hand, brands and companies can now meet customer needs in an integrated way, building more loyal and long term relationships with their users, which is one of their main goals. So in this context brands also win by expanding their portfolio and, in the end, get more satisfied clients. Moreover, all of the already mentioned gains come at a low price and in a fast pace, thanks to the embedded finance model.
3. Fintech or digital banks, the BaaS providers
For suppliers of the final product is a strategic alliance with banks because they become essential in this technological equation. Besides, it is a great opportunity for them since they can open new lines of businesses at interesting margins and obtain a deeper understanding of consumer behaviour through the data.
4. Banks or financial companies as a regulated institutions
What do banks gain from sharing their software? For them it’s a new opportunity to charge nonbank companies a regular fee to access the BaaS software, or to charge them in a pay-as-you-go way for each service used. Financial institutions now also have the chance to expand to new markets as Banking as a Service is scalable, simple to implement and has great potential.
It is also remarkable that BaaS is classified as a platform that falls under the Open Banking framework which is making this model possible and definitely changing the financial services space.
Banking as a Service will connect digital platforms and financial services to change the business scene for years to come.
If you are interested in finding out how Strands can help your bank, or if you would like to get a Free Demo of our API HUB Open Banking solutions, please fill out this form and one of our Sales Reps will get back to you as soon as possible