January 11, 2023
The growing significance for embedded finance has led to the surging popularity of Banking as a Service (BaaS). In simpler words, BaaS allows licensed banks to seamlessly integrate and offer financial services and banking products directly within the offerings of non-bank businesses. This integration empowers non-bank entities to provide banking services to their customers without needing to obtain a banking license themselves.
To simplify it further, BaaS allows non-banks to include banking products and services under their domain. In this way, banks have the flexibility to create their platforms or collaborate with third-party BaaS providers to facilitate the process. BaaS presents a powerful solution for both banks and non-banks to tap into the potential of offering banking services within their existing ecosystems.
This approach grants banks the freedom to develop their platforms or partner with 3rd party BaaS providers to streamline the process. BaaS represents an influential solution for banks and non-banks alike, enabling them to unlock the potential of providing banking services within their existing ecosystems.
The Banking as a Service ecosystem comprises of 3 primary components: brands, providers, and license holders:
These are the non-bank institutions that are aiming to enhance the customer experience by extending their existing portfolio by adding financial services.
These refer to banking technology companies that offer Banking as a Service platform along with API technology.
- License holder:
These are traditional banks that offer licenses to fintech aggregators or other service providers.
APIs play a significant role in delivering BaaS solutions to the customers. Banks aiming to provide BaaS services to their customers go through digital transformations and adopt relevant business models. Non-bank customers can directly access banking services through the company's mobile app or website. Banking as a Service is also known as "white-label banking" as it allows non-bank business to act as intermediaries without serving any regulations.
BaaS is gaining traction in today’s digital era as it focuses on customers’ needs rather than just transactions. Even though BaaS might seem like a complicated process, it eases out processes for both banks and clients. BaaS empowers many fintech’s and digital banks to tailor the needs of their customers using the API technologies. Since today’s customer demands a seamless journey, it is important to provide them with a personalized journey to stay relevant.
Given the increasing consumer demand, it is expected that banks will eventually embrace BaaS in the coming future, providing financial offerings precisely at customers' point of need. According to Simon Torrence's analysis, programs based on embedded finance have the potential to become a $7.2 trillion industry by 2030, surpassing the world's top 30 global banks by more than twice.
The financial industry is rapidly progressing toward a future, where sharing of data will become the new consumer expectation, as evidenced by legislation on open banking already implemented in several countries. Banks that proactively adopt this approach will gain a competitive edge by staying ahead of the curve, along with capitalizing on a new revenue stream, thanks to the increased demand and monetization on their platforms.