Banking as an industry is always considered a competitive arena by all participating stakeholders irrespective of size and geography. But banking sector has gone through a transformation in the last two decades and with fintech players’ emergence, the transformation has been massive. Traditional banks facing challenges with a legacy architecture and faster speed to market expectations can leverage Banking as a service to identify the right place & partner in the ecosystem.

Banking as a Service is a transition towards ecosystem capabilities wherein non-financial players can embed banking services into their offerings and at the same time allow traditional banks to access a large customer base & customer data by embedding fintech or non-financial products in their banking services. Banking as a service provides possibilities for new value streams via an open ecosystem enabled by APIs and provides both banks and non-financial companies to build new features/offerings on top of existing services thus enabling new value propositions for their end customers. As per an industry report, BaaS is expected to reach $7T by 2030 growing at a rate of 50% for the next 5 years and 85% of senior executives surveyed are already implementing BaaS solutions or planning to within the next 12-18 months.

Enabling Factors for Banking as a Service 

Banking as a Service in its current form is enabled because of multiple factors that range from technology proliferation, government flexible regulations, and a more demanding end customer. Some of the critical enabling factors are:

• APIfication led Open Banking – Growing use of APIs in the technology space, the emergence of SaaS-based pricing & business models. APIfication enabled non-financial companies to use banks platforms via APIs
• Digital Adoption – Mass stream digital adoption wave is accelerated in the last few years, with mobile-first banking & mobile-first approaches becoming the mainstream
• Cloud Computing – Increased computing power is helping organizations to leverage the vast amount of data, the transition towards a consumption-based economy & business model, the ability to scale & grow across geographies, and the emergence of a service model such as PaaS, IaaS, SaaS, and a push to further penetration of automation
• Supporting Regulations – Supporting regulations by forward-looking governments, transparency, and low barriers to non-financial companies & fintech in the financial domain have led to the proliferation of banking as a service

Banking as a Service (BaaS) versus Banking as a Platform (BaaP) 

Banking as a Platform is a kind of business model in which a bank aggregates its traditional services with digital & new services from third-party partners and offers new services on its channels. But, in the case of Banking as a Service, Banks leverage their APIs to distribute core financial services products through third-party or partner-owned channels. BaaS allows non-financial companies to offer banking services & products to their end customers.

Benefits of BaaS Adoption 

Banking as a service adoption has benefits for all the stakeholders including the end customer. Some of the benefits for different stakeholders as per their role in the BaaS ecosystem are mentioned below:

BaaS Provider 

• Understand their customer better leveraging partnership with Distributor/Embedder with significant customer data and choices
• Innovation Beyond Banking

BaaS Distributor 

• Offer financial products & services to their customers without requiring a banking license
• Bring customers closer to businesses by providing integrated offerings
• Launch new products faster
• Elevate the brand experience

BaaS Enablers 

• Easy entry into new business models
• Promotes innovation for the overall ecosystem
• Promotes partnerships with Producers & Distributor

Way Forward for BaaS Adoption

A successful BaaS adoption will rely on the participating stakeholders in the ecosystem. A BaaS provider will be able to bring required capital and manage risks, regulations & compliance expertise whereas a distributor will be able to bring global reach, customer proximity, and end customer behavior. An Enabler in the form of a fintech will be able to help the ecosystem in overcoming the legacy technology challenges and help in the modernization of point solutions.

Overall, a staircase-based approach would help companies successfully reap BaaS benefits.

Step 1: Identify Use-Cases – Identify business use-cases as per the market & segment you operate in. The Use-Cases should have a business case with visible ROI

Step 2: Develop Differentiated Offerings – Based on Identified use-cases, develop differentiated services/offerings

Step 3: Devise Monetization Strategy –A BaaS monetization strategy should be suitable for the offering and multiple monetization strategies could be explored based on the market/segment/partnership. E.g., Transaction based pricing or fixed fee model (monthly/yearly) or one-time fixed fee.

Step 4: Develop Partnerships – Identify partners that bring synergy to existing offerings or compliments existing services/ products. Partners included BaaS enablers and help solve the technology needs of the BaaS adoption