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What Is Banking as a Service (BaaS)?
No, it’s not a freshwater fish—you’re thinking bass. It’s OK, you’ve probably been locked inside for months like the rest of us, so it’s perfectly fine if you’d rather fantasize about fishing right now. You know what, let me help: Here’s a moss-covered cabin deep in the woods, the smell of pine needles, the distant call of a loon, the lap of the water along the side of a canoe as you cast your line. No, really. Take your time. When you’re ready, we’ll explore what BaaS really means by taking a close look at how this financial services model fits into the world of consumer-directed finance, and what it means for financial institutions, fintechs, and non-bank businesses. When we’re done, you’ll have a better understanding of the technology and the incredible opportunities that the Banking as a Service model offers—and you’ll be free to head out to your shed or garage and clean off your rod and tackle box.
Banking as a Service (BaaS) Is All about Implementing Banking Services into Non-Bank Businesses
So, what is BaaS? Let’s keep this nice and simple. Banking as a Service (BaaS) is an innovative banking model that integrates full banking processes directly into the customer experience of non-bank businesses.
These banking processes can include everything from creating loans or processing payments to opening full retail deposit accounts with debit cards. The model allows startups, fintechs, and other non-bank businesses—really, any brand at all—to build innovative financial services solutions into their own customer experiences using modern API-driven platforms.
Now, this is huge. Ultimately, the BaaS model means you no longer have to be a bank in order to offer traditional banking services. This doesn’t mean you don’t have to worry about security or compliance or regulation or anti-money laundering or all of those complex legal elements that banks have to worry about. It just means that you’re going to need a partner that will take care of all that for you—and that partner must be a federally regulated bank with a banking license.
How Does Banking as a Service (BaaS) Work?
The best way to think about BaaS is to visualize the final banking services solution as a three-layered technology stack. You have non-bank brands on top of fintechs on top of financial institutions—and a whole lot of API-driven technology seamlessly and securely linking everything together.
FS:11, a London-based firm focused on delivering next-generation financial solutions propositions for the financial industry, does an incredible job capturing a modular BaaS tech stack in their report, Banking as a Service: Reimagining Financial Services with Modular Banking. In it, FS:11 outlines a discernable stack of financial services offerings categorizing the banking stack into nine different areas of specialization. They also divide the stack among three types of players to create a cohesive view of how a BaaS solution is built: brands, fintech service providers, and licensed banks.
Each player provides one or more pieces of the overall solution or BaaS stack.
The BaaS Stack: Brands, Fintech Service Providers, and Licensed Banks
The top layer of the BaaS stack belongs to brands. Brands control the customer experience. This is typically the user interface and the digital elements that create the overall customer experience for the end consumer. Brands are the non-banks that provision traditional banking processes into their customer experiences. When a consumer engages with a BaaS integrated financial solution in their customer journey, this is often the only brand the consumer will see. This level of integration gives brands complete control over the customer experience—everything from product selection to financing and even payment. Owning the entire customer journey gives brands more opportunity to promote brand engagement, reward customer loyalty, and reinforce brand recognition. It’s a strategy that can open up entirely new revenue streams for brands and turn a single sale of a product into multiple financial services-based touchpoints that could span years.
The middle players in a BaaS stack are fintech service providers that offer specialized financial services solutions to brands. This is the as-a-service layer of the stack. Fintech service providers typically don’t hold a banking license themselves. Instead, they offer their as-a-service banking solutions to brands by using modern APIs that access an actual banking system at a partner’s secure and regulated infrastructure—the licensed bank. These fintechs are often specialized in one area of traditional banking, focusing on payments or loans or even retail accounts—really, any number of the traditional financial services that banks offer.
Think of the traditional vertically integrated financial products and services that banks are known for: retail and deposit accounts, investments, loans, residential mortgages—the list goes on. Fintech service providers essentially disassemble the vertical integration of financial products and solutions in order to target and specializing in one or more particular areas.
The third player, and the foundation of the BaaS stack, is the financial institution. The financial institution holds the banking license. They take care of the regulatory and legal obstacles, while providing access to their infrastructure and legacy banking systems through the use of open banking APIs. Their systems communicate with fintechs and brands to create users and products and allow end customers to access banking services directly through a brand’s website or mobile app. Financial institutions are a major piece of the BaaS stack and partnering to create BaaS solutions is one way for them to offer their services and solutions using modern platforms.
Why Is BaaS Important?
Is BaaS disruptive? Absolutely it’s disruptive! Banking as a Service has the potential to completely change the way consumers borrow and pay and experience financial services. It’s ironic because disruptive is a terrible term for an integrated technology solution that effectively creates customer experiences that are anything but disruptive. The BaaS model places the perfect financial solutions at the perfect point in the customer journey, creating a seamless experience for virtually any brand.
Banking as a Service revolutionizes the way consumers experience banking. A key component of consumer-directed finance or open banking, BaaS creates opportunities for everyone, including brands, fintechs, banks, and consumers.
For brands, BaaS provides an opportunity to create new revenue streams and streamlined customer experiences. It creates opportunities for brands to increase brand engagement and recognition and provides new ways to earn and reward customer loyalty. For fintech service providers, BaaS lowers the threshold for new players into the banking industry. It can take millions of dollars and years of work to acquire a banking license in Canada. With BaaS, innovative fintechs can consider partnerships with banks in order to offer new, highly specialized financial solutions. For banks, BaaS creates seamless modern banking experiences, connecting legacy systems to modern API-driven platforms to offer the right products at the right time in a brand’s customer journey. And what about consumers? For consumers, just accessing financial services becomes easier—it’s right there when you need it. And by making it easier to choose between financial providers, BaaS crates more competition between industry players, which has the potential to drives down the cost of financial services and products. This is customer-centric banking.
The entire BaaS model creates a whole new financial ecosystem teaming with fish new ideas and fish ways for consumers to experience banking.
OK, OK. I get it. You get it. Just go grab your rod.
https://info.11fs.com/hubfs/Banking%20as%20a%20Service_reimagining%20financial%20services%20with%20modular%20banking.pdf (Retrieved September 25, 2020)
https://www.solarisbank.com/blog/what-the-hell-is-banking-as-a-service-and-what-is-it-not/ (Retrieved September 17, 2020)
https://www.businessinsider.com/banking-as-a-service-platform-providers#:~:text=a%20client%20here.-,Banking%2Das%2Da%2DService%20(BaaS)%20is%20a,to%20enhance%20their%20own%20services.&text=Pure%20BaaS%20Providers,Retail%20Banks%20w%2F%20BaaS%20Services (Retrieved September 24, 2020)
https://www.businessinsider.com/private-white-label-banking#:~:text=White%20label%20banking%20is%20another,financial%20products%20with%20existing%20infrastructure (Retrieved September 28, 2020)
Learn about the difference between Open Banking and BaaS here.
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