Bank as a Service – What is it and how does it work?

Businesses can now access financial services more easily than ever before. In the past, non-financial businesses had to build out large technical infrastructure and become regulated financial institutions themselves. They can now simply plug in what they need. This is banking as a service. The concept of Banking as a Service (BaaS) is quickly gaining traction in the financial sector. A number of factors are driving this shift to BaaS, including the rise of fintech companies and the increasing demand for digital banking services. So, what is exactly banking as a service? Let’s know about Banking as a Service and how it is transforming the industry.

What is Banking as a Service?

In simple terms, the concept of Banking as a Service involves tech companies partnering with banks to offer their customers the bank’s financial products (e.g., bank accounts and credit cards). This partnership model allows chartered banks to market their products under the brands of tech companies.

The BaaS model allows digital banks and other third parties to access banks’ systems via APIs directly, enabling them to build bank offerings on top of the providers’ regulated infrastructure, as well as unlocking the open banking opportunity that reshapes the global financial services industry.

Banking as a Service companies offer legacy firms a chance to share their data and infrastructure to defend against fintech threats. For digitally native customers, access to this level of information will be table stakes within a few years, so banks that begin now will likely be rewarded with high demand

Banking as a Service providers

The popularity of Banking as a Service is rapidly growing, especially in mature markets like Europe and Australia, as well as in North America and Canada as well. The global BaaS market is expected to reach US$12.2 billion by 2031. Here are Banking as a Service examples.

1.Stripe Treasury

With Stripe Treasury, users can embed financial services into their platforms or marketplaces. Using the integration, users can create accounts, including identity verification and KYC checks, store funds, move money, and attach payment cards.

2. Shopify Balance

Shopify Balance is a business bank account for Shopify merchants in partnership with Stripe Treasury and Evolve Bank. It includes a physical and virtual card that can be used for bill payments, purchases, and cash withdrawals. Furthermore, it offers cashback, money transfers, money management, and early payment options.

3. Lending Club

With the Lending Club Tailored Checking Account, small businesses can open an account online in as little as 10 minutes. The company also offers mobile wallets, debit cards, bill pay, business checks, ACH origination, and more. With Treasury Prime API, Lending Club has access to banking services and card issuing through Marqeta, which is a fintech partner of Lending Club.

How does Banking as a Service work?

Licensed banks and financial institutions securely connect to a non-bank entity’s embedded financial services via an API (Application Programming Interface), enabling seamless communication. Customers can access financial services, such as loans, payments, product financing, credit cards, and digital wallets, without visiting another bank’s website.

Alternatively, a third-party BaaS provider, working with banks, embeds financial services in FinTech and other industries with BaaS platforms.

Benefits of BaaS for businesses

• The API-driven nature of BaaS enables cross-selling capabilities, which can lead to new revenue streams for businesses.
• Business logic and data can be compartmentalized with BaaS, and development time can be reduced.
• The use of APIs, both their own as well as third-party, helps businesses innovate significantly.
• API ecosystems can dramatically increase the number of customers for products and services.

Banking as a Service use cases

1.Online banking

With BaaS, fintech and non-fintech companies can offer their customers online banking services. They could focus on improving their services instead of focusing on bank licenses and integrations. Customers can benefit from these user-friendly and technologically advanced products compared to traditional banking. Further, they can develop apps that allow customers to track their transactions and account balances. Also, they can ensure faster access to funds and no hidden fees for better customer service.

2. Investment services

The Banking as a Service model can also help non-bank, and fintech players automate finances and invest assets. Customers can get a personalized investment plan with low-cost index funds. Furthermore, they can automatically rebalance the portfolio in accordance with the customer’s investment plan. They can also help customers find investments that suit their needs.

3. Debit and credit cards

Non-banks can offer credit and debit cards to their customers using the Banking as a Service model. A customer’s transactions can be tracked in real-time through an app. Users can view their account details and payments in an easy-to-use interface. A low-interest rate is another way for businesses to attract customers. There are a lot of companies that provide cashback offers on their credit and debit cards. This cashback can be assets that have no expiration date and can be used to purchase products/services in stores, websites, or apps.

4. Verify customer identification

A failure in payment transfer can have a huge impact on an organization’s reputation. It might also result in a company’s merchant account being branded as “high-risk.” Payment transfer failures can be reduced by verifying bank accounts. Before starting the payment process, BaaS platforms can help fintech/non-fintech businesses verify the beneficiary’s bank account. Bulk payments can be transferred across different payment methods, such as net banking and UPI.

5. Loans

Businesses can also use BaaS to lend funds to their customers. As an example, airlines can provide customers with one-click loans to ensure that their travel plans are not disrupted and that they receive the best service possible. Businesses can also offer customers the option to purchase now and pay later. Customers can choose their payment schedule upfront. The app can help them keep track of their monthly EMI payments.

BaaS as the future of banking

Financial institutions are increasingly relying on Banking as a Service in order to meet the changing needs of their customers and remain competitive in the marketplace. As a result of BaaS, other companies are able to offer financial products and services to their customers using the infrastructure and services of traditional banks. Further, it allows smaller companies and start-ups to enter the market without investing in expensive infrastructure, while improving consumer convenience and offering more financial options.

It also offers a platform for fintech companies to provide new and unique financial services, allowing more flexibility and innovation in the financial sector. The growing demand for digital financial services and the adoption of technology further solidify BaaS as the future of banking. Financial institutions can succeed in the digital era by focusing on security, innovation, and customer experience.