Digital transformation is democratizing data across industries, resulting in greater transparency and better customer experiences. New technologies are opening up legacy systems to startups and third parties and, in some cases, putting the data directly in consumers’ hands.
In financial services, Banking-as-a-Service (BaaS) platforms have emerged as a key component of open banking, through which firms increase financial transparency for customers by opening application programming interfaces (APIs) for third parties to develop new services.
Banking-as-a-service, or BaaS, offers banks, insurers, and wealth managers a great way to reach more customers at a lower cost by partnering with non-financial companies. But if banks do not act in a timely and strategic manner, BaaS could also become a threat, since it will open up the market to challengers.
What Is Banking-as-a-Service?
A BaaS model allows digital banks and other third parties to connect directly with banks’ systems via APIs so they can build banking offerings on top of the providers’ regulated infrastructure, and unlock the potential of open banking to reshape global financial services.
By moving into the BaaS space to share their data and infrastructure, tech-savvy legacy firms can ward off the encroaching threat of fintech. Soon digitally native customers will consider this level of information as the standard – so banks that begin now will be ahead of the curve, and will likely be rewarded with high demand.
How Does It Work?
The BaaS model begins with a fintech, digital bank, or other third-party providers (TPP) paying for access to the BaaS platform. The financial institution opens up its APIs to the TPP, which provides access to the systems and information necessary to build new banking products or offer white label banking services. With a BaaS provider, any company can essentially become a “bank.”
Launching their own BaaS platforms will also give legacy institutions an added revenue stream while they get ahead in open banking. BaaS can be monetized by charging clients a monthly fee for access to the platform or by charging a la carte for each service used.
Top Use Cases
- Card payment and processing
With BaaS, non-financial companies can offer branded payment services. In addition to increasing brand loyalty, white-label debit cards also provide companies with insight into their customers’ behaviour.
Direct bank transfers can be accepted as a payment method by merchants through BaaS based on Open Banking. They are a fraction of the cost, don’t cause chargebacks, and happen in real-time.
- Identity verification
The benefit of partnering with a specialist BaaS provider is that companies don’t have to worry about building their own KYC solution or keeping up with regulatory changes. The KYC API allows customers to quickly and inexpensively verify their identity by plugging into the bank’s API.
- Plug-and-play neobank
Creating neobanks with BaaS is seen as the perfect way to re-invent the entire banking experience. The companies use Banking as a Service to provide everything from a payment card to separate accounts.