What is banking as a service?
Put simply, banking as a service (BaaS) is the process whereby financial institutions (FIs) and non-financial institutions (non-FIs) are provided with the tools to deliver financial services that are traditionally offered by banks, such as monetary accounts or loans. Several governments require companies providing such services to have a banking license, so those without one use a BaaS model to effectively borrow licenses and technologies.
While BaaS providers are often banks, FIs without a banking license can still offer BaaS services. These types of providers do so via an API, distributing products built by a banking license holder.
One example of a BaaS arrangement would be an FI extending their banking license and tech stack to a supermarket, so it can offer credit cards to its shoppers.
Isn’t that just embedded finance?
While they’re often confused, embedded finance and BaaS are different things. Embedded finance is essentially the end-product of BaaS. To use the above example, BaaS is the FI providing their license and tech to the supermarket, and embedded finance is the supermarket offering a credit card to its customer. Basically, BaaS is the company-facing back end, and embedded finance is the customer-facing product.
Why is BaaS important?
From online checkouts to currency exchange to buy now pay later, the very landscape of financial services is shifting to accommodate consumer demands for integrated, user-friendly services, and BaaS is poised to meet them. It’s a constantly growing market, powering more and more of the things we do every day.
This growing popularity is due to the financial benefits and convenience that BaaS can provide for FIs and non-FIs alike. For FIs, it offers a new avenue for growth, broadening their reach and flexibility. For non-FIs, it enables them to expand the solutions and products they offer through integrated financial services. This in turn drives growth by treating their customers to one-stop solutions tailored to fit their needs. This model is far more economical for non-FIs who can’t afford costly licensing and tech stack fees.
That said, BaaS has its drawbacks. Non-FIs can suffer from vendor lock-in, becoming reliant on their provider’s performance. And FIs face the threat of being left by the non-FIs they sponsor, especially as the market becomes more and more saturated. There are also data security concerns for both parties, as BaaS relies on the free exchange of data, and with too many cooks, it can be difficult to know who was meant to be watching the pot.
Who’s talking about it?
BaaS has been a hot topic for several years now, with many experts still singing its praises. For example, noted fintech expert and Fintech Brainfood founder Simon Taylor, says that “The future of BaaS is bright…BaaS will deliver the automated, compliance-first, materially higher-performing financial services infrastructure the market craves.”
Kindgeek founder, Yuriy Gnatyuk, echoes this sentiment, predicting the creation of whole fintech ecosystems built around BaaS, extolling the architecture’s massive potential. In fact, this prediction is well on its way to fruition. According to Cornerstone Advisors, the number of banks developing a BaaS strategy has doubled since 2023, with more expansion on the horizon.
Useful Links
Banking As A Service: Current State And The Future
Banking as a Service, Explained: What it is, Why it’s Important and How to Play
Banking-as-a-Service (BaaS) vs Embedded Finance
Confusion, Cost, and Compliance: The Bifurcation of BaaS and Embedded Banking
