The world is moving towards open banking services from regulated banking infrastructure. BaaS is the catalyst that allows third-party companies to connect with bank APIs and leverage banking facilities.
BaaS (Banking As A Service) is another fintech breakthrough that allows banks and fintech to collaborate. The catch is that many of these advancements are mistaken for one another. Today, we’re here to define what Banking As A Service is and isn’t.
In the last several years, the banking industry has seen a transformation. This shift has become inevitable as more fintech businesses enter the market. Financial services are evolving so that new products, channels, partnerships, and opportunities emerge. At the heart of it all, Banking As A Service plays a crucial role.
What is BaaS?
BaaS (Banking As A Service) is an end-to-end strategy that integrates various service providers into one single detailed procedure for completing a financial service in a timely and efficient manner. In simple words, it allows third-party companies to connect with bank APIs. It enables open banking services while allowing organisations to construct new financial services on top of the provider bank’s regulated infrastructure.
What Distinguishes Banking As A Service From Traditional Banking?
Money storage, remittance, and payment processing are some of the functions of banks. For banks to provide these functions, they must invest heavily and build the appropriate infrastructure. The processes, together with the complicated infrastructure, result in congestion. Because of these gridlocks, fintech businesses and non-bank organisations have given a lot of thought and application to establishing financial services by collaborating with banks rather than constructing an entire infrastructure.
How Does BaaS Work?
Banking As A Service allows third-party organisations to access current banking services via APIs that connect banks and third-party organisations. Fintech firms, programmers and developers, and other non-financial organisations can use these APIs to access banking services.
They can develop their features as a layer on top of the existing financial services. To put it another way,
1. A fintech firm or person pays for the use of BaaS.
2. A BaaS platform, such as a bank or a financial institution, releases its APIs.
3. A fintech company/individual creates unique financial services using these APIs.
Factors Impacting BaaS
While fintech is evolving and changing the way financial services are delivered, a few essential factors have contributed to the rise of BaaS.
1. Banks are attempting to catch up to fintech startups in terms of speed. Alternatively, banks are collaborating with fintech businesses to develop new financial services. Startups and small businesses are beginning to take advantage of more convenient and effective business banking.
2. The rise of digital transformation and a mobile-first strategy in recent years has had a significant impact on BaaS adoption.
3. Banking’s business architecture is growing into a more sophisticated system incorporating newer technology and techniques.
Banking rules have evolved in a way that has aided in the development of healthy industrialisation.
What Are The Advantages Of BaaS For Businesses?
Before integrating any new technology in our business, especially finance-related, we wonder about the advantages of the tech. BaaS is one burning topic of the fintech industry and before we discuss how it’s going to help businesses, let’s discuss all the advantages of BaaS.
- Businesses may compartmentalise business logic and data with BaaS, reducing their time designing and deploying apps.
- Businesses may innovate considerably more by leveraging their APIs and third parties’ APIs.
- Using API ecosystems to build goods and services may dramatically expand the number of customers.
Now let’s go ahead and see some of the BaaS use cases.
How Can BaaS Help Businesses?
- Payment and Processing via Credit/Debit Card
Non-financial organisations use Banking As A Service (BaaS) to give payment capability to their platforms or applications in today’s digital economy. As a result, these firms may save money on overhead by not having to build and operate their payment infrastructure.
With an increasing number of e-commerce sites vying for clients and online sales continuing to rise, the only way to stand out is to provide a full service and assist customers. Small business lending is a valuable instrument that may help small businesses compete in major e-commerce industries.
- Improved Client Service
Integrating many services into a single platform is an excellent method for businesses to increase customer service capabilities. Banks may expand their client bases by integrating their delivery services to numerous enterprises from various sectors by giving BaaS solutions.
Identity verification and app-based online services are some of the other use cases of BaaS. You can get all these services for your business by accessing this link.
Traditional banks are likewise losing clients to digital competitors while investing in infrastructure. BaaS end to end strategy that integrates various service providers into one single detailed procedure for completing a financial service will undoubtedly see more digital financial goods in the future, given the government’s aim to increase support for digital efforts.
1. Because both models rely on APIs to interact between banks and fintech businesses, the BaaS model is sometimes mistaken for open banking. However, these models serve pretty different purposes.
2. Banking As A Service (BaaS): Companies include complete banking services in their solutions.
3. Open Banking: Businesses create products based only on data.
In the fintech business, BaaS has become relatively popular. Neobanks, the latest fintech term, have risen in popularity in several nations worldwide.
Neobanks assist firms in managing their whole financial operations by increasing transparency and alternatives and giving real-time capabilities. In addition, many new banks and challenger banks searching for a new revenue stream have extended their APIs to non-financial organisations.
More than merely a source of revenue, BaaS has allowed traditional banks to develop relationships with both emerging and established fintech companies. It also aids traditional banks in catching up to what certain fintech firms are doing.
While COVID has significantly influenced traditional banking, it has also aided in the quick acceptance of digital banking. Meanwhile, Indian FinTech companies are performing excellently and participating in every aspect of banking.
The State Bank of India and Uber have partnered to provide car financing to Uber drivers.
Snapdeal and Freecharge have partnered with Yes Bank to enable “immediate refunds”.
The majority of these types of cooperation are only feasible because banks let external companies access their technology and data.