What is Banking as a Service (BaaS)?

Jude Hadidi
January 16, 2022
What is Banking as a Service (BaaS)?

At the present, the field of fintech is rife with buzzwords. So much so that it may become disorienting trying to figure out who does what.

Banking as a Service (BaaS) has received a lot of attention recently, and rightfully so. But it may be described in a different way... a far more general word, one you're surely familiar with... 'whitelabelling'

Banking as a Service lets other businesses to integrate their digital banking services with non-bank products/services, or fintech start-ups link with a bank's systems via APIs to offer a service that could not be delivered in-house.

So now that we know what BaaS means, let's take a closer look into why it's dominating news right now:

Why BaaS is needed?

Entering and innovating in a strongly regulated sector such as banking and financial services is quite challenging and complex.

Anyone attempting to establish, implement, or operate a financial business may be considerably hampered by a variety of lengthy and costly roadblocks. This means high initial capital needs combined with a very delayed 'route-to-market' only to assess the viability of your intended solution, which has traditionally kept the financial services sector small and impacted competitiveness.

As a result, BaaS has emerged as an appropriate alternative for banks to enable dynamic new, customer-oriented propositions and for fintechs to harness bank partnerships to provide innovation to the market via established, licensed companies.

Established financial institutions with legacy infrastructure can tap into innovative modular solutions that would be difficult and costly to build in-house, while non-bank businesses can leverage licensed and regulated banking back-ends without having to apply for and be granted the relevant licenses, registrations, and validations.

How does BaaS work?

Banking as a Service (BaaS) makes use of Application Programming Interfaces (APIs) to securely and directly interface with systems from banks, enterprises, fintechs, and middleware suppliers.

This layer of collaboration generates opportunity for everyone engaged. Legacy banks may monetize their services by creating BaaS platforms, companies can sell whitelabelled financial products to their loyal customer base, fintechs can find a cost-effective and scalable path to market, and middleware vendors gain from the requirement for scalable IT infrastructure.

Instead of competition, it is establishing a new reality of collaboration and integration.

Guide: Digital Transformation Challenges in the Financial Services Sector

Innovations in the field of BaaS

In a world where banking is no longer limited to banks, building societies, and credit unions, product and service design may be tackled from a whole different angle, and the interplay and interoperability of solutions can be built without the constraints of legacy IT infrastructure. As a result, the potential for creativity is multiplied many times over.

Let's look at some of the new possibilities:

Big technology wants a piece of the action

Big digital firms view financial services as another weapon in their arsenal, making them an important part of people's lives, while also understanding the economic value that can be made by using conventional banks' infrastructure alongside their brand and client base.

The challengers want to be integrated

Instead of seeing the large banks as rivals, BaaS allows challenger banks to see them as partners. Partners with expertise, clout, and financial clout... Fintech start-ups, on the other hand, may contribute to the challenger bank ecosystem by supporting their proposal from a variety of customer-centric perspectives in order to create a single seamless experience.

Large banks strive to diversify their revenue streams

By giving up their digital banking services via API, they may also engage in discussions on commercial, product, and compliance assistance. Traditionally, banks would have had to 'stand-up' a fully self-contained business activity within their organization. BaaS enables them to monetize components of their service offering that were previously only a cost-base.

So there you have it, there's a reason why everyone in the financial services industry is enthusiastic about BaaS... and we are, too. Any tech-enabled upheaval piques our professional technologists' curiosity. So, the next time someone asks you about Banking as a Service, tell them how you intend to create consumer and company value with your new and creative offerings!

Sitech collaborates with a number of  banks, and other financial service providers to improve their direct to consumer products as well as their back office and IT infrastructure. Contact us right now if you have an idea for how your company may generate new revenue streams through Banking as a Service.

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