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What You Should Know About Banking-as-a-Service

August 18, 2021


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There are a plethora of new FinTech and banking business models emerging, including banking-as-a-service. Here’s everything you need to know about this new way non-banks are capitalizing on evolving customer needs.

Given the surge in online banking activity, it’s no surprise that even non-banks are looking to get in on the action. The ability to offer banking services and facilitate transactions has the potential to improve the customer experience and drive new revenue streams. However, these abilities are not without their drawbacks. The ability to offer banking services requires a banking license along with scrutiny under an entire set of banking regulations. Most non-bank organizations couldn’t even begin to think about such an undertaking — until now.

The Rundown on BaaS

Banking-as-a-service (BaaS) operates similarly to the software-as-a-service (SaaS) model that most modern companies are already using for their technology needs. As organizations increasingly leverage digital cloud networks, they gain the ability to integrate third-party solutions seamlessly into their technology infrastructure. Instead of designing and running their own solution, they outsource the product creation and simply enable access to the external technology within their own user interface.

From a user perspective, there is no discernable difference between accessing a platform’s tech product or a third party’s. However, the set-up does allow for the merchant to avoid the added regulation compliance as they are technically not processing the banking services themselves. By offloading the responsibility of the banking product to the original provider, companies can free up operational bandwidth without sacrificing customer experience.

Digital’s Day

This is particularly important in today’s digital-first landscape. A year spent at home has turbocharged the growth of online spending. E-commerce sales now amount to $4.28 trillion worldwide, while e-commerce’s share of total retail sales is expected to hit 21.8% by 2024; this has already increased from 7.4% in 2015 to 18% in 2020.

With consumers opting to make purchases and manage their money online in greater numbers than ever, companies are having to provide those digital options. As a result, the digital transformation market is expected to grow at a compound annual growth rate (CAGR) of 22.7% from 2019, reaching $3,294 billion by 2025. Specifically, data shows that companies are focusing on improving the customer experience in the short term (71%) and on modernizing their IT infrastructure in the long term (50%).

BaaS Benefits

By offering BaaS to their customers, companies can both improve the customer experience and take advantage of the most advanced technology solutions. This would most commonly be in the form of a few key services:

  • Loyalty Debit or Credit Cards – A payments company can offer custom cards with BaaS that are designed to accrue rewards for specific behaviors that suit its audience. This encourages the user to continually engage with that provider, building loyalty over time.
  • Short-Term Financing – Many consumers today, particularly younger shoppers, are wary of traditional forms of credit but still working with a budget. Payments institutions that enable short-term financing or pay-over-time capabilities through BaaS can help their customers afford their lifestyle, without the associated risks of traditional credit.
  • Saving Facilities – Common personal finance guidance in 2021 recommends having transparency and oversight across all your finances. By using BaaS to offer a savings account within their platform, payments companies enable their customers to manage their money and transactions in a single place — improving convenience and visibility.

Benefits also extend beyond the new services available through BaaS. Working closely with a provider can help create valuable partnerships between banking services and FinTech companies, which will be useful as regulations continue to evolve and these service areas overlap even further. Rather than being competitors, these groups become collaborators and even customers to each other.

Additionally, BaaS provides access to data that the payments company would ordinarily never gain access to, due to banking regulations and privacy rules. Instead, under open banking rules, payments companies can utilize this customer data to enhance their other service offerings even though they’re not fulfilling the banking service themselves.,

Businesses can also be confident that they’re offering an elevated customer experience by maintaining the entire customer journey within their platform. Because the banking service is integrated within the payments platform, there is no disruption to the consumer’s experience. Instead, they only see the touchpoints that are directly offered by the brand itself.

Challenges to Keep in Mind

The appeal is strong but payments companies interested in BaaS should still keep in mind that choosing the right banking partner is important if they want to build a successful long-term relationship. Selecting a partner that is already familiar with their customer base could help ensure quick and instinctive adoption of these new services. Moreover, the sensitive nature of banking compliance means that mutual trust is imperative in this type of partnership.

Companies should also consider the technological infrastructure needed to support BaaS. If they have not already invested in cloud technology, they may struggle to successfully integrate the banking tools into their offering; this could lead to a greater operational burden than not offering BaaS in the first place. Creating a solid tech stack on which they build the BaaS product should be the priority.

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