FinTech Focus: What is Banking-as-a-Service BaaS? by William U Morales Fintechtris

This feature has become table stakes for platforms; without embedding online payments, platforms have a much harder time competing in the market. Facilitating online payments also helps SaaS 2.0 platforms generate more revenue—in addition to charging for monthly subscriptions, they can also charge customers for access to payment processing. ClearBank is notably the UK’s first new clearing bank in 250 years, and aims to transform the clearing bank experience and create a new level of open competition and transparency in the UK market. Its technology stack transforms the ability for financial institutions to provide current accounts to their customers, resulting in faster, more efficient payments, and financial inclusion. U.S. regulators need to watch and learn from both the European rollout and the efforts in Asia. I read that in many cases, when banks are asked to build and maintain APIs simply for regulatory reasons, instead of revenue generation, the quality of what’s provided really starts to suffer.

Emerging startups and institutions are increasing competition with their own BaaS offering. Around the world, the access and benefits of Banking-as-a-Service fueled the Open Banking. Born from regulation pushing banks to open access of client data to 3rd parties, open banking has spawned the popular independent banking brands we see today such as Revolut, Chime, and Monzo. Even though sharing data openly is now required, financial institutions are still cautious of risk exposure to their customers due to poor external controls and security.

The top layer is the FinTech company that interfaces with the end user (or front-end) — receiving data from customers on transaction requests that it sends to the BaaS layer. The BaaS provider also sends data from the bank to the FinTech as responses to transactions requests. As BaaS continues to expand bank offerings, the playing field widens for all industries to deliver banking services seamlessly. Humans as a service represents the top layer of the proposed revision of the BaaS stack.

So AngelList collects those instructions from their customers and passes them along to their bank partner. For example, let’s say you add payments to your core solution, allowing your customers to accept money on your platform. You see a lot of interest, but customers tell you that they also want the ability to easily pay for business expenses with their revenue, so you want to test offering your customers a card. The best BaaS solutions should allow you to quickly add different capabilities and test them before rolling them out more broadly. Its end-to-end payment services are accessible via an interoperable proprietary platform that’s PCI-DSS (Payment Card Industry – Data Security Standards) certified and hosted in Tier-4 data centers for advanced security. Bankable helps its partners meet the technological and regulatory challenges of developing disruptive financial services.

There is no need to get a banking license

While there will be some integration time required, you should be able to access developer-friendly APIs and build on top of ready-to-use financial infrastructure. This way, you can focus on how your core business and embedded finance can work together, rather than building banking infrastructure from scratch, yourself. Because Hair Flair processes all client payments on The Brush, The Brush has a complete understanding of the salon’s financial history, and the platform inherently understands the salon industry and typical capital needs.

Under this model, banks make financial services powered by third parties available to their customers via their app or website. For example, a bank might offer loans underwritten by Upstart, or they might offer an automated savings tool powered by Acorns. It’s a way for financial institutions to expand their product offering without having to build from scratch. I think demand from consumers in the U.S. for in-context banking services is certainly driving some of that interest, along with revenue in this economy.

Real estate businesses have eliminated extra steps for property buyers by integrating loan and insurance options into the process. Retailers, including those in eCommerce, give buyers access to financing offers with immediate decisions to invite purchases. Some employers, such as Uber, allow workers fast access to earnings through dedicated debit cards. In all cases, product and service companies hope that the more efficient process helps attract and retain customers .

Winning big with fearless tech partnerships

Beyond this, 80% of Gen Z and Millennials use a money transfer tool. Railsbank, funded through debt and venture capital rounds with impressive investors , is seeking an additional $100 million of financing in 2022. Confirm compliance with respective data laws and banking regulations . Asia has a strong disadvantage because of its high fragmentation of jurisdiction areas compared to Europe. FinTechs can plug into the national Banking-as-a-Service hub to provide their specific regulated and licensed face to their customers.

Further customization is then layered on top to set up deposit accounts, debit cards or credit cards, and loans. With the acceleration of digitization, including automation and APIs, banks can scale BaaS faster, putting embedded finance within reach for more companies considering it. At the same time, companies seeking to embed financial services increasingly see their digital experiences as a composition of modules built by others. This is often because they focus on software engineering as a core competency, seeing payments, lending, or deposit and checking accounts as just another product capability to add to the user experience. BaaS providers are integral for a variety of businesses, from neobanks to marketplaces. When a software platform uses a BaaS provider, this is typically called “embedded finance” because the platform adds the financial services as part of its core software.

Benefits of Banking as a Service

Rather than using their personal card, they decide to apply for a business credit card to purchase new equipment and supplies. According to a Stripe survey, 55% of businesses have to visit a local branch in person and 23% have to send a fax in order to open a bank account. Global Payments Accept payments online, in person, or through your platform. Founded banking-as-a-service in 2016, the Paris-based startup has approval from the French Prudential Supervision and Resolution Authority , and is a STEP2 and Principal member of the Mastercard networks. Treezor was acquired by the Societe Generale group in 2019 to accelerate the parent company’s open innovation strategy, as well as the international expansion of Treezor in Europe.

Non-bank and fintech businesses can also leverage the BaaS concept. Using BaaS, you can assist customers to automate their finances and investments. Additionally, they can help create a customized investment plan using low-cost index funds. With this card, customers can obtain real-time updates on all of their transactions. They present the customer’s account information and payments intuitively.

Industry impact of Banking as a Service

Working with traditional banks, financial technology companies use APIs to offer a full stack of banking services, including traditional accounts, credit cards, loans, and more. Banking-as-a-Service has become THE dynamic solution in FinTech to digitally deliver a customer-centric, bank offering into the market quickly. BaaS providers have been able to provide a banking infrastructure through APIs that can be implemented and launched in months without monetary licenses or large rounds of capital. Think of APIs as Lego blocks that fit together to form a banking core framework and system — through a series of API calls a user can be onboarded, created, and transactions executed.

• Offering bank accounts enables Gusto to keep more money “on their platform;” in other words, they can earn various types of fee revenue from it.
• Others include Bond, Solid, Treasury Prime, Stripe Treasury, Moov, Synctera, and Column.
• The best known BaaS’ fintechs providers in Brazil are Matera, Zoop, Dock, and S3 Bank.
• Next to Solarisbank, other providers in Europe’s growing BaaS landscape include ClearBank, RailsBank and Starling Bank.
• Silicon Valley Bank provided banking services to nearly half the country’s venture capital-backed technology and life-science companies, according to its website, and to more than 2,500 venture capital firms.
• Additionally, they can help create a customized investment plan using low-cost index funds.

The future of customer intimacy lies not in ensuring the customer has an account or mortgage but rather in providing a better customer experience that starts from wherever the customer needs it. Banking-as-a-Service has been a modern-day development trend for several years now. In 2012, Credit Agricole, a French bank, launched an API marketplace that allowed developers to access its data and services through their applications. Then, in 2013, Yes Bank and RBL Bank, two Indian banks, pioneered BaaS by creating APIs for their business data, which developers could use in their own apps. You may want to test product/market fit to see if there is demand for the financial services you want to integrate into your product.

What is Banking-as-a-Service (BaaS) and how is it transforming financial services

Examples of top-rated BaaS providers include the non-banks, Railsbank, Finastra, and Marqueta, and the bank, BBVA. They offer BaaS embedded finance services in the U.S. and globally. Third-party BaaS providers improve the user experience through their BaaS platforms. Banking as a Service links these businesses with online customers to the systems of licensed banks via an API connection for integration. It often uses third-party BaaS platform providers with middleware software and financial applications.

Additionally, firms might entice clients by providing reduced interest rates. Banking as a Service seamlessly provides essential services and financial products to customers, contributing substantially to economic growth. BaaS is different from open banking, which refers to the permissioned sharing of bank customer data and information in FinTech products and services. Open banking serves as one catalyst for deploying BaaS applications. The introduction of added gateways through APIs has increased levels of risk, which require enhanced firewalls and other controls to prevent intrusions.

With BaaS, virtually any business can become a banking provider by relying on the complex technology and sophisticated infrastructure of traditional banks. It is also possible to aggregate transactional data from multiple user accounts to provide consumers with a full picture of their finances. At the moment, open banking is among the top fintech software development trends. Open banking allows organizations to access data for enhancing rendered services and minimizing risks. For example, a financial institution can use the information about customer credit history, insurance packages, and personal data to make proper loan decisions while not compromising data privacy.

Embedded Finance

Established in 2020, the organization lets customers easily integrate a white-label platform into marketplace apps. LendingClub Bank, formerly Radius Bank, is a fintech company that pioneered issuing personal loans online. Representing an online financial community, LendingClub connects creditworthy borrowers with investors.

If you’re looking for a way to project what that might look like for your company, check out our revenue calculator and full revenue projection tool. To make these types of collaborations possible, banks must open up their data and technology to external parties. With more and more e-commerce sites competing for customers, and as online sales continue to increase, the only way to stand out is to offer a comprehensive service and help customers out. Lending is an incredibly powerful tool that can help small merchants compete with large e-commerce markets. The banking industry is one of the fastest-moving sectors in the world. To combat high levels of fraud and identity theft, the industry is implementing stricter regulations.

Just like all these terms, I’m sure there’s a lot of opinions on the subject. So I might broaden this one just a little bit, and I want to talk about it from a software perspective. So from a financial institution’s software that they’re using, having spent 20 years in this industry in engineering, the biggest change I’ve seen is exactly what you’re asking here. Third parties, fintechs, previous competitors, current competitors – it’s literally all fair game. So I’d say that partnerships are going to continue to be imperative on both sides – on the provider side and on the enabler or the distributor side.