Banking as a service is a model through which licensed banks can integrate their services with non-banking service providers. It helps incorporate banking products and services through third-party distributors. This way, non-banks or pretty much any business can offer banking services legally, even without a banking license. Such companies unify banking facilities into their own products. Hence, when it comes to future-proofing banks, Banking as a service(BaaS) is one solution that seems most relevant for traditional banks to level up their business game.
How does it work
- With BaaS, services such as digital payments, loans, and deposits for non-bank businesses can be carried out using the bank’s existing license and secure interface.
- The services are provided using API(Application Programming Interface), which acts as a mediator between two applications.
- Non-bank service providers collaborate with these banks while BaaS allows these brands to embed financial services into their customer experience. The beauty of BaaS is that it can easily integrate with third-party applications. Companies like Uber Money and Apple Card amongst several others use BaaS.
- Traditional Banks tend to own the entire value chain. On the contrary, successful BaaS players only focus on a few stages of the value chain.
Commonly used BaaS configurations
1. Provider only
Providers issue their banking license, operations, and technology for use by other non banking companies.
2. Providers – Aggregators
Providers-Aggregators are like Providers, but also collaborate with other vendors to offer groundbreaking solutions.
3. Distributors only
Distributors handle end-customer relationships and offer unique financial services and propositions.
4. Distributors – Aggregators
Distributors-Aggregators strengthen the propositions by adding new technology from multiple providers.
By collaborating the non-banking companies with regulated financial infrastructure, BaaS offers better-specialized services and speeds up their entry into the market. These offerings are agile and have the potential to disaggregate the value chain of traditional banking.
The future of Banking as a Service
The scope of BaaS has a huge spectrum because of the flexibility it offers. Through BaaS, any service provider can incorporate BaaS into its infrastructure with just a few lines of code. Hence, BaaS is also known as White label banking. In 2020, the Global BaaS market size was valued at $2.41 billion. The same is projected to touch $11.34 billion by 2030 growing at a CAGR of 17.1%.