Financial services are undergoing a quiet revolution. Banking and payments are becoming more open environments than ever before; businesses have access to tools and services from which they were previously locked out; and consumers are enjoying a huge range of new, exciting, and genuinely useful products with finance at their heart.
This is all thanks to the explosion of Banking-as-a-Service.
Banking-as-a-Service (BaaS) describes an ecosystem in which licensed financial institutions provide access to their services to non-banking businesses, generally through the use of APIs.
Let’s look at an example: employee expense cards. This growing market relies on BaaS to deliver its products. Expense card startups ‘lease’ access to banking and payments services from regulated institutions such as banks and payment providers. They integrate these services with their own technology using simple, developer-friendly API calls. Then, they build their own tools, interfaces, and user experiences to help their clients solve the real-world problems associated with employee expense reporting.
Until recently, this model wasn’t possible. A hopeful fintech startup would previously have had to undertake the complex and time-consuming process of signing agreements with slow-moving legacy institutions. They would then have faced the significant challenges associated with integrating cumbersome proprietary banking technologies into their own tech stack. They would have faced significant regulatory hurdles. Above all, it would be expensive and time-consuming.
BaaS is a crucial new frontier in financial services. It removes many of the barriers that businesses have faced when trying to launch or integrate financial products, including complex regulation, slow-moving legacy institutions, and old technologies. It means that financial services are more open than ever before.
Why is Banking-as-a-Service useful?
BaaS solves several key problems that have come to characterise financial services today. For example:
What about Embedded Finance?
You’re likely to see the phrase ‘Embedded Finance’ in connection with BaaS. Embedded Finance describes a model in which financial services can be fully embedded into non-financial products, using APIs and BaaS technologies and techniques. Want to learn more? Read our separate article on Embedded Finance.