What is Banking-as-a-Service? Your questions answered


Posted on July 24, 2023
What is Banking-as-a-Service? Your questions answered
Banking services for all! Licensed financial institutions are now working with non-banking businesses to modernise finance, bringing benefits aplenty for consumers and businesses.
OpenPayd Editorial Team
OpenPayd Editorial Team
July 24, 2023

Financial services have never been easier for businesses to access. Gone are the days in which non-financial businesses would need to become regulated financial institutions themselves and build out vast technical infrastructure. Now, they can simply plug in what they need. It’s banking…as a service.

So what actually is Banking-as-a-Service?

Banking-as-a-Service (BaaS) is a type of software that allows regulated institutions to deliver financial services to non-banking businesses, via API.

The non-banking business integrates these services with their own technology using simple, developer-friendly API calls. Then, they can use that infrastructure to build their own tools, interfaces and user experiences to help their clients and streamline their own operations.

Until recently, this model wasn’t possible. Traditional financial institutions were built on bespoke, legacy tech platforms that limited their ability to integrate with their client’s own products and services. Their clients would then have faced the significant challenges associated with integrating cumbersome proprietary banking technologies into their own tech stack – a bit like building a new sports car and then attempting to put a 40 year-old tractor engine in it.

That’s without mentioning the significant regulatory hurdles a non-banking business would have to overcome, possibly requiring an entirely new team. Long story short, embedding banking services used to be an expensive and time-consuming proposition.

Why is Banking-as-a-Service useful?

BaaS was designed to solve many of these key problems and offer businesses a faster, simpler way to offer financial services.

  • One partnership, a multitude of options. Traditionally, if you wanted to offer financial products and services, you’d face some challenges – not least of all, meeting the significant regulatory obligations. Combining multiple services would have involved juggling a handful of different integrations. Using BaaS, you can partner with a single financial services provider and pick and choose the services you need, and the locations you’re operating in.

  • Simplify backend processes. For businesses with complex payments and banking needs, BaaS enables them to change the way they operate and reduce manual overhead. This can be seen in features such as automatic payment reconciliation, freeing up Ops staff by integrating virtual IBANs and a payment infrastructure that routes and reconciles payments automatically. Approaches such as this can eliminate human error and empower your teams to focus solely on growing your business.

  • It’s good for consumers. As the rise of the challenger banks has demonstrated, consumers are hungry for improved experiences and service – things that traditional banks are very poor at delivering. BaaS allows modern companies to challenge what we have come to expect from financial services and use their expertise in design and UX to build better services, with the more complex and regulatory side of things taken care of behind the scenes.

What are some examples of BaaS?

A real-life example of BaaS in action would be OpenPayd’s collaboration with foreign exchange fintech Caxton. Caxton processes over €1 billion in transactions each year, with every payment previously passing through one central business account. OpenPayd’s BaaS stack was able to give them access to virtual IBANs, which they could assign to every customer on their platform. This alleviated the need to reconcile manually and drastically cut operational overhead and human error.

Citizen would be another example, that was established to simplify and speed up payments between consumers and merchants. Adopting a philosophy of ‘no card, no codes, no apps’, Citizen partnered with us to access our virtual IBANs and real-time payment rails. Citizen did not need to build out new financial architecture to provide these services, it could simply plug in OpenPayd’s solution to its offering.

BaaS comes in a myriad of forms, from payments to lending to foreign exchange. You may be familiar with more examples than you realise.

How is BaaS different from embedded finance?

While BaaS and embedded finance are linked, they are not the same thing. BaaS is the tech stack that sits behind the scenes, covering all the relevant regulatory requirements and the technology that underpins a financial service.

Embedded finance on the other hand, describes the layer that sits on top. It describes how a user interacts with specific types of financial services like accounts, payments or FX. Typically this will be in a way that has been fully integrated within the app or digital interface they’re using via API. Embedded financial services are built on BaaS, but they’re both different parts of the value chain.

Let’s give an example to bring this to life. Many of our clients like we described above are looking to issue unique virtual accounts for their underlying customers, to help them reconcile incoming payments. This is the embedded finance portion: issuing named IBANs for their customers as part of their onboarding. Underlying that is the Banking-as-a-Service infrastructure – the underlying accounts, across every relevant currency, that are being issued by a financial institution that is regulated in the relevant markets.

Why has Banking-as-a-Service become so popular?

Let’s start at the beginning. Historically, banking technology was, unsurprisingly, built by banks themselves. Because of that, it was bespoke to each organisation and not created to be used by any other, let alone a third-party.

Then as software ramped up in the 1990s, new tech companies began selling software solutions to banks. While modernised, these were, again, bespoke to each particular organisation. They were highly modified over the years and left to run on internal servers. Many of these core systems are still in use today. They have been customised and updated, but they are still the engine behind the bank’s technology function.

Since that time, two major technological advancements have occurred: the development of cloud computing and a rise in APIs. These advancements, combined with regulation coming through to encourage more competition, have made financial services more accessible to non-banks.

This has allowed new fintech businesses to work with banking partners and wrap their services into a single API integration, offering businesses easy access to a full-suite of banking services. This is exactly what we have done at OpenPayd.

How do you intend to roll out embedded payments, embedded banking, embedded lending, embedded insurance

The demand for Banking-as-a-Service has been growing fast. In our research into embedded finance, most of the companies that are looking to roll out embedded payments and banking will be partnering with BaaS providers in order to do so.

BaaS has already achieved a great deal in improving access and implementation of financial services, which both businesses and consumers are benefitting from. However, this will only continue. We are still at the beginning of the easy-access financial services era. It’s likely that the most significant improvements are still ahead of us.