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:
BaaS unlocks banking. Traditionally, if you wanted to offer financial products and services you would be subject to very significant regulatory obligations - perhaps even the requirement to secure a banking licence. Just as importantly, you would face major technical challenges, not least of which would be making sure that your systems ‘play well’ with the cumbersome old proprietary software run by the legacy institutions. BaaS changes that. It allows businesses to pick and choose the services they need from a range of dedicated service providers. By plugging into those services through APIs, businesses can easily access the parts of the banking ‘stack’ they require, in a developer-friendly manner - allowing them to concentrate on building great products.
It’s good for emerging industries. As well as lagging behind on the tech front, the legacy banks have become extremely risk-averse. This has meant that many businesses, especially those in new or untested markets, have struggled to access the banking services that they need. For example, crypto startups have been locked out of banking and payments services for some years, as legacy institutions consider them to be an unappealing risk. BaaS, however, is more agile, more nimble, and more familiar with many of the most exciting new markets and technologies being explored today. BaaS operators are better able to service clients with specific needs, including through the provision of top-class service and support.
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 gives consumers more choice. It means that they are no longer confined to the major banks and financial services providers, and that cutting-edge startups can access the infrastructure that they need in order to deliver better, friendlier, more affordable customer experiences.
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.