Banking-as-a-Service or BaaS refers to platforms that expose an API to third parties to allow them to access banking services. These banking services include payments, FX, accounts and more recently Open Banking functionality like payment initiation and account information services.
What does API mean?
To explain briefly, API is an intermediary system between two applications. It allows them to interact with each other. This is the most efficient, secure and flexible way for businesses to access and build financial products to offer to their own customers.
With the rapid technological development and the emergence of many fintech companies, banks have to stay competitive. It is no longer sufficient to provide basic banking services to the public; banks should be up-to-date with the latest digital innovations and redefine their service delivery model. The banks that support innovation and collaborate with other technology businesses will really cement themselves in the future of finance.
- Competitive advantage
Fintech (financial technology) is concerned with making financial activities more efficient by using the latest technology. These firms pose a threat to legacy banks (i.e., traditional banks) because the purpose of a fintech is to fill in a gap in the market and offer better customer experiences. To stay competitive, legacy banks can offer BaaS to third party providers.
- Increased customer base
Normally, banks cater to just the general public or businesses by providing them financial services i.e. account opening, deposits, etc. However, in a competitive market where fintech exists, banks can benefit from increasing their customer base and offering the core infrastructure on which these new businesses can build on. By offering banking-as-a-service, banks can attract different types of customers e.g. third party providers such as payment service providers, making them the banks’ clients.
- A new source of revenue
BaaS allows third party providers to have access to a bank’s core infrastructure. These third-party providers, white label the banks services and offer them to the end users as their own. The bank’s revenue stream generally comes from service charges and micro-transaction fees. Clients can also pay a fee to access the BaaS platform, making it another source of revenue that is likely to grow in the future.
- Increased efficiency
Legacy banks, while a necessary institution, often struggle to keep up with digital innovations, leaving a gap that is filled by other institutions. Banking-as-a-service is a good way for banks to enter the digital sphere alongside the new, innovative fintech companies. These new technological advancements are going a long way in enhancing customer experience and in turn, satisfaction.
Banking-as-a-service is an innovation whereby banks can gain a competitive advantage and increase their revenue by white-labeling their service through APIs.