Businesses and brands are changing and improving their relationships with their customers remarkably fast – especially in the digital realm. In order to add value to their products and services, some nonbank companies have already begun offering integrated financial services. Examples of these financial offerings can be found in bank accounts, credit card payments, lending, and other tools that end-users engage with regularly through apps, websites, and eCommerce.
Essentially, this is referred to as Banking-as-a-Service (also known as BaaS). BaaS is a business model that enables banks to integrate their digital banking capabilities directly into the products of other organizations. Not to mention, embedded finance and BaaS are two sides of the same coin. Brands and Fintechs offer embedded financial services to consumers and businesses while BaaS providers are the suppliers and enablers for those brands and fintechs.
The Workings Of Baas And Its Implementation
An institution that offers Banking-as-a-Service typically opens its API to fintechs, digital banks, or other third-party providers, who will pay a fee to access its BaaS platform. APIs are specialized codes that simplify interactions between systems. Once they have received access, they will be able to develop and offer white-label banking to customers, who can be businesses or brands.
Is Banking-as-a-Service Really The Future Of Financial Services?
There is already speculation about Banking-as-a-Service as the future of financial services. Some even claim that it will change the booming Fintech industry as well as the global market in a variety of ways.
Banking-as-a-Service empowers brands to launch their own financial products (otherwise known as white-label banking) in a faster and more cost-effective way. They don’t have to acquire a banking license, as banks already have one, which gives them an advantage in a high-risk environment.
Furthermore, Banking-as-a-Service is dominated by three players:
- Financial Institutions/ Banks: Companies that are licensed to conduct banking and share their APIs with other companies.
- Nonbank Businesses: Businesses that offer financial products to their customers.
- Third-party Providers/ Fintechs: An organization that develops and offers financial products and services as a conduit between banks and businesses.
By utilizing the BaaS business model, all parties will be able to either improve their existing offerings or grow their business by attracting new clients.
Below are some of the most promising prospects for the main players;
- Empowering The End User/ Customer: Consumers increasingly have more and more access to information, enabling empowered clients who demand seamless and direct experiences with the products and services that they consume. Research reveals that users are increasingly drawn to multiproduct customer experiences known as ecosystems.
- The Transformation Of Brands Into Banks: Companies and brands are now able to build long-term relationships with their customers by meeting their needs in an integrated manner, which is one of the most significant goals. Consequently, brands also benefit from the expansion of their portfolio and, therefore, get more satisfied customers. The embedded finance model enables all of these gains at a low price and very quickly.
- Digital Banks And Fintechs, The Banking-As-A-Service Providers: In this technological equation, the suppliers of the final product must form a strategic alliance with banks. Aside from that, they have an opportunity to enter new markets at an attractive margin. Through the data, they can also gain a deeper insight into consumers’ behaviour.
- Banks And Financial Companies Are Regulated Institutions: Sharing software offers a new revenue stream for banks because they can either charge non-banking companies a regular fee or a pay-per-service charge. With the advent of Banking-as-a-Service, financial institutions can now expand into new markets since it is simple to implement, scalable, and has significant potential.
A notable aspect is that BaaS falls under the Open Banking framework, making this model possible and creating a significant difference in the financial services space.
Digital platforms and financial services will be connected through Banking-as-a-Service to transform the business landscape for years to come. The OpenPayd payment platform enables you to provide payments services within your own business model and ecosystem. From ensuring smooth licensing to securing your infrastructure, our team will help you through the entire process. Get in touch with us today!