What is Banking as a Service?

The many fintech business models available make it hard to differentiate them. For instance, the term BaaS leaves many scratching their heads. This shouldn't be the case, though! BaaS is an end-to-end service that allows banking institutions to offer banking services through a third-party distributor. 

BaaS is a platform that lets banks open up their APIs to fintech companies and other third parties. Doing this allows the development of new innovative services and enables open banking services. 

Is BaaS the Same as Open Banking?

Unfortunately, no! The two models are often confused to mean the same thing but serve distinct purposes. The open banking model allows banking institutions to connect to non-banks by opening their APIs. 

Open banking enables third parties to access the financial information necessary to develop new innovative services or new apps. And this translates to the development of better banking options and services.

The main elements of open banking are:

• Open banking can help boost revenue streams for financial institutions and widen their customer reach. It can create revenue-sharing systems allowing clients to access third-party developed apps, which improves profits through subscription.
• Through open banking, clients have control of their transactional data. This is transforming the relationship between clients and financial institutions. 
• Open banking allows financial institutions to commercialize their infrastructure. This is achieved by moving into the BaaS space and providing core services to fintechs.

On the other hand, BaaS involves non-banking businesses integrating banking services into their products. The platforms facilitate seamless and safe data exchange between banking institutions and fintechs. Adopting BaaS is an excellent way to save time and resources that financial institutions would otherwise use to pay software engineers.

The Pros of Banking as a Service 

Banking as a Service benefits both financial institutions and clients alike. It's associated with significant growth for banks and non-banks. The platform enables non-banking institutions to offer core services to clients through collaborating with banks.

 The notable benefits of BaaS include:

• Increased Revenue Source

BaaS encourages open banking by allowing financial institutions to share valuable data with third-party institutions. It boosts revenue for financial institutions. Besides, most banks prefer working with a model that allows them to charge fees for every API transaction.

The collaboration between banks and fintechs makes it easy to discover new revenue creation techniques. An example is a collaboration between JP Morgan Chase and a fintech firm named On Deck, which enabled faster processing of business loans for small companies and startups. 

• Better Customer Insights

BaaS allows banks to collaborate with third-party institutions, which helps gain new customers. In addition, it enables financial institutions to gain better insights into customer preferences. With more information about customer preferences, banks find it easier to design customized offers to entice new customers and enhance customer satisfaction. After all, most clients are likely to respond to personalized offers.

• Innovative Products

 In the past, banking was heavily regulated, but the introduction of BaaS transformed the sector for good. It promoted competition in the banking sector by enabling non-banking institutions to offer core-banking services. This has resulted in more innovative banking products and services, and clients can now access different products.

 BaaS has also brought about greater financial transparency since the third-parties focus on specific customer aspects. Examples include business payouts and simplified loaning processes. The result? Better service provision and the emergence of customized, easy-to-use services relevant to customers' needs.

• Wider Customer Reach

Almost everything is digitalized, and customers prefer financial institutions offering seamless services. For this reason, most banks collaborate with non-banks to provide innovative services and reach a wide range of customers cost-effectively.

Typically, BaaS reduces the cost of customer acquisition. It allows financial institutions to offer services to underserved sectors of the population which may be overlooked due to inadequate documentation. 

• Improved Customer Experience 

 Loans are common among banking clients, but BaaS has changed the idea. It's more about the product and the customer. Nowadays, many clients are tech-savvy and opt for digital banking services but still expect the same level of satisfaction.

BaaS and other technological innovations enable financial institutions to offer superior services to clients. BaaS also allows financial institutions to provide real-time access to financial information and updates. 

The Cons of Banking as a Service

BaaS benefits financial institutions, incumbents, and clients in various ways. However, this isn't without downsides. BaaS has some demerits, which are mostly linked to online banking. But banking institutions have come up with an innovative way to counter this. 

The cons include:

• Service Interruptions 

Interruptions and downsides are presumably the most major issues associated with BaaS. The use of computers and the internet significantly relies on the systems' efficiency. As a result, slight hiccups can hinder clients from accessing online accounts. Sometimes, servers go down, deterring customers from accessing online services and information.

• Security Concerns

 Banking sites and mobile banking apps should safeguard client information and other valuable data. Financial institutions often update security protocols to avoid cyber attacks that can compromise their systems. However, we have had hacking cases in financial institution systems being hacked and customer data compromised.  

Common threats and cyber risks for financial institutions include:

1. Malware 
2. Phishing
3. Vulnerability exploitation attacks 
4. Distributed Denial of Service (DDoS) Attacks
5. Insider threats

Here are examples of recent attacks on financial institutions in 2021: 

1. A case involving American Express whereby a hacker posted data of 10,000 card users on a forum for free - This included personal information and credit card numbers. The hacker also claimed to possess valuable data for Mexican bank customers of Santander and Banamex.
2. A case involving Bitmart in October 2021 that involved stealing a single private key - The act enabled cybercriminals to get away with over $200 million worth of cryptocurrencies.

• Limited Access to Client Services

 Clients can make various transactions with online banking thanks to BaaS. These may include paying bills, making deposits, checking bank balances, etc. However, there are limits to the services you can access online. 

For instance, it's easy to apply to open a bank account online or fill out a loan form online. But, you may have to visit in person to present your identification documents or sign papers. You also have to visit a bank branch or ATM when you need cash. 

• Convenient Services but Sometimes Slow

 BaaS enables financial institutions to offer various innovative services and a better experience to clients. These are convenient and an excellent way of saving time. For instance, clients can accomplish most banking transactions online, saving the time and cost of visiting a physical branch. 

However, this is slower due to the lengthy verification process. The applications are reviewed as per the bank's policies, which may take days, depending on the type of service.

•  Deposit Limitations

Financial institutions allow customers to make deposits online, but clients may have to visit the branch when depositing vast sums of money. This mainly applies to businesses that make massive deposits. Also, not all checks qualify for the online deposit system, and a physical visit may be necessary.

What of the complications? Implementing BaaS in financial institutions is a complex process hampered by intricate and lengthy roadblocks. This translates to high capital assets and delayed processes to access the intended solutions. And this has affected growth among most small financial service providers.

The Banking-as-a-Service Outlook

BaaS offers considerable gains to banks, non-banks, and clients. It has led to the development of innovative solutions making services more accessible and convenient. Again, it enables banks to reach a broader client base and offer improved customer experiences. 

While BaaS may sound like an intricate term, it's an important business model, and we can help! We assist banks and credit unions in solving various issues. These include acquiring customers digitally and providing insights to help identify cost-effective products and offers. 

We will also provide a compelling platform to help your institution compete with fintech and neo-banks. Schedule a demo to learn more about BaaS and how it can aid your institution in generating new revenue streams.