Banking as a Service: What is It & What is It Not?

 Banking as a Service: What is It & What is It Not?

With significant growth in the fintech industries and several customers shifting to the new age trend of online banking, it has become tough for people to understand what’s in there and what’s not. Don’t worry, we have got your back. We have covered everything you need to know about banking as a service.

What is Banking as a Service?

You can understand banking as a service as an allowance to non-banks and non-financial institutions to offer core services to customers through them using bank APIs. These non-banks partner with existing banks that cut off the need for bank licenses by a customer.

Your work has become hassle-free due to services as such. Online banking and banking as a service are just some great examples of how your work has become easy. 

The highlight of banking as a service is the day-to-day solutions it offers through its integrated APIs. You can also refer to APIs as the heart of BaaS.

How Does Banking as a Service Work?

Banking as a service provides the required infrastructure as service and communication hardware. Banks own licenses and thus they offer core financial services. These services are exposed via APIs when existing banks integrate with BaaS providers. 

Banks share their license with the BaaS providers and allow access to financial solutions. This communication between provider and bank is done via API and thus it ensures secure transmission of data. The basic layout of how banking as a service works lies in four parts. They are:

  • Licensed banks
  • BaaS providers
  • Brands/ fintech
  • End customer

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Benefits of Banking as a Service

Financial services are the key and basic common feature of every business. Ensuring a secure flow and offering services on their own, Banking as a Service also benefits in several listed ways.

1. For End Customers

With banking as a service, not only the physical presence of the customer in the bank is eliminated, rather it has made every transaction effortless for customers too. Even approval for loans is carried out virtually.

2. For Business and Brands

Customers are becoming more loyal to brands that have implemented embedded finance on their platforms, and these integrated financial products are bringing in additional profits. Fintech startups have yet another opportunity to implement their financial solutions on short timelines, on a tight budget, and without the need for a banking license.

3. For BaaS Providers

Digital banking is witnessing a rise and the future of this seems to have a commendable growth towards the end of this decade. Hence, banking as service providers expects success from the profit they collect via the transaction fees.

4. For Banks

Banks will benefit greatly from the implementation of BaaS. This innovative strategy is the cause of the commission fees paid to providers and the additional revenue streams available to them. Furthermore, the positive effects of innovation can assist in overcoming legal issues and gaining a competitive advantage in today’s market. In addition, the system’s two-way flow of user data allows financial institutions and banks to learn more about their customers’ buying and investing habits.

Is Banking as a Service the same as Open Banking and Platform Banking?

Actually, no. Open banking also connects with non-banks via API, so the two models are frequently confused. Non-bank businesses that use BaaS models incorporate full banking services into their products. While platform banking is just the opposite of Banking as a service. The allowance of all banking services via API is just done through banking as a service. There is no other third party involved than the fintech businesses that help in banking, to fulfill the gap between customers and banks.

Danny White