Banking as a Service: an increasingly popular solution for banks

  • 14 December 2022
  • Blog | Fintech and Innovation in Banking | Blog

What is banking as a service (BaaS)? 

Banking as a service (BaaS) describes a start-to-finish system whereby nonbanks are able to offer financial products (such as current accounts, credit cards, and savings accounts) by renting banks’ licenced services. Nonbanks can offer these financial services by connecting their own business infrastructure to a banks’ system, with data shared through APIs. This allows the end consumer to obtain banking services at the same source when buying a product or service from the nonbank and allows banks to fulfil the role of platform and service provider. 

Through BaaS, banks are steadily increasing disintermediation between banking services and the end-consumer, with banks able to act as either platform providers (using self-created platforms, perhaps partnering with fintechs or other corporates to distribute products from third parties), or service providers (the platform is owned by a third party while banks, through APIs, distribute their financial services to end-consumers onto these platforms). Some popular examples of BaaS include Uber Cash, Apple Credit Card, and Amazon Cash. 

What is the difference between BaaS and embedded finance? 

Although banking as a service is often used interchangeably with “embedded finance”, there are fundamental difference between the two processes. Although both BaaS and embedded finance allows nonbanks to offer licenced financial services, BaaS allow companies to rent banks’ infrastructure and regulated products, meaning companies can offer consumers digital banking services which would otherwise need a banking licence. Embedded finance, on the other hand, allows nonbanks to offer financial services as an ’add-on’ to their own services through partnering with banks. An example of embedded finance would be a business offering credit directly from its website, such as Klarna or Uber. 

What are the advantages of BaaS for nonbanks and consumers? 

In addition to the extensive growth opportunities for banks, BaaS is often perceived as a ‘win-win’ situation for all parties involved, including fintechs and consumers. For fintechs or nonbanks, BaaS offers an alternative route to obtaining a banking licence, which can be time-consuming and difficult to obtain. Likewise, BaaS offers opportunities for the end-consumer to obtain cheaper prices for banking products and often a better e-commerce experience than traditional banking.  

Future predictions for BaaS 

Despite once being viewed as a laborious process, BaaS has become increasingly popular with banks in recent years as a tool to develop their digital capabilities, expand distribution channels, evolve business, and access previously untapped markets. In a recently released whitepaper by Juniper Research: Banking-as-a-Service: Segment Analysis, Competitor Leaderboard and Market Forecasts 2022 – 2027. The data suggests that BaaS revenue is expected to increase by $27 billion over the next five years, whilst BaaS platform revenue has been forecast to top $38 billion by 2027 - a 240% increase from 2022. 

Likewise, S&P Global estimate that: “BaaS will play a greater role in both retail and corporate banking in the next five years, as banks scale up their technology and re-think their business cases. Initially, BaaS solutions mainly disrupted the payment segment, but that was only the beginning. The BaaS ecosystem is rapidly evolving to offer a wider range of products, such as consumer financing, insurance, or day-to-day workflow solutions for companies, including working capital, treasury, or transaction banking.” Whilst S&P Global don’t expect BaaS to fundamentally change traditional banking models in the short term (the new infrastructure required will take time), S&P Global do predict that, in the medium term, BaaS will have an increasing impact on banks’ business profiles through offering greater opportunities and risks. Further, it is predicted that only major banks with sufficient scale, investment power, and high-end technology will be able to develop platforms which can fully harness the opportunity BaaS presents in the coming years.