Exploring the Potential of Banking as a Service (BaaS) in the Finance Industry

23 February 2023
6 min read
Banking as a Service - Blog

Exploring the Potential of Banking as a Service (BaaS) in the Finance Industry

The 2020s are shaping up to be an era of innovation and disruption, with centralised systems giving way to decentralised alternatives. The rise of third-party service providers has revolutionised various industries, and the banking sector is no exception. The introduction of BaaS, or Banking as a Service, has played a significant role in creating a more inclusive and accessible financial services industry. With its innovative approach, BaaS, the secret ingredient in the brave new world of banking, is revolutionising the way companies step into the finance arena, making financial services more accessible and democratic.

In this blog post, we’ll explore the impact and potential of Banking as a Service in the financial sector and find solutions for every party involved to reap the benefits of BaaS.

Banking as a Service (BaaS), Explained

In short, Banking-as-a-Service (BaaS) is a model that enables banks to open up their APIs for third-party developers to build new financial services. The new financial solution allows for increased transparency and enables businesses outside of the finance industry to manage and use regulated infrastructures. In the time of open banking, fintechs, and even super apps, the service has become the key to growth for many newcomers.

Although BaaS is extremely beneficial for newcomers, there’s a common belief that it serves as a threat to conventional banks. But when everybody plays their cards right, the model can easily turn into a win-win situation for all parties in the equation.

The Potential and Benefits of BaaS

The disruption trend in the finance industry is growing exponentially, and BaaS will only catalyse the growth. In only five years, the number of fintech companies with a unicorn valuation of more than $1 billion has reached from 25 to more than 275. With more companies embracing the BaaS model, it’s only natural for neobanks and fintech companies to gain more traction.

Customer Acquisition Costs

In a time when 30% of banking customers are considering switching banks, the BaaS model serves as the perfect key to growth for fintech companies and third-party financial providers. To emphasise the impact of BaaS, we can look at the cost of acquiring new financial service customers. According to Oliver Wyman’s report, BaaS can reduce the customer acquisition cost by as high as 95%—from the $100 – $200 range to the $35 – $5 range. 

Operational Efficiency

Another benefit of BaaS is its effect on efficiency, as the model provides increased operational efficiency, streamlining the process of providing financial services. The model eliminates the need for financial institutions to manage their own infrastructure and technology, freeing up resources to focus on core business activities. Also, API use enables greater automation and reduces the risk of manual errors, leading to more accurate and reliable services. 

Serving Higher Customer Expectations

The entry of new players in the financial services sector has set a new standard for customer expectations. Both individual and business customers now seek a comprehensive range of attributes from their financial service providers, including personalisation, effortless transactions, and a dedication to making a meaningful impact on society and the environment. Rising expectations underline the importance for financial institutions to continually innovate and transform in order to stay competitive in today’s rapidly changing market. BaaS presents an opportunity for financial institutions to meet and exceed these demands by providing customised and convenient services with a focus on sustainability.

State of the BaaS Model: Some Perfect Partnership Examples

By joining forces, fintech companies and BaaS providers are able to offer a wide range of services, including mobile banking, digital wallets, and real-time payments, which are accessible and convenient for customers.

Several fintech platforms already leverage the BaaS model with the help of BaaS providers or bank partnerships. For example, Dave, a fintech platform that offers overdraft protection and cash advances, has partnered with a BaaS provider to launch a high-yield checking account product. 

Another example is SoFi, a personal finance platform that initially focused on student loan refinancing but has since expanded into other financial products and services, including savings accounts and checking accounts, which are powered by a BaaS provider. 

Betterment, an AI-powered advisor platform, has also launched deposit accounts through a partnership with a bank, which allows it to offer customers a comprehensive range of financial services. There are many more examples that highlight how fintechs and BaaS providers can work together to offer new and innovative financial products that meet the needs of customers, and as a PaaS and SaaS provider, we are super-excited for the endless possibilities that await the future of the financial services.

Challenges to Implementing BaaS

While BaaS has the potential to improve the financial services industry greatly, there are several challenges that must be overcome to implement the model successfully. These challenges can be centred around time, resources, and expertise in navigating regulatory requirements and ensuring data privacy and security.

Time Constraints

One of the main challenges of implementing BaaS is the amount of time required to design, test, and roll out a new financial services platform. Financial institutions must consider the time needed to integrate new technology into their existing systems, as well as the time required to train employees on the new platform.

Resource Allocation

Allocating the necessary resources for BaaS implementation is surely another significant challenge for financial institutions. From investing in technology infrastructure to training personnel, implementing a BaaS platform requires a substantial amount of financial and human resources. However, the potential benefits of this innovative model make it a worthwhile investment for many organisations. Still, with the right partner by your side, tapping into the full potential of BaaS becomes much more achievable

Regulatory Compliance

Financial institutions must also consider the regulatory requirements associated with implementing BaaS, including data privacy and security regulations. Ensuring compliance with these regulations is essential for protecting customers’ sensitive information and maintaining the credibility of the financial institution.

Despite the challenges, any institution that needs to leverage the BaaS model can successfully implement BaaS by working with a trusted third-party provider who brings a wealth of expertise and resources to the table. By leveraging the experience and resources of a BaaS provider, financial institutions can streamline the implementation process, overcome regulatory challenges, and improve their operations.

Become a Powerful Fintech with Tmob

At Tmob, we specialise in providing Future-Ready Fintech Solutions to help companies become influential players in the financial services industry. Whether you want to build a financial service or even a digital bank from scratch or simply enhance your existing operations with fintech features, our team of experts is ready to help. With our cutting-edge infrastructure and UX-UI-based design, our team and platforms are ready to implement a wide range of services, including loans, savings, digital transactions, e-wallets, and more.

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