Banking-as-a-Service: who is it for?
As regulation, technology and changing consumer demands continue to drive innovation in the financial services industry, we are starting to see a significant uptick in Banking-as-a-Service offerings (BaaS).
However, while the Something-as-a-Service styling has its roots in technology – for example Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) – BaaS should not be misunderstood as simply the next technology model in that series.
BaaS goes well beyond classic outsourcing models like information technology outsourcing (ITO) and business process outsourcing (BPO). In these models, businesses rent core platforms and business operations to avoid the time and cost of building their own and also to benefit from the economies of scale that a small business cannot achieve alone. But ultimately, the business still needs to design and run the products and back them with their own capital.
That’s where BaaS differs. With the BaaS model, the service being rented is a full end-to-end product business offered through the use of application programming interfaces (APIs). It includes the technology and operations, but also product and service design, regulatory compliance and risk management. Typically, it also runs on the balance sheet of the BaaS provider, meaning that a user does not need to raise the money to fund and secure their new product offering.
So, who is BaaS for? At its most basic level, it’s for any business with a strong brand and customer base, for whom more value can be leveraged by offering banking products, such as lending and credit card services.
We identified three principal groups of businesses who could benefit from BaaS.
The first are financial services businesses who do not currently offer banking products – or, at least, not the full suite of banking products their customers might want. Insurers and wealth managers for example, have built relationships with their clients in their respective product areas, but cannot offer loans, credit cards or deposit accounts, as they do not have the required regulatory permissions. These businesses have all the key ingredients to originate a healthy flow of product business – a strong brand, solid customer relationships, well developed contact channels and customer relationship management systems – but they don’t have the means to manufacture the products.
Similarly, some financial services firms may be capital constrained and therefore not able to self-fund the growth of a lending portfolio. For these businesses, BaaS provides a route to offer a range of credit-based products, fully funded and capital backed. What’s more, BaaS providers who are licensed banks themselves, will be able to generate funding at retail deposit rates, rather than having to use wholesale funding, which comes at a considerably higher cost.
The second group are organisations outside of financial services, which have large customer, member, or fan bases where the brand offers access into financial services. Many sports clubs, trade unions, and professional societies have the brand strength and trust to support offers of branded financial services products from select and trusted partners. We’ve seen this model most commonly in the credit card market with affinity programmes, which gives us a sense of the value opportunity that can be addressed by offering BaaS to a broader industry set.
A third area for BaaS is where banking products are required as a secondary element to the primary product sale. This type of offering is already common across the retail, automotive and telecoms industries, all of which offer financing alongside high value purchases, for example a lease on a car or a loan for a sofa. Buy now pay later (BNPL) is becoming an increasingly significant element in the retail proposition, and BaaS offers proven, professional management of this element, rather than it being managed on the side.
As developing technology continues to inspire entrepreneurs all around the world to provide new innovative services, these secondary financing needs will only expand further and entrepreneurs should be empowered to include the financing element from inception. That’s where BaaS comes in.
BaaS is a frictionless enabler providing a fast and simple means to access financial products, without shifting the customer out of the brand or the purchase journey. It also offers entrepreneurs a way round the often-onerous regulatory frameworks that come with these types of financing products, leaving it to the banking experts.
Despite the naming style, BaaS is not just the next technology model from cloud providers, nor is it a straightforward outsourcing service of technology and operations. It’s the ability to take advantage of a full end-to-end product business, with all its expertise, regulatory permissions and financial capital, to the benefit of both businesses and the consumer. And all available at the end of a single API call.