Unlike the old days, when we had to visit a bank to withdraw cash or to purchase something at a store, everything is online today. Now, you have access to your bank via smartphones and avail of banking services with financial APIs without having to visit a bank physically. Banking as a service (BaaS) allows merchants to infuse payment processing and financing into the customer journey.
What Is Banking As A Service ( BaaS)?
Banking as a Service is a platform that permits non-bank organizations to introduce financial services into their products. For instance, companies that do not have a banking license can offer payment services or loans to customers by instilling financial APIs into their business model. For providing this service, banks can create their independent platform or work in collaboration with third-party providers, offering API banking solutions.
Digital products that are based on API banking solutions that we use regularly are:
- BaaS acts as a support system for financial app development.
- Producing contemporary mortgage software and money lending apps would not be possible without BaaS.
These services are offered and backed by banks but are executed by a third party.
How Does BaaS work?
There are three segments that you need for an absolute Banking-as-a-Service experience. These are:
- Licensed banks
A BaaS provider is lent a license by a licensed bank and is offered access to its financial products. The communication between the provider and the bank’s infrastructure is established through financial APIs, and the financial solutions can be utilized by fintech. Thus, access to banking functionality is provided to the end customers.
Banking as a Service providers supply solutions for integrating financial services into the platforms of their clients. These include:
- Assessing risks and management tools
- Managing account
- User interface design and so on.
Banks are mature ecosystems and highly regulated, ensuring tight security and a financial structure that is organized. Banks also pledge compliance with contemporary laws in the sector and provide the necessary customer data. Fintechs embed their products with Base functionality which provides you with a trouble-free customer journey.
Many banks have started to offer their own BaaS platform after the increasing popularity of BaaS, which allowed fintech and other companies direct access via financial APIs. It has led to a rise in competition for traditional financial institutions since fresh fintech startups are emerging every day. An API banking solution always ensures security at each level.
Advantages Of Banking As A Service
BaaS has an innovative approach to digital transformation, which is its greatest advantage. Financial operations are an integral part of any organization, and the parties involved in the process can appropriate benefits by streamlining the system.
The consumer experience can be enhanced with ease, speed, and a wide array of payment methods, by using BaaS solutions. Each transaction can be made hassle-free and pleasant with tools that were not used before. Getting loans approved virtually is a relevant example since going to banks for this purpose is not feasible when you can get a loan from the comfort of your home.
Businesses that have integrated finance into their model are performing better and gaining customer loyalty and earning profits from the financial products embedded on their platforms. They can also reduce the costs required on the infrastructure needed to house legacy banking services.
According to MarketWatch’s report published on April 12 2022, by 2027, the global digital banking platform market is predicted to reach $8.67 billion. BaaS solutions provide profits from the transaction fees they charge which increases the success rate. Nonetheless, the solutions created by TPPs drive the whole industry forward.
Fintech startups have the opportunity to execute their financial solutions within a short duration, at a cost-effective budget, and do not need a banking license to do so. API banking solutions enable a bi-directional flow of data between end customers and banks.
The adoption of BaaS has a lot of advantages for banks such as the commission fees by providers and the additional source of income due to this innovative strategy. The optimistic effects of innovation help control legacy issues and get a better position in the highly competitive market. Lastly, the bi-directional flow of user data in the platform permits financial institutions to attain new insights into their customer’s investing and buying patterns.
Main BaaS Services
Financial APIs are the central point of the model, and the benefits of the system depend on the solutions it offers for daily operations. Established BaaS providers have a list of APIs at their disposal that covers anything related to finance.
APIs are segregated into four categories:
- Cards, transfers, and digital wallets – APIs offer functionality to issue virtual or physical cards, P2P transfers, and mobile wallets.
- Plug and Play APIs – are ready-made modules that are harmonious with every unique platform and provide solutions for fraud monitoring, trading, user interface, white-label banking, and so on.
- Core Banking Services – these include the basics of business such as deposits, loans, and cross-border payments.
- Acquiring – APIs handle POS terminal acquiring, online acquiring, mobile or NFC payments, and electronic payment systems.
Although APIs can provide independent solutions, they are integrated with BaaS solutions and platforms.
Things To Know Before Choosing A BaaS Provider
When you have decided to integrate your business with a financial service provider, you need to keep certain things in mind. These are listed as follows:
- You should look into the reputation of the provider by checking the reviews and testimonials.
- You should check the services provided to ensure that they are aligned with your business needs.
- Know the owner of the APIs and other solutions. Be informed if they are owned by third parties or by the company.
- Understand the scalability of the provider: if they have the resources and stamina to provide successful solutions as your business grows.
- Estimate how quickly and efficiently the provider can deliver the solutions you want.
Future Of BaaS
The digital banking scene is changing swiftly, and BaaS is bringing advanced solutions to the problems faced by customers. Banks, service providers, fintech, and brands can benefit by developing efficient and productive integrated solutions. DigitalApiCraft designs and builds functional API banking solutions that can provide effective solutions for companies.