Banking as a Service, Explained: What it is, Why its Important and How to Play Deloitte China

Hungry for reform, do banks have enough appetite for digital transformation? When considering the benefits for digital transformation against the cumulative costs of putting off any change, the opportunity cost becomes significant. So Jeannette Kescenovitz, senior director solution management for banking-as-a-service at Finastra, many thanks again for joining us on the BAI Banking Strategies podcast. So Jeannette Kescenovitz, senior director solution management for banking-as-a-service at Finastra, welcome to the BAI Banking Strategies podcast. Many BaaS and challenger banks looking for an alternate source of revenue have also opened their doors for other non-financial companies to use their APIs. To understand this, let’s break down the functions of a bank – holding money, remittance, and payment processing.

When evaluating a potential partner, ask detailed questions about what you’ll be required to build and what kinds of staff support you’ll need. Ask for a reliable launch timeline and confirm that other companies have done it before. The first and most obvious way to diligence a potential banking-as-a-service provider is to tap your network. Find out which other companies work with a given provider and read their case studies. Or just reach out to a fellow builder on Twitter and ask for a candid assessment. Of those, just a handful have made a name for themselves by effectively partnering with tech companies to offer banking-as-a-service.

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Dealing with financial services is an essential part of running a business, yet most of today’s financial services aren’t designed for the needs of independent business owners. Shopify Balance offers Shopify merchants a fast, simple, and integrated way to manage their funds, pay bills, and track expenses. This gives them easier access to financial products and greater control over their finances. banking-as-a-service A decade ago, almost every platform could be considered “SaaS 1.0,” where they simply offered tailored software services and generated monthly recurring revenue from customer subscriptions. Today, most platforms are considered part of the “SaaS 2.0” generation, which facilitates online payments for their customers—marking their first step into embedding financial tools into their product.

There is a need for monitoring functions that will enable seamless and secure operations across applications and domains through secure authentication. Businesses are able to integrate financial services technology into their existing products and services. To see banking as a service in action, consider the bank account and debit card that Lyft offers to its drivers. In addition, drivers get paid instantly and can access their accounts directly through Lyft’s app or website. Tech-savvy legacy firms can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure.

Once these regions move away from ‘reviewing’ to ‘acting’ on open banking initiatives, the global leadership should start to quickly change. This separate process required applying directly with the bank — a lengthy process (of months) and a large capital requirement. With high upfront costs, investment capital required, and a timeframe of over 1-2 years just to test the market, firms were eager for a faster, low-cost solution.

FUTURE OUTLOOK OF BAAS

Our unbiased reviews and content are supported in part by affiliate partnerships, and we adhere to strict guidelines to preserve editorial integrity. The editorial content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. What you find might surprise you, and you may end up making the switch and enjoying the benefits of banking as a service.

By contrast, working with a platform may require a much lighter lift, freeing you to focus on other strategic priorities. These are fees you earn when your customers make purchases with their debit, credit, and charge cards. These card payments typically return between 1.5–3% of every transaction as interchange revenue.

How companies onboard users virtually will be critical in determining secure KYC protocols and authentication standards, while balancing a valuable user experience. Being able to create and protect digital fingerprints that validate an end user quickly without requesting re-entry of personal information and physical ID, will lead to dramatic industry growth and trust. Embracing the new developments in financial technology and services, the Banking-as-a-Service stack can be redefined in analogy to the Cloud stack. We hope we could shed some light into the potpourri of technical terminology and business models in the evolving banking and fintech world. The banking landscape is in continuous flux with new innovators constantly stepping on the scene.

What are the factors influencing BaaS?

It is featured as part of our commitment to diversity and inclusion. Guha and other analysts say that the government’s response is expansive and should stabilize the banking system, though share prices for medium-sized banks, similar to Silicon Valley and Signature, plunged Monday. The bank held billions of dollars worth of Treasuries and other bonds, which is typical for most banks as they are considered safe investments. However, the value of previously issued bonds has begun to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment.

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• With BaaS solutions, it is possible to avoid the complex and time-consuming process of obtaining a banking license.
• This is a great move to cement their place as a helpful financial provider.
• Customers can perform banking activities through the website or a mobile app of a non-bank business they know and trust without going through a bank.
• Regulators trying to stem panic among customers shut down Silicon Valley Bank and Signature Bank within days.
• With this technology, digital banks have emerged that improve banking processes and access for specific customer segments.

Last week, as news of Silicon Valley Bank’s failure spread, some banking experts said the Dodd-Frank package might have forced the bank to better handle its interest rate risks had it not been rolled back. The Federal Deposit Insurance Corporation announced on Friday that it would take over the 40-year-old institution, after the bank and its financial advisers had tried — and failed — to find a buyer to step in. The takeover put about $175 billion in customer deposits under the control of the federal regulator. Once Silicon Valley revealed its huge loss on Wednesday, the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run.

BBVA Open Platform is a BaaS platform serving the U.S. and global customers. Risk and controls will evolve to protect critical customer data, but allow for a smoother process for identity verification across multiple companies and services. In Brazil, BaaS is regulated by the Brazilian Central Bank within the rules of a Payment Institution. The best known BaaS’ fintechs providers in Brazil are Matera, Zoop, Dock, and S3 Bank. The infrastructure as a service layer provides basic infrastructure services through an IaaS provider. A majority of these services would be available on demand and do not necessarily need to be FinTech services .

What is banking-as-a-service?

This way, BaaS solutions contribute to improved financial transparency and reduced time to market when building fintech mobile and web apps. The most popular monetization strategies are charging a monthly fee for the use of a BaaS system and requiring a specified price for each service offered. How you approach launching embedded banking will drastically impact the kinds of products you can offer your customers, your time to market, and the amount of resources you need to invest.

This stack element acts as a mediator between the bank and FinTech, sending data back and forth through the BaaS provider. BaaS also allows third parties to bypass certain development stages by accessing the banks’ functionality instead of creating their own processes from scratch. Therefore, they can go to market sooner with their offerings, saving time and money. Additionally, third-party providers avoid the difficult and time-consuming process of becoming a licensed bank and the need to fulfill regulatory duties required of banks. By now, Trustshare has managed to attract $4.2 million during two rounds. Using BaaS platforms, businesses and institutions avoid the need to get a banking license, which may take more than a year.

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Traditional banks, like JP Morgan, offer their infrastructure to fintechs. In the coming years, BaaS is set to evolve and grow according to consumer needs. But the definition gives us little idea about the real-life examples of banking as a service. Let’s explore how BaaS institutions operate based on some real-life examples. Fintechs offer banks with their digital capabilities to reach more customers. For instance, SoFi offers both career coaching and attractive interest rates on refinanced student loans.

Includes payments services

The program will provide loans to banks, credit unions, and other financial institutions for up to a year. The banks are being asked to post Treasuries and other government-backed bonds as collateral. With some BaaS providers, launching embedded banking can take 18 months and requires hiring a large team. Others can get the job done in 3 months, for a lower upfront investment.

Each month, Gusto helps their small-business customers send millions of paychecks via direct deposit. They realized that many of the people they were helping to pay didn’t have bank accounts—and many more were ready to switch banks for a better experience (faster payments, fewer fees, etc.). Offering bank accounts enables Gusto to keep more money “on their platform;” in other words, they can earn various types of fee revenue from it. Accessing your payments service, financial accounts, and cards through one provider could easily allow you to pay solopreneurs or contractors on your platform, using the money your customers earn from sales. The solopreneur or contractor would have access to those funds in seconds via a financial account and card, while you wouldn’t incur any additional working capital needs. Now, with the rise of banking-as-a-service solutions, platforms are beginning to evolve yet again to „SaaS 3.0″—offering additional embedded finance features to customers beyond payments.

There are dozens of ways of how non-banks can improve their customer experience and boost their revenue by offering their own banking services. However, if you want to offer banking services, effectively every government in the world requires you to own a banking license. And due to the systemic relevance of banks to the functioning of the economy, such a licence is difficult to obtain.

In essence, they empower virtually any company in any industry to participate in the fintech space. There are also some key distinctions to know so you have the best understanding of their respective roles in virtual finance. BaaS is a model that aims to ensure the execution of financial service—for instance, carrying out digital transactions, issuing loans, or opening bank accounts—delivered online via tech devices. The primary objective of BaaS is to complete a service in a timely and speedy fashion.