Banking-as-a-Service (BaaS) refers to the process of financial institutions (banks and credit unions) sharing their data with third-party providers (TPP) to provide new services. In other words, BaaS allows third parties to connect with legacy institutions via an API so that the third parties can provide banking services.

BaaS is a form of “embedded finance.” The finance is “embedded” because the customer of a non-financial company can access services like lending and payments directly from the non-financial company. The third-party provider owns and manages the customer relationship. Therefore, BaaS is typically “white label,” which means that the financial institution would not be named or branded as part of the third party’s services. The banking service is integrated into the product or service of the third-party provider. In this way, the brand becomes the bank.

BaaS is sometimes referred to as a “platform,” because the third-party providers are connecting to the financial institution’s platform. Financial institutions can choose to offer a “BaaS platform” to third-party providers.

Although BaaS shifts the customer relationship away from the financial institution, the financial institution still plays a key role as the point of intersection with financial regulation. Financial institutions are heavily regulated. BaaS allows non-banks to provide banking services that are built on the regulated infrastructure of financial institutions. In this way, financial institutions manage the regulatory compliance so that their clients (the third-party providers) can focus on the customers.

Why should banks and credit unions consider adopting BaaS? BaaS is an opportunity for legacy institutions to play an important role in digital transformation, rather than ignoring or fighting this growing trend. BaaS provides non-interest income (NII) through fees to the financial institution. Therefore, BaaS offers a potential new revenue stream for financial institutions that want to engage with the trend toward digital transformation.

Examples of BaaS

• Lending. This could be a loan from a retail firm, such as WalMart.
• Payments
• Know Your Customer (KYC)
• Wealth Management
• Digital Assets

B2B2X

BaaS is an example of the B2B2X business model. B2B is business-to-business. B2B2X is business-to-business-to-X. The X in B2B2X is like an X in algebra that could be either “consumer” or “business.” The financial institution (the first B in B2B2X) provides BaaS to the third-party provider (the second B in B2B2X) and the third-party provider provides embedded finance to X. The X could be a consumer or some other business.

If the third party is a consumer-facing business, then the BaaS provided to the the third party would be a B2B2C business model. The BaaS is a B2B relationship with the third-party provider that supports the third-party provider’s relationship with its customer (the consumer). In this way, the third-party provider owns the full customer relationship.

Sharing data

The sharing of data is typically done through an API (application programming interface). The financial institution opens its API (grants access) to the third-party provider.

The API provides the third-party provider with the information necessary to offer banking products or services.

The purpose could be to share the data directly with consumers. Some would argue that this is a democratization of data. BaaS is a component of open banking.

Third-party providers (TPP)

The third-party providers could be fintech firms or other forms of startups.

Fees

The third-party providers (TPP) pay fees to the financial institution for accessing BaaS.

The financial institutions could charge their clients either for access or usage. An access fee could be a monthly fee for unlimited access to the BaaS platform. A usage fee could be an a la carte fee structure for use of specific data. The APIs can be mixed and matched to meet the needs of the third-party provider.

Regulation

BaaS providers must have a bank or credit union charter. In other words, they must be licensed.

There are some “pure BaaS providers” that do not offer financial services directly. However, these providers must still have a regulated charter. For instance, Solarisbank is a leading BaaS provider headquartered in Germany. Solarisbank markets itself as “The tech company with a banking license.”

User interface and experience

BaaS is often about improving the user interface (UI) and user experience (UX). Together, this is referred to as UI/UX.

The idea is to connect a legacy system to a different interface.

Pros

• Transparency (access to data)
• Customer experience (ease of working with data)

Resources

How the banking-as-a-service industry works and BaaS market outlook for 2022 by Shelagh Dolan at Insider Intelligence (July 2021)