In the world of payments, where digitalization continues to accelerate, you’re probably aware as a merchant that you’re faced with the challenge of optimizing the management of your payment processes.
And in recent years, the emergence of innovative new models capable of reshaping the way financial services are designed has been gaining momentum.
Among these new models, the so-called “Banking As a Service” model is emerging as a key solution for modernizing financial infrastructures, without having to become a full-fledged financial institution in the banking sector.
So, if you’d like to find out more about the Banking As A Service concept, its benefits and key components, in addition to the opportunities it can present to better grasp the strategic levers of this model, you’ve come to the right place 😊
Why is this model growing so fast? What are its advantages, and what is its impact on the banking sector?
You’ll find out in this article, so let’s get started with a quick overview of the subject!
What’s BAAS?
Behind the BAAS trigram hides the name Banking As A Service or in French, banking as a service.
What does it actually mean?
The aim is to enable companies that are not banks in the strict sense of the term to integrate banking functionalities into their offerings, without having to have the sometimes cumbersome architecture and infrastructure of traditional banks.
How does it work?
The entire operation and exchange of data between financial institutions and companies wishing to take advantage of Banking As A Service is based on the implementation of dedicated programming interfaces known as APIs (Application Programming Interfaces).
Without going into too much technical detail, APIs are standardized computer programming tools that enable information to be shared securely between a bank (in the context of Banking As A Service) and a third-party institution.
Nb: In addition to APIs, the cloud model can also be used to support information sharing via Banking As A service.
The advantage of the Banking As A Service model is that you can select from a catalog of services made available by the banks the services required, for example, to process specific payment transactions.
Pssst, if you’d like more information on the subject, in a previous article dedicated to open banking we listed the main APIs used in the payments sector, but you should know that there are many more 😊
Yes, but is Banking As A Service vs Open banking the same thing?
Banking As A service vs Open banking
These two innovations are quite distinct in several respects, including their purpose and implementation:
- Open banking stems from a regulatory initiative launched in 2018/2019 to promote the sharing of financial data and diminish the monopoly of traditional banks as we know them.
And, who says regulation says obligation… for banks, it’s about forcing banks to open up their information systems and share their data with fintechs or payment service providers.
- BAAS is an innovation that enables banks to offer a catalog of different options that can be selected “on demand” by a third-party player. This enables the player in question to choose the services they wish to use, in a way that is transparent to the banks.
Who are the players involved in banking as a service?
- Traditional banks: they provide the infrastructure (i.e., the catalog of banking services, such as payments or account management) to players such as fintechs or payment service providers,
- API providers: who may be different from banks, straddling the line between banks and BAAS solution users, API providers create and develop the tools needed to share information between the various stakeholders.
- Fintechs, neobanks or non-bank players: they use the catalog of services made available by banks (via the APIs they have developed) to offer innovative services without having to be a bank, and therefore without the need to have bank authorizations as defined by the ACPR (Autorité de Contrôle Prudentiel et de Résolution).
Banking As A service: what are the advantages?
In terms of advantages, as you will surely have noticed, by integrating banking services via the dedicated solution that is banking as a service, access to innovative financial (and therefore payment 😊) solutions is favored by the competitive interplay linked to digitalization.
But let’s take a closer look at the benefits for the different types of player we have already identified:
For traditional banks: new sources of revenue and collaboration
Thanks to Banking As A Service, banks can monetize their infrastructures and services via the APIs they offer.
In this way, BAAS is a real boon for generating new sources of revenue without having to make major investments, and transforms their role from that of supplier to that of technology partner.
Not to mention the fact that this new model enables banks to collaborate with other companies, extending their reach to players they would not have been able to reach before.
For fintechs and new players: unconstrained innovation
By leveraging the BAAS platforms offered by financial institutions, new players can offer financial products (payments, loans, etc.) without having to obtain a banking license, which is a long and tedious process, while focusing on their core business of offering innovative and differentiated solutions.
Banking As A Service also reduces the barriers to entry for this type of company, which can enter the financial market with a low initial investment, benefiting from robust and secure infrastructures while offering their customers a high level of personalization.
For non-financial companies: to reach new customers and develop value-added services
By integrating services such as payments for their customers, thanks to Banking As Service, these companies enrich the customer experience and develop customer loyalty.
More and more companies from a wide range of sectors (e-commerce, insurance, telecoms) are integrating financial services into their offerings, but that’s not news to you 😊
Finally, offering new, innovative services reinforces the positioning of these non-financial players as innovative players offering comprehensive functionalities.
But associated with these advantages, there are also many challenges, otherwise it would be too simple😊
Banking As A service: what are the challenges?
The major challenges addressed by this new model remain, however, to make it relevant and adopted by all.
Among the major challenges is regulation and compliance within the legal framework of the financial sector, seen as one of the strictest.
Banking as a service players operate in multiple countries with often national regulations with specific laws on finance and customer data confidentiality (with, for example, the regulation on the management and protection of customer data in Europe, also known as GDPR) or the fight against money laundering and fraud.
- These regulatory aspects raise numerous questions about the division of responsibilities, which can create tensions between the various partners.
For example, in the event of non-compliance, who is responsible? The bank that provides the service, or the institution that offers it to its customers?
Another major challenge is data security !
Indeed, the interconnection between banks and other players multiplies vulnerabilities (even if, admittedly, APIs are often secure), and there is no such thing as 0 risk.
With BAAS, non-financial companies can access their customers’ banking information, and this raises questions about how data is stored, used and shared to avoid regulatory sanctions and the leakage of personal data.
And finally, with the development of innovation, including BAAS solutions, competition remains fierce for all players concerned to differentiate themselves while maintaining their strategic position.
For non-financial companies, this also increases their dependence on banks, as they consume their services.
Banking As A Service thus embodies a major transformation of financial services, opening the floodgates of banking services to new external players thanks to APIs.
This new innovation-led model redefines the traditional boundaries between banks, fintechs and non-financial businesses, while simplifying access to financial services.
Only time will tell if Banking As A Service is the key to creating a more inclusive financial system in the years to come 😊
