Banking as a service is one of the most important trends in finance today and an interesting situation that seeks to allow giant financial institutions, smaller customer-facing businesses and the everyday consumer to all come out on top.
The opportunities banking as a service (BaaS) promises to bring, in terms of allowing businesses to take greater control of their funds, digitize operations and build more customer-centric products, is likely to become a key feature in their future growth. One in which much of the friction that currently exists within finance dissipates, and businesses can focus on creating innovative products and services that make life easier.
If you think of technological advancements such as wireless technology, broadband or cloud data storage, it’s possible to put BaaS into that same “game-changing” category. I believe it is the kind of development that could make financial services unrecognizable within a decade. It is with this belief and my knowledge from founding my company, a banking as a service platform, that I share the potential impacts over the next decade. Not convinced? Let me explain how.
What is banking as a service?
In the most simple terms, BaaS enables non-regulated entities to provide regulated financial services. Previously, if your business wanted to offer banking services to your customers, you had two options. You’d either need to obtain a banking license, which can take years to obtain and requires a dedicated compliance team, all while building and maintaining substantial financial infrastructure. Alternatively, you’d have to partner with a bank and do everything on their terms.
If you wanted to issue credit on the go to your customers, you would, again, need the requisite license/infrastructure or be tied to a rigid banking partner. This was the case for all financial services, but now, that’s changed. Through fees paid for an API integration, companies can unlock the services desired or needed with no regulatory requirements or additional risk passed on to the business.
This is not only groundbreaking for businesses but advantageous for all stakeholders involved.
BaaS And Businesses
As I’ve already touched upon them, let’s start with the potential benefits to businesses. BaaS does not just apply to companies in a particular industry or of a particular size — both local businesses and global conglomerates can use BaaS to their advantage.
Aside from the aforementioned regulatory challenges, businesses of all sizes still face certain fees and operational blockers when paying, balancing their books and storing money. These difficulties skyrocket if you attempt to transact across borders, and most importantly across currencies, where foreign exchange fees can swallow your profits and put the handbrake on your global expansion.
It is this type of use case that BaaS seeks to solve by helping to bring better access to financial services, all over the world. This can enrich a company’s payment and settlement options while helping make growth more fluid. There is also the opportunity that comes with the ability to easily pass on banking services to your customers. It can help strengthen your relationship with them, improving customer loyalty and enabling you to receive a level of data that was never before possible.
BaaS And Traditional Financial Institutions
On first impression, it may seem like the advantage handed to non-financial businesses would come at the expense of financial institutions. They’re losing a monopoly over data and services that were previously only available to them. That weakens them, right?
Not necessarily. Regulated financial institutions have the ability to offer their services as a third party and substantially grow their client base. Appealing to new customers is something traditional financial institutions have often struggled with, whereas young, tech-driven companies typically jump that hurdle to reach a younger customer base. They are also able to integrate with other regulated services and grow their own offerings further.
BaaS And The Consumer
The final would-be beneficiary of BaaS is the everyday consumer. Not just people who have a specific interest in finance or are wealthy enough to employ wealth managers and stockbrokers — all of us.
When regulatory changes swept through finance, specifically PSD2 and open banking initiatives, there was a general consensus that there needed to be more competition. For too long, archaic institutions had made the barriers to entry in financial services too high, and because of that, innovation was not fast enough. As much noise as fintech had made in the past decade, the industry recognized that we could go much further.
BaaS allows that competition and that innovation to happen. Using BaaS, you could order a pizza from your video game console. You could invest your spare change when buying a coffee. Buy-now-pay-later, one use case for BaaS, is already proving to be hugely popular and generating a lot of buzz, as merchants can tackle checkout abandonment without taking on credit risks.
Will all of the above examples happen? Of course not, but the point is that businesses will respond to consumer demand and that has not always been possible when it comes to finance, making the future exciting even in its uncertainty.
Both non-financial companies and financial institutions are recognizing that BaaS requires a plan for how to best utilize it. I’m not suggesting every single business needs BaaS, but if there are ways it can be used to enhance a company’s offering, it is important to explore those opportunities rather than risk potentially giving the upper hand to a competitor.
I predict that financial services will become increasingly embedded in the daily lives of those in finance and develop in ways no one can yet imagine — which is why this is such an exciting time for the consumer.
Originally published at Forbes.com