Banking as a Service (BaaS) is the latest financial offering to disrupt the way we spend, borrow, and access our money. For generations, the public has treated banking as separate from other customer services and has regarded banks almost as sacrosanct institutions. Now, this view is rapidly changing, as BaaS allows banking to be seamlessly integrated with other services and businesses as part of the wider e-commerce ecosystem.
But while BaaS can be seen to offer greater convenience for customers, and conveys numerous benefits to its providers and distributors, the impact of the phenomenon is potentially more far-reaching than this. Traditional banking has been permanently disrupted, with new players in the financial technology (fintech) sector quickly gaining an advantage over established firms. Furthermore, the relationships of consumers with their financial providers are inevitably becoming more diversified, at the same time as finance, commerce and data harvesting become more integrated and interchangeable.
What is Banking as a Service?
BaaS is a method by which licensed banks can work with businesses in other sectors to offer financial products and services, such as loans, payment services, insurance and more, via said businesses’ own website or app. Using BaaS, a non-financial company (NFC) can act as financial provider without the need to acquire a banking license or the necessary technology. NFCs in sectors such as retail, travel, telecommunications, lifestyle services, healthcare and even fast food chains can directly offer financial services to their customers as part of a ‘one-stop shop’ that’s both convenient and cost-effective.
A simple example might be where a retail business offers an interest-free 12-month loan to customers so they can purchase one of the business’ costlier products. Reading the small print, the customer would see that this loan is not actually offered or guaranteed by the retail business, but by a third-party financial provider or bank. This provider has a banking license and is responsible for complying with all relevant regulations, including security, data protection and so on. Simultaneously, the customer’s experience is that they are taking out the loan with the retail company at the same time as buying the product.
Businesses such as auto sales have long offered such loans. The difference is that now such a business might also offer mobile bank accounts, with a proprietary debit or credit card that accrues loyalty points, redeemable with the business, whenever the customer uses it to make a purchase. The customer might also be able to insure an item at the point of purchase, all without interrupting their buying journey.
The advantage for the NFC is that the customer enters a deeper relationship with their brand, and the company gains access to more data about their spending habits, which can be used to tailor offers, products, and services either towards individual customers or a specific demographic.
The financial provider also gains access to many more customers, and their information, at a much lower cost than it would normally expect. For traditional banks, offering banking as a service is an easier and more cost-effective way of penetrating the digital finance sphere than completely overhauling their systems.
A disruptive threat
It may seem that with BaaS, everyone is a winner. But financial experts like Julio Herrera Velutini, an established figure in global banking and founder of the hugely successful Britannia Group, are keenly aware of the threat BaaS could pose to legacy financial institutions that are slow to adapt to changing times. New digital challengers could easily steal a march on ‘dinosaur’ banks that aren’t making full use of the technology at their disposal.
As well as existing banks providing BaaS to NFCs, new digital startups can acquire a banking license and provide Banking as a Service using cheap and scalable cloud-based technology. They could distribute these services to customers either via partnerships with existing web businesses or by setting up any number of online banks or financial providers, each potentially aimed at different markets.
These newcomers are lean, mean, and efficient, with low overheads and no baggage, making them agile and flexible in a shifting marketplace. We are already seeing technology companies acquiring banking licenses and leveraging their superior digital know-how and insight to outmaneuver their more cumbersome, established rivals.
The arrival of BaaS certainly doesn’t mean ‘game over’ for traditional banks. In many cases, it has given them a new lease of life and opened many potential new opportunities. But these institutions must adapt to survive and realize that Banking as a Service isn’t just a profitable sideline but the future of financial interaction. By making use of technology to open new markets and new reach new customers, Banks can use BaaS to reinvent themselves for a new digital era.