Turn up the BaaS: How banks are rising to the occasion to embrace a discerning business model

Among the myriad tracks signifying evolutionary dynamics, mutualism finds resonance among researchers and biologists as an exploratory construct for behavioural validation. For the unversed, mutualism refers to relationships or interactions among species with each deriving a net benefit.

Barter being a primordial habit has a significant biological connection, for all mutualistic relationships thrive on the simple “give and take” principle.

Aphids and ants engage in a prominent display of mutualism with the honeydew secreted by the former lapped up by the latter, who in return, protect the aphids from predators. Some even go on to move the aphid eggs and nymphs to the ant nest in order to harvest the honeydew perpetually in what might look like the ant equivalent of a dairy farm, as research describes. Biologists call this a service-resource relationship. Other predominant forms include pollination, cleaning symbiosis and zoochory, the last of which involves animals dispersing plant seeds, advertently or inadvertently.

Move over, Biology!

Mutualism serves as a perfect allegory to explain how various ecosystems including those in an industrialized setup can progressively collaborate to sustain and grow as opposed to stirring the hornet’s nest in a world throttled by rising fiscal asymmetry.

And what else, but BaaS to headline this topic in the world of banking.

Banking as a Service (BaaS) managed to breach the terra incognita so prominent in the languid and regulated realms of financial services as data became too enormous an entity to be contained and too lucrative an opportunity not to be monetized.

What is Banking as a Service (BaaS)?

Banking as a Service (BaaS) is a quasi - open banking phenomenon that allows non-banking organizations to offer banking services to their customers. This approach to banking is opening up new opportunities for businesses, including fintech startups and established businesses in various industries to offer banking services that were previously only accessible through traditional banking institutions.

BaaS platforms are created and managed by banks, and they provide APIs (Application Programming Interfaces) that allow third-party providers to access banking services, such as account management, payments, and loans, among others. BaaS platforms offer the opportunity for businesses to offer financial services to their customers without the need to obtain a banking license. By integrating BaaS into their systems, businesses can offer banking services seamlessly to their customers.

How is BaaS pushing innovation into the banking ecosystem globally?

According to a report by Juniper Research, the global BaaS transaction value is expected to reach $7.3 trillion by 2024, up from $3.3 trillion in 2020. This represents a CAGR (Compound Annual Growth Rate) of 19% over the forecast period.

BaaS is driving innovation in the banking industry by providing opportunities for non-banking organizations to offer financial services. BaaS enables businesses to provide banking services, which were previously only accessible through traditional banks. In addition, BaaS platforms can provide innovative solutions to the existing banking industry by offering services that traditional banks may not have. The following are some examples of how BaaS is pushing innovation in the financial services and associated industries:

Fintech Startups

Fintech startups are among the beneficiaries of BaaS platforms. The use of BaaS platforms by fintech startups has enabled them to offer financial services without the need for a banking license. With BaaS, fintech startups can focus on developing their unique financial products, such as mobile banking apps, without the need for significant investment in back-end infrastructure. For example, Monzo, a UK-based mobile bank, uses a BaaS platform provided by OakNorth Bank to offer services such as account management, payments, and loans to its customers.

Traditional Banks

BaaS is also transforming traditional banks by enabling them to collaborate with fintech startups and other businesses. Traditional banks can leverage BaaS platforms to offer their services to a broader audience and collaborate with businesses in different sectors to develop innovative financial products. For example, BBVA, a Spanish bank, has developed a BaaS platform that enables businesses to offer banking services to their customers, while also enabling BBVA to expand its customer base.

Non-Financial Institutions

BaaS is also enabling non-financial institutions, such as retailers and telecom companies, to offer financial services to their customers. For example, Alipay, a Chinese mobile payment platform, has partnered with banks to offer a range of financial services, including savings accounts, insurance, and investment products to its customers. This partnership has enabled Alipay to expand its services and offer more value to its customers, while also enabling banks to tap into Alipay's extensive customer base.

The number of BaaS providers is also increasing rapidly, with more than 100 BaaS providers operating globally. This number is expected to continue to grow as more businesses and organizations recognize the benefits of BaaS. This growth is driven by the increasing demand for innovative financial solutions that meet the needs of customers. The use of BaaS platforms enables businesses to offer such solutions seamlessly and at a lower cost than traditional banking institutions.

The adoption of BaaS is not limited to specific regions, as it is being adopted globally. A few global studies have shown that the adoption of BaaS in Asia is growing rapidly, with many businesses and organizations recognizing the benefits of BaaS in terms of cost reduction and improved customer experiences. Europe is also seeing an increase in the adoption of BaaS, with many traditional banks collaborating with fintech startups to offer innovative financial products to their customers.

The use of BaaS is also expected to increase in the coming years as more businesses recognize the associated benefits. A report by Business Insider Intelligence predicts that by 2024, BaaS will account for 7.3% of the global banking revenue, up from 3.5% in 2020.

Interaction of BaaS with Platform Banking

Platform banking refers to the provision of banking services through a platform that brings together different providers, including traditional banks, fintech startups, and other businesses. Platform banking is enabled by the use of APIs, which enable different providers to access banking services.

BaaS plays a critical role in platform banking, as it enables fintech startups and other businesses to offer banking services to their customers without the need for a banking license. BaaS platforms provide the necessary infrastructure and APIs to enable third-party providers to access banking services. Fintech-led examples of BaaS and platform banking include Stripe, Revolut, N26, and BBVA Open Platform.

Stripe: Stripe is a fintech startup that provides payment processing services. It has developed a BaaS platform that enables other businesses to offer payment processing services to their customers. Through the Stripe BaaS platform, businesses can accept payments, manage subscriptions, and handle refunds, among other services.

Stripe has also developed a platform banking solution that enables other businesses to offer financial products and services to their customers. The Stripe Connect platform enables businesses to offer loans, insurance, and other financial products to their customers, with the necessary regulatory and compliance requirements handled by Stripe.

Revolut: Revolut is a digital bank that provides banking services through a mobile app. It has developed a BaaS platform that enables other businesses to offer banking services to their customers. Through the Revolut BaaS platform, businesses can offer services such as account management, payments, and loans to their customers.

Revolut has also developed a platform banking solution that enables other businesses to offer financial products and services to their customers. The Revolut Connect platform enables businesses to offer services such as insurance and investment products to their customers, with the necessary regulatory and compliance requirements handled by Revolut.

N26: N26 is a digital bank that provides banking services through a mobile app. It has developed a BaaS platform that enables other businesses to offer banking services to their customers. Through the N26 BaaS platform, businesses can offer services such as account management, payments, and loans to their customers.

N26 has also developed a platform banking solution that enables other businesses to offer financial products and services to their customers. The N26 Marketplace enables businesses to offer services such as insurance, investment products, and travel services to their customers, with the necessary regulatory and compliance requirements handled by N26.

BBVA Open Platform: BBVA Open Platform is a BaaS platform developed by the Spanish bank BBVA. The platform enables fintech startups and other businesses to access BBVA's banking services, including account management, payments, and loans. The BBVA Open Platform also provides tools for compliance and risk management to enable third-party providers to meet regulatory requirements.

BBVA has also developed a platform banking solution that enables other businesses to offer financial products and services to their customers. The BBVA Marketplace enables businesses to offer services such as insurance, investment products, and travel services to their customers, with the necessary regulatory and compliance requirements handled by BBVA.

An optimal approach for banks to evaluate BaaS propositions

The implementation of BaaS requires a clear strategy and approach to ensure that it is effective and meets the needs of the bank. Here are some key factors that traditional banks should consider when evaluating BaaS propositions:

Compliance and Security: Compliance and security are critical considerations for banks when evaluating BaaS propositions. Traditional banks need to ensure that the BaaS platform they select complies with relevant regulations and standards, and that it has robust security features to protect customer data.

Scalability: Banks need to consider the scalability of the BaaS platform they select. The platform should be able to handle increasing volumes of transactions and customers as the bank grows.

Customization: The BaaS platform should be customizable to meet the specific needs of the bank. Traditional banks have unique requirements, and the platform should be flexible enough to accommodate them.

Technical Integration: Banks need to ensure that the BaaS platform can be integrated with their existing systems seamlessly. The platform should be compatible with the bank's core banking system and other systems that it uses.

Partner Ecosystem: Traditional banks should consider the partner ecosystem of the BaaS platform. The platform should have a broad range of partners, including fintech startups and other businesses, to enable the bank to offer innovative financial products and services to its customers.

Banks should also evaluate the reputation and track record of the BaaS provider before making a decision. It is important to select a reliable and reputable BaaS provider to ensure that the implementation of BaaS is successful.

Mutualism key for coexistence as banks and fintechs continue their territorial face-off

BaaS can help banks to compete with fintechs by enabling them to offer new products and services quickly and cost-effectively. Banks can leverage the expertise of fintechs to develop and launch new products and services, which they can offer to their customers. This can help banks to stay relevant in a rapidly evolving financial services landscape and retain their market share.

In addition, BaaS can help banks to reduce costs and improve efficiency by outsourcing non-core banking functions to third-party providers. By leveraging BaaS platforms, banks can focus on their core competencies, such as customer relationship management and risk management, while leaving other functions such as payments and account management to BaaS providers.

However, it is important to note that BaaS is not a one-size-fits-all solution for banks. Each bank will have unique requirements and will need to evaluate BaaS propositions carefully to ensure that they meet their needs and are compatible with their existing systems. Banks should also consider the partner ecosystem of the BaaS platform and the reputation and track record of the BaaS provider.

Overall, BaaS can help banks coexist with fintechs by enabling them to collaborate and leverage each other's strengths. By offering innovative financial products and services quickly and in a cost-effective manner, banks can stay relevant and competitive in a rapidly evolving financial services landscape.