How BaaS is enabling fintech innovation and disruption

By now, the rise to prominence of Banking as a Service (BaaS) is virtually indisputable – and so are its benefits to companies across the board. These include lower processing costs, increased customer trust and insights, faster time-to-market, and more. When it comes to fintechs specifically, BaaS (or embedded finance) enables them to pursue innovation and disruption without having to deal with any of the complexities that come with traditional banking.

How does BaaS enable fintechs to innovate?

As a more-or-less-discrete business model, traditional banking rests on four main pillars: basic financial services, relationship lending, core deposit funding, and brick-and-mortar street-level branches. For today’s fintech innovators, this is not enough.

One reason for this strained relationship is that banks are slow to adopt the latest digital tools and replace obsolete legacy infrastructure. This makes it more difficult for tech-savvy fintechs to cooperate with them effectively.

In addition, traditional banks aren’t exactly known for their great customer service, and fintechs can’t do their job well by running back and forth to local branches or hanging on the phone all day long. If banks offered extensive online services, this would be less of a problem. Unfortunately, as we’ve already mentioned, this is rarely the case.

With BaaS, however, fintechs gain access to the existing banking infrastructure via a relatively simple API connection and without having to worry about licensing or regulatory compliance. This enables them to develop innovations much faster than ever before. 

Here’s why:

1. Accessing banking infrastructure through BaaS allows fintechs to redirect some of their cash from development to sales and marketing.
2. BaaS offers functionality that’s not available with traditional core banking services.
3. The reduced need to work out the complexities of core banking significantly reduces time to market compared to building products from scratch.
4. More extensive data aggregation results in more tailored and easy-to-use products and services to consumers.
5. BaaS facilitates the development of new financial service applications (e.g., e-wallets) that bring in fresh revenue streams from loyal customers.
6. With bank-end infrastructure taken care of, fintechs can focus more on building an attractive front-end to gain new customers expecting a seamless UX.
7. With BaaS, fintechs don’t need to worry about licensing or regulatory compliance.
8. Scaling is much easier with BaaS than with legacy systems.

How is BaaS disrupting the financial industry?

The way traditional banks fare in the face of BaaS depends on whether they see it as a direct competitor or as an opportunity. Ever since the 2008 financial crash, the public image of, and trust in, banks has been much below what it used to be. On top of that, banks are becoming increasingly unable to meet today’s consumers’ expectations regarding customer service, flexibility, and seamless experience.

BaaS is disrupting the financial industry along several axes. By tapping into BaaS, fintechs are increasingly dominating digital payments, cryptocurrencies, and peer-to-peer lending services that leverage algorithms to automatically screen the risk levels of borrowers.

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What does the future hold for BaaS and fintech innovation?

BaaS solutions hold a lot in store both for companies willing to integrate them and the end users. With the help of licensed partners, fintechs and virtually any company willing to provide banking services to its customers, can do so with minimal investment. Will an increasingly more level playing field pave the way for novel applications we can’t yet imagine? We can’t wait to find out!

FAQs: BaaS and Fintech Innovation

How do fintechs enable scalable money movement across multiple countries?

Fintechs enable scalable multi-country money movement by building or partnering for local payment rail access in each market, rather than routing everything through slower, costlier correspondent banking. API-first infrastructure lets them add new countries incrementally without re-architecting their core payment systems each time, which is part of why scaling is significantly easier with BaaS than with legacy banking infrastructure.

Why do fintechs struggle to work with traditional banks?

Traditional banks are often slow to adopt digital tools and replace legacy infrastructure, which makes it difficult for tech-savvy fintechs to integrate with them effectively. Banks also aren’t known for strong customer service, and without extensive online options, fintechs can’t operate efficiently through local branches or phone support alone.

What makes BaaS faster to launch with than building banking infrastructure from scratch?

With BaaS, fintechs access existing banking infrastructure through a simple API connection without having to work out licensing or regulatory compliance themselves. This significantly reduces the time and complexity involved in building products from the ground up, letting fintechs redirect resources from development into sales and marketing instead.

How is BaaS disrupting the traditional financial industry?

Trust in traditional banks has declined significantly since the 2008 financial crash, while banks have struggled to keep pace with consumer expectations around flexibility and seamless digital experiences. By tapping into BaaS, fintechs are increasingly taking over digital payments, cryptocurrency services, and peer-to-peer lending that uses algorithmic risk screening, areas where legacy banks have been slow to compete.