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The Future of Banking: Introduction to Banking as a Service

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In recent years, the concept of Banking as a Service (BaaS) has been steadily gaining in popularity, and many experts in the field now believe it to represent the future of banking as such. But what exactly is BaaS? What benefits does it offer compared to services provided by traditional banks? And why is it widely perceived as ushering in a new era of banking? 

Let’s take a look at each in turn.

What is Banking as a Service?

In simple terms, BaaS is a technological solution that allows a company to offer its own regulated banking infrastructure to clients in need of adaptable financial services.

The way this works is fairly simple: you can picture the BaaS platform as sandwiched between a bank and a client, with a separate API on each side.

By purchasing the right to use a BaaS platform, a client becomes able to expand its offering to customers. In other words, the client adapts the platform’s financial products to its needs and creates brand new services.

Here’s a basic example of what that looks like in practice.

Say, an owner of a department store wants to reduce the number of customers lost to a competitor. To this end, the owner signs up with a BaaS platform and issues branded debit cards to return customers. All funds and transactions are handled by the platform that mediates between a traditional bank and the store. Return customers earn loyalty points that can only be spent at the store, which improves customer retention.

At this point, you may be asking, “Why go through a middleman, instead of directly through a bank?”. We’ll answer this question in the next section.

What are the benefits of Banking as a Service?

Banking as a Service disrupts traditional banking and brings a number of significant benefits to companies and customers alike.

Lower costs

Acquiring any financial license is a laborious, time-consuming, and expensive process. Most fintechs and other companies simply do not have the resources or in-house expertise for it. No less costly is the process of ensuring compliance with PSD2 and conducting AML/KYC procedures for every client. BaaS platforms like ours, take all of those responsibilities onto themselves, leaving the client to focus on growing their business.

Operational efficiency 

BaaS enables companies in diverse industries to develop their own technological infrastructure without resorting to specialist knowledge or dealing with strict local and international regulations. BaaS platforms are often a one-stop-shop that covers all of a company’s financial needs, thereby increasing transparency and reducing operational complexity. Needless to say, this makes the day-to-day functioning of companies more efficient and hassle-free.

More and better choices

Innovative solutions typically strive to be client-oriented and flexible, which is highly beneficial to startups and SMEs that regularly find it difficult to meet their needs with traditional banks. Innovative solutions like BaaS make it easier for them to get off the ground fast, not least because they no longer have to deal with licensing and compliance. 

Other benefits

The above is only a small sample of the benefits provided by BaaS platforms – describing all of them would make for an extremely long article, indeed! That being said, here’s a short, and by no means complete, list of other key benefits:

  • Increased customer trust. By integrating with banks, companies gain the ability to leverage the associated trust and expand their customer base.
  • High-quality customer service. Today’s digitally-native consumers expect a seamless experience from them no less than from their social media and shopping platforms. Lucky for them, BaaS providers usually give their clients much more attention than regular banks do.
  • Superior UI and UX. BaaS platforms offer convenient, modern user interfaces and the ability to create seamless customer experiences that don’t require them to leave their favourite app, shop, or platform.

Why is BaaS the future of banking?

Arguably, the easiest way to answer this question is by looking at what made Banking as a Service possible – and popular – in the first place.

The first pillar here is the widespread use of APIs, which enable two solutions to share data with each other and to communicate. It is thanks to APIs that BaaS platforms and other third-party distributors can access the resources of traditional banks and offer financial services based on them.

The second pillar is the rise of cloud-based products. In order to remain competitive, businesses today need, in addition to flexibility – scalable, automated, and secure solutions to banking. All of these are made possible by the cloud.

The third pillar is the continued growth of the fintech industry. As finance-related startups continue to grow and seek new possibilities for expanding their services, integration with banking capabilities becomes a must. BaaS allows them to avoid pursuing a banking license and investing tons of money to secure regulatory compliance.

The last, fourth pillar is the rising needs of customers. Most people now favour the all-in-one approach to software, which means they don’t want to be constantly switching between different apps to satisfy their needs. BaaS provides them with embedded finance solutions all in one place – with a seamless user experience to boot.

Since neither of these four trends, in addition to others, is likely to be reversed or overturned anytime soon, it is safe to say that Banking as a Service will continue to gain fresh ground in the near-to-mid future. What makes it so attractive is that it’s a genuine win-win-win:

  1. BaaS platforms disrupt the industry with innovative products and establish a robust business model that answers to 21st century demands;
  2. customers, both companies and private users, benefit by gaining access to a much wider range of flexible products and services, higher-quality customer service, and lower costs.

Want to unlock the benefits of BaaS for your customers? Check out our BaaS solution.

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