Starsoft
The global uprise in the development of Fintech, and other non-bank businesses as well as their success in delivering financial services through their products without organically developing them are results of Banking as a Service.
What is Banking as a Service?
Banking as a Service is an end-to-end process/ model that enables non-bank businesses to integrate banks’ financial services and products into their business through API-driven platforms.
It is a mutual-driven arrangement which both the banks and non-bank businesses benefit from.
Banks can reach as many customers as possible, through these businesses, at a lower risk, and in turn, increase their revenue margins. The non-bank businesses too can now distribute financial services through their websites and also generate more revenue.
But, how does Banking as a Service achieve these benefits?
Let’s take an example to simplify the explanation
You are the owner of a big restaurant, with a lot of competitors in the same line of business. To avoid losing your existing customers and even your new prospects to your competitors, you need to find new ways to entice your customers or renew and develop the old ways.
To do this, you adopt Banking as a Service into your business. With this adoption comes the ease of financial services as your customers can now make payments through your website without actually going through the bank.
Through this, you can also create offers that benefit the customers like installment payment, using discount codes, and creating customized cards.
Let’s say that you now make an offer that for every time each customer pays through the website to purchase food from your restaurant, they get a coupon. When they collect this coupon till it gets to a certain number, they get a 50% discount on their next purchase from your restaurant.
Now, that is an enticing offer that would benefit both your business and the bank because;
- Your customers would make sure they pay through your website instead of other means of payment so that they can access that irresistible offer. This would increase the number of people that use this form of payment and therefore increase the number of customers that the banks have indirectly, and thus increase their revenue margin.
- Your customers would want to buy from you at all costs because now they know that an incentive is involved. They would want to get that particular number of coupons. And to do that, they have to purchase food from you. This would increase their loyalty to your restaurant and in turn, save your business from losing customers. Also, their love for free food would generate income for your business.
There are other incentives you can add like discounts, buy 4 and get 1 free, and many more using Banking as a Software platform.
Instead of collaborating with banks, why can’t these non-bank businesses just create financial services in their product themselves?
Unfortunately, non-bank businesses cannot offer financial services without the appropriate licenses. These licenses are however hard to get if a business is registered as non-financial.
So, to offer financial services through their products, they need a distributor that is licensed to do so (banks and other financial institutions) and then, they can integrate banking services into their products through them.
Key components of Banking as a Service (BaaS)
3 key components are involved in the process of Banking as a Service. They include:
- Banks
- Banking as a Service (BaaS) platform
- Non-bank businesses.
Banks
Traditional banks are the ones that are licensed to offer financial services to the public. They provide the infrastructure on which the financial services of non-banks(Fintech and other non-financial businesses) are built.
To offer financial services to non-bank businesses, they need BaaS providers. So, what they do is expose the data of their banking system to BaaS providers so that they can access it. After this, the BaaS providers take it up from here.
BaaS platform
To access the data from the bank’s banking system, BaaS providers pay to get it. After payment, they integrate banking services to non-bank businesses through the BaaS platform.
BaaS providers create software that allows for easy transmission and communication of data between non-bank businesses and banks.
In short, the BaaS platform (and BaaS providers) act as an intermediary between the banks and the non-bank businesses.
Non-bank businesses
These businesses are the ones in need of providing financial services to their end consumers through their products.
So, to be able to offer financial services in their business, they contact BaaS providers. BaaS providers allow these businesses to connect to the BaaS platform so that they can access and also offer financial services through their businesses.
In summary, the key components of the BaaS system connect, from the banks to the Baas platform to the non-bank businesses, and through these businesses, customers can now enjoy the perks of accessing financial services non-bank businesses.
Benefits of using Banking as a Service
The benefits of using Banking as a Service are not tilted to one side than the other because it’s a triple win where the banks, the non-bank businesses, and the end customers all benefit from the service.
The benefits of using Banking as a Service include:
- Increased revenue margin
Both the banks and the non-bank businesses benefit from an increased revenue margin using BaaS. The banks can now get across to customers of the business that might not even bank with them, and charge fees for every API – driven financial transaction that they make with the business. The non-bank businesses too can now provide financial service without actually going through the hassle and cost that comes with getting a banking license.
- Build a large customer base
The banks and businesses can now gain each of their existing customers indirectly i.e banks now have access to the business customers, while the business too can now access the banks’ customers.
This would enable growing a larger customer base on both ends, earning their trust and loyalty.
- Improved customers experience
Customers can now get the most out of using businesses’ financial services. They can now get offers like discounts, loans, online payments, and other financial products that would increase their experience in dealing with non-bank businesses.
- Low-cost risk
With each end sticking to their area of expertise, banks providing financial services and products and non-bank businesses providing away with their technological advancements.
Banks, especially, gain in this regard as they can offer their financial services to an increased number of customers without spending to innovate and build technological approaches.
Non-bank businesses (Fintech) come with technological advancements, while the banks benefit from them.
- No need for a banking license
Just like we stated earlier, it is very difficult for non-bank businesses to acquire the required license that allows them to provide financial services alone(without integration with banks). Also, the cost that comes with acquiring these licenses is simply not a piece of the pie.
So, instead of a banking license, Base allows these businesses to distribute financial services and products by integrating with banks through API-driven platforms.
BaaS saves non-bank businesses from the cost of getting the required license and still allows them to operate and provide financial services to the end customers.