Banking as a service, or BaaS, has been a buzzword in the fintech sector for quite some time. Simply put, banks can earn money by giving fintech companies or even large merchants, access to their IT and business infrastructure. It is currently estimated that BaaS is only 1% finished.
With a surge in the number of banking and fintech business models emerging, it can be hard to sometimes keep them apart. There are a number of key benefits to the BaaS model, but before we delve into that, if you’re scratching your head and wondering what on earth it is still, here’s an easier way to look at it.
What is Banking as a Service?
Banking as a Service accounted for 51% of cloud-based services used in organisations worldwide as of 2019. To fully understand it, the easiest way to describe what is it is to put it into an example. Imagine you’re the manager of an airline. Whether you choose BA, easyJet, Ryanair or Emirates is up to you. Imagine you’re facing tough competition and would love to strengthen your customer loyalty.
Perhaps if you could offer your customers a debit card, you could award them loyalty points whenever they pay with it. Each time your customers use the card they would interact with the brand. Because of this you’d be able to analyse their spending behaviour and offering them a better and more tailored service.
Banking as a Service allows a licenced bank to integrate their digital banking services directly into the products of non-banking businesses. The non-banking business, in this case the airline, can offer their customers digital banking services without needing a banking licence!
COO Lee Britton of PFS, a business that offers virtual prepaid cards, commented, ”Financial Technology is a fiercely competitive space and BaaS allows fintech’s to compete with established banks but conversely, we also enable established banks to take advantage of new technologies that can run independently or in conjunction with their core banking platforms.”
To fight or collaborate? Fintech vs. banks
With AI (artificial intelligence) and virtual assistants already operating in the banking world, the next wave of the fintech revolution could arrive sooner than we think. Where the fight or collaborate question is concerned, there are certain things thank banks have that fintech’s don’t and vice versa.
Things that banks have that fintech’s don’t:
- Banking licences
- Global infrastructure
- Direct access to different payment, clearing systems and settlement mechanisms
- Full range of services under a single licence – loans, credit cards, investment products etc.
Things that fintech’s have that banks don’t:
- Simplified regulatory requirements
- Lower operating costs
- Full digitalised
- Smaller-scale, more flexible infrastructure
Reasons why fintech’s should partner with banks:
- Fintech businesses will be able to hold their customers funds in banks
- Fintech’s can make payments with a corresponding bank
- Fintech’s can make cash transactions when they partner with a bank
Ultimately, the success of next-generation banks will come down to how well they navigate through technologies to fulfil their customers financial needs. With banks and fintech’s joining forces, the two may no longer be competitors and may quickly become allies.