Are you head over heels to know all about the rise of banking as a service? If so, then this blog will put a full stop to your search. The world is updating with the rise in technology and to pace in with the updates of digitalization globally, banks moved further and introduced Banking as a Service. BaaS or Banking as a Service allows non-banks and non-financial banks to offer services financially to their customers.
This is done via integration with existing banks through APIs. Here is a brief description of Banking as a Service and what you should know about the rise of this service.
BaaS is the growing business model that allows banks and third parties to connect.
What is Banking as a Service?
Banks improve their services constantly and they always try to make banking easier for their customers. Building effectively running mobile applications and net banking are just some great examples of how banks have brought changes in customer lives. Online bank services allow customers to carry several operations on their own in seconds.
Banking as a service allows businesses to customize banks completely by integrating all financial processes in their business process. This service also eliminates the need of building banking applications for businesses.
How does Banking as a Service or BaaS Works?
Traditional banking requires a lot of investment and set up to get started for holding money and payment processing. While Banking is a service partner with the bank for the same instead of the building of its own. It also allows withdrawal of bank services directly and carries it via API that communicates between the bank and third-party organizations.
BaaS is complex on its own, and thus it requires secure and strong authentication of users’ data that complies with the bank laws. It works mainly in three common steps-
- Customers/ companies pay to use BaaS.
- Bank opens its API for the customer usage of the customer.
- Customers/ companies create financial services using existing bank APIs.
Web apps use another secure form of banking as well known as cloud-based BaaS. Companies that own banking licenses can work as regular finance banks. These companies turn their BaaS stacks into cloud-based solutions that are more secure and reliable. This kind of virtualization of traditional banking ID is carried out by companies like Amazon. Amazon can turn its platform into BaaP (Banking as a Platform) or SaaS (Software as a Service).
Rise of Banking as a Service
A non-financial company can distribute financial products under its brand, giving the idea that the customer is purchasing a product from that company, even though the financial product is provided by a financial institution. Whereas a financial institution that wants to offer BaaS through a distributor can build a platform for that purpose using the most up-to-date low-cost, scalable technology, significantly reducing its cost of serving customers.
Here are the main reasons for the exponential growth of BaaS:
1. Demand of Customers
The very first reason for the rise of banking as a service is demand. The demand for integrated financial services has seen a decent rise. Fintech industries have an eye on small businesses as they serve as their potential customers. They fulfill the needs of small businesses by providing online user-friendly banking services and loans at an affordable rate.
2. Growth of Fintech industries
Another reason for people shifting towards BaaS is growth. Digitalization in India saw an appreciable growth rate of Fintech industries which is higher than the global increase rate. These industries work as third-party organizations that are integrated directly with banks. Owning a bank license requires investment and infrastructure which is replaced by BaaS.
3. Banking Revenue
Further, banking as a service also helps in enhancing banking revenue. Integration with non-banks has opened new ways of revenue that are helping in the growth of banking revenues. Through Banking as a Service, Banks has also been able to reach a wide customer base.
BaaS gas gained a lot of trust among individuals. The reason for the same is the involvement of the bank. When people see their familiar bank then they automatically start trusting a business. So, the business not only gets the customer’s trust but also the insights about their customers. By employing insights, businesses can assist consumers in developing unique and customized services to address specific problems.
Lastly, banking as a service is a cost-effective initiative for banks. They don’t have to spend money on technological advancement. By shaking hands with third-party apps, banks will get ready-made technologically advanced solutions at their doorstep. It can really assist banks in making additional investments and earnings estimates.
Fintech industries are the future and with a ton of benefits for both banks and customers, Banking as a Service is a boon for the business and banking industry.