“BaaS,” or “banking as a service,” is a business model where licensed banks allow their data and digital services to be integrated, via APIs, into the products of other types of businesses. That allows those businesses to offer banking services without needing financial regulation and oversight.

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What Banking as a Service Isn’t

Part of understanding the banking as a service business model is recognizing what it isn’t. There are a number of related terms and concepts to BaaS that aren’t quite the same thing. We’ll go over a few of the common ones below. 

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Embedded Finance vs. Banking as a Service

Embedded finance refers to the practice of a non-financial business offering methods of conducting financial transactions from directly within its products. The main difference between banking as a service vs. embedded finance is that BaaS is the behind-the-scenes infrastructure that makes consumer-facing embedded finance solutions possible.

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Another way to think about the difference is in who uses each model, and why:

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• Embedded Finance: Used by a non-financial business in order to avoid disrupting the customer’s journey by them having to detour to a licensed financial institution to carry out financial transactions.
• Banking as a Service: Used by a licensed financial institution to allow customers to access its services beyond its own website or physical branches (i.e. at non-financial businesses).

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Banking as a Platform vs. Banking as a Service

Banking as a Platform (BaaP) is a business model where a registered financial institution builds off the APIs of non-financial businesses – usually Fintech companies – to offer a wider range of services. This is also sometimes called platform banking.

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The difference between banking as a service and banking as a platform is that the two business models are basically the inverse of each other:

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• Banking as a Platform: Licensed banks build off the APIs of non-financial businesses to integrate non-financial services into their product(s).
• Banking as a Service: Non-financial businesses build off the APIs of licensed banks to integrate financial services into their product(s).

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Open Banking vs. Banking as a Service

Open banking is a set of rules and processes that govern how financial and non-financial institutions can share customer data through APIs. Like with embedded finance vs. banking as a service, the difference between banking as a service vs. open banking is that the former is made possible by the latter.

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The other main difference between the two is in what is shared over an API:

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• Open Banking: API-based exchange of basic financial information between financial and non-financial institutions.
• Banking as a Service: API-based exchange of financial information and functionality between financial and non-financial institutions.

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So with open banking only, a person can organize and review their financial data on a non-financial platform. This is useful for simple budgeting tools, for example. 

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Add BaaS on top of that, though, and the person can actually make financial transactions on a non-financial platform – such as opening accounts or taking out loans – as if they were directly interacting with a licensed bank.

Essentially, BaaS is a licensed bank lending out connections to its data and functionalities to non-financial businesses for a fee.

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The non-financial businesses then use these borrowed capabilities to build bank-powered transaction capabilities into their products. Or they may create product-specific financial applications that fill banking as a service use cases beyond what a bank’s typical functions cater to.

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The basic process looks like this:

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1. A licensed financial institution offers access to its data and functionality, via APIs, for a fee.  
2. A non-financial service – usually a Fintech company – pays this fee to be able to access a financial institution’s data and functionality via an API.
3. The non-financial service uses this API-fed financial data and functionality to develop new product-specific financial solutions, or build the capacity for financial transactions into its existing product(s).

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This sequence is sometimes extended by a Fintech company using a bank’s API to develop a new financial product, and then licensing the product’s functionality via API to another company for building its own applications. In this way, a Fintech platform can become a BaaS platform as well.

Banking as a service benefits banks, as well as Fintechs and other non-financial companies, in several ways. It can also be advantageous to customers of both of these types of businesses.

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BaaS benefits for banks

• Increased revenue: A licensed bank can make extra money by becoming a banking as a service platform, lending out its data and tech to other companies for application development.
• Broader customer reach and insights: Allowing their financial functions to be embedded in non-financial products doesn’t just expose banks to potential new customers. It also lets them look into how those people conduct their business, and so develop more personalized marketing strategies.
• Less need for R & D: By offering BaaS, banks don’t need to invest as many resources in innovating their own technology. They can simply adopt the ready-made solutions Fintech firms build off their infrastructure.

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BaaS benefits for Fintechs and non-financial companies

• Diversified product offerings: Non-financial companies can attract new customers by creating innovative new financial solutions that banks – and competitors – may not offer.
• Reduced app cost and time to market: Building a financial application based on a banking as a service solution means a company doesn’t have to spend the extra time and money to create it from scratch.
• Lack of need for a banking license: A non-financial company that uses a banking as a service solution doesn’t need to spend time and money to become a licensed financial institution, as the bank’s already-trusted infrastructure does all the regulatory heavy lifting.

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BaaS benefits for customers

• Greater choice: The reduced cost of building BaaS-powered products means there are more of them out there on the banking as a service market, allowing customers to select the ones that best suit their needs. 
• More competition for business: A larger banking as a service market size also means greater competition for customer business. This not only drives down costs to the end user, but also incentivizes businesses to build superior customer-oriented products to stand out from the competition.
• Expanded access to finances: Customers of marketplaces that use a banking as a service model can complete financial transactions without having to actually leave the marketplace and go to a bank. This gives them greater access to, and control over, their finances.

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There are already several examples of banking as a service being used by well-known businesses. Here are some prominent instances of banking as a service companies partnering with big players in other industries to create innovative new financial products.

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Barclays & Green Dot + Uber

Uber is making it easier and more attractive for people to make money as ride-sharing drivers, thanks to BaaS. By partnering with Barclays Bank and Fintech company Green Dot, Uber has turned its app into a financial management hub for its drivers. That includes services like taking out loans for car purchases or rentals, as well as cashing out trip earnings or cash-back rewards at automotive-oriented businesses.

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Goldman Sachs + Apple

Tech giant Apple has partnered with noted financial institution Goldman Sachs to offer its own credit card: the Apple Card. Besides its capability to be used like a regular payment card at a point of purchase, the Apple Card unlocks additional features for applications on Apple’s iPhone and Apple Watch devices. These include budgeting and bill payment tools, retailer locating functions, and biometric payment approval.

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The Bancorp Bank & Stride Bank + Chime

Chime is one of the most well-known neobanks – a Fintech company that uses BaaS to offer financial services and target demographics that traditional banks often don’t. Through partnerships with The Bancorp Bank and Stride Bank, Chime has expanded its product lineup from prepaid debit cards to functions like early paycheck availability and checking accounts structured for easy credit-building.

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First Internet Bank + Treasury Prime

Treasury Prime is an example of a banking as a service Fintech company. That is, it develops new financial solutions by leasing the infrastructures of licensed banks, and then loans these products out to other companies that need them. One of these clients is First Internet Bank, one of the first ever neobanks that provides personal finance management, loans, and mortgages.

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Treasury Prime augments First Internet Bank’s offerings by providing BaaS functions like account openings, money transfers, payment cards, and compliance/risk management.

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Banking as a service, or BaaS, offers some exciting new opportunities for both registered financial institutions and Fintech startups. But one of the fundamental challenges for the banking as a service industry going forward will be maintaining the security, privacy, and trust of customers. This will be especially critical given that many more types of businesses will be able to access not only financial data, but also actual financial functions.

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BaaS providers will need to have powerful transaction and suspicious activity monitoring programs to detect fraud and money laundering attempts – not only for their own systems, but also for any BaaS products that leverage those systems. Contact Unit21 today to see how we can help.