What is Fintech-as-a-Service?

The last two years can arguably be called the “fintech boom.” Consumers around the world adopted contactless payments on a large scale and switched to e-commerce, even for essential goods. Meanwhile, the hype around crypto and the metaverse has created further momentum for fintech solutions. Given that virtually every company wants a piece of the pie, how do you democratize fintech adoption and make it easily accessible on any platform? This is where fintech-as-a-service or FaaS comes in.

What is Fintech-as-a-Service? Explained with example

The term “fintech” refers to financial technology. Essentially, it is a software application designed to automate and improve the experience of customers accessing financial services, as well as simplify the management of financial operations for business owners.

Providing financial technology as a service is referred to as “fintech-as-a-service”. This service’s technology provider is solely responsible for the platform’s development, maintenance, updates, compliance with security requirements, etc. The user (another service provider) simply builds the fintech functionality into their platform through an application programming interface (API). They pay a monthly subscription fee for the API without investing in the infrastructure.

APIs allow many computer programs to interact with each other. It is a type of software interface that provides a service (FaaS) to other software applications (ie the platform that builds fintech).

Let’s understand the meaning of “fintech-as-a-service” with an example. Vacation rental company Airbnb is partnering with PayPal to give its customers more online and in-app payment options. That’s why PayPal supplies Airbnb with FaaS technology via a single connection.

FaaS solutions include white-label e-wallet systems, card issuance, payment acceptance, payouts or remittances, identity verification, fraud protection, virtual account as well as merchant services, as well as delivery, administration and reporting solutions.

Advantages of FaaS

By incorporating FaaS, companies can reduce the time frame of the entire financial process and significantly improve the customer experience.

Numerous businesses are now adopting FaaS – driven by a truly compelling reason, to improve customer satisfaction and retention. Compliance with the law and robust security procedures are additional benefits. By using FaaS, both financial and non-financial organizations can digitize their financial activities and give customers easy access to loans and services.

FaaS automates and optimizes financial operations, eliminates unnecessary paperwork and minimizes human intervention. By integrating robotic process automation (RPA) with FaaS, companies can free up employee time for other important tasks. As a consequence, procedures are simplified, document analyzes are exhaustive and results are obtained quickly.

Some of the other key benefits of using fintech-as-a-service include:

• Add your own branding: Customers can change the look and feel of the platform without letting end users know that it is supported by an independent FaaS provider.
• Save on maintenance costs: 100% of the responsibility for keeping the platform active rests with the technology provider.
• Prevent fraud: Instead of establishing their own payment gateways and dealing with a lot of red tape, companies can choose a FaaS platform that already complies with the strictest security requirements, such as PCI DSS (Payment Card Industry Data Security Standard).
• Launch digital systems faster: Using a third-party payment system to establish payment flow as well as bring a product to market is significantly faster than designing the system from scratch.
• Reduce processing fees: FaaS solutions allow merchants to route transactions through various payment service providers. This allows businesses to choose suppliers who offer the most advantageous terms for each given transaction.
• Customize as you like: In most cases, FaaS systems are easily adaptable and designed and managed by experienced and competent professionals.

Is Fintech-as-a-Service regulated?

National and international bodies monitor fintech-as-a-service solutions to ensure they follow data protection best practices and avoid money laundering and fraud.

All financial institutions should comply with the Financial Conduct Authority in the UK (FCA). All money services businesses (MSBs) in the United States must register with the Financial Crimes Enforcement Network (FinCEN). The General Data Protection Regulation (GDPR) applies in Europe to all businesses and fintech firms that collect and store consumer data.

When developing APIs, many fintech companies use regulatory technology (RegTech) to ensure compliance without increasing costs. This ensures legal compliance with all legislation, respects clients’ privacy preferences and automates the production of mandatory reports.

4 levers for FaaS success

There is a reason for the meteoric rise of fintech-as-a-service or FaaS at this moment. In addition to favorable market conditions, there are four factors that contribute to the success of FaaS:

1. Interoperability for global payments

Global penetration of standard payment mechanisms such as credit cards is still very low. Billions of users use alternative payment methods, including cash, bank transfers, e-wallets and local debit networks. Fintech-as-a-service has significant potential in the fragmented world of local payments. APIs allow FaaS to solve the problems of managing local payments.

2. Merging the fintech stack

To make FaaS implementation fast and easy, a single, integrated technology stack created from the ground up is required. This will enable product managers as well as developers to create high-quality localized user experiences for both domestic and international commerce. FaaS consolidates the financial planning, payment and money transfer functions that modern businesses use to develop powerful apps via a single, universal, scalable API.

3. A global payment network

With a consolidated stack in command, the next step is to choose expansion and scaling strategies. This requires a broad, reliable payment network that supports multiple payment methods. These means of payment include cash, bank transfers, e-wallets, as well as local debit systems. FaaS providers such as PayPal, Rapyd, etc., have built global networks compatible with local payment methods to drive fintech-as-a-service adoption.

4. The emergence of advanced technologies such as AI

FaaS market growth is expected to be driven by the global adoption of sophisticated technologies such as AI, cryptocurrency, open banking, voice bots, prescriptive analytics, cloud or big data analytics, as well as digital payments. Individuals and businesses can digitally save, invest, borrow and transfer cash as a result of these financial innovations. For example, banks can use a FaaS platform for action predictive modeling, which will collect and analyze a customer’s data across multiple sectors and deliver recommendations.

Status of the Fintech-as-a-Service market

The worldwide market for FaaS startups is estimated to reach $161 billion by 2026, according to an IndustryARC report.

Globally increasing acceptance of FinTech solutions and platforms is expected to drive the market expansion. Moreover, the emergence of artificial intelligence, cloud-based software, with big data related to financial services will accelerate the expansion of FaaS. The growing use of mobile phones for online purchases is expected to give a significant boost to fintech-as-a-service.

Some of the top startups in this segment include:

• Rapidly: Rapyd, a start-up established in the UK, creates worldwide digital wallets. Through the startup’s application programming interface (API), companies accept hundreds of global payment methods.
• FISPAN: Canadian startup FISPAN offers services for embedded platforms. The company makes it possible for the banks to develop digital communication channels that are branded and fully integrated.
• Neo Mena: Neo Mena Technologies, an Emirati start-up company, offers comprehensive investment services. This consists of a complete digital investment solution as well as a suite of mobile-first user applications with integrated sales and administrative functions.

Suffice it to say that fintech is now a force to be reckoned with in the technology ecosystem, and FaaS is opening up fintech access for companies worldwide, regardless of size or availability of resources. In fact, the latest fintech trend to transform holiday shopping experiences – BNPL – was largely driven by FaaS.