How Banking-as-a-Service is shaking up the fintech ecosystem

Today, consumers face more choices than ever when it comes to their finances. From modern offers such as Buy Now, Pay Later (BNPL) and embedded financial platforms, to more traditional products such as credit and debit cards, both institutions and retailers are being asked to deliver more seamless, fast and flexible solutions to their customers.

Crucially, companies launching new financial products often require the complex underlying infrastructure of a bank to bring their offerings to market – this is of course with the obvious exception of certain BNPL products such as Klarna, which can operate without full regulation. Similarly, incumbent banks themselves, which already have the full regulatory permissions required to operate, may need to adopt core banking platforms to modernize their legacy systems to develop truly competitive offerings to meet the needs of their customers. This is where Banking-as-a-Service (BaaS) and Platform-as-a-Service come in to disrupt the fintech landscape.

Explaining the BaaS proposal

The growth of Platform-as-a-Service (PaaS) gives existing financial institutions the ability to upgrade their core platforms and apps, without having to overhaul their entire system architecture. Meanwhile, non-financial dealers and retailers can also participate with Banking-as-a-Service, as BaaS equips these firms with the technical tools and regulatory infrastructure required to bring their own financial products to market.

Beyond the scope of nimble fintechs, the PaaS model serves legacy banks, allowing incumbents to leverage the core banking capabilities of next-generation core banking platforms to layer new technology on top of their existing systems. In the case of BaaS, this term describes a business model where technology companies provide access to modular banking services, typically via Application Programming Interfaces (API). Meanwhile, legacy and challenger banking institutions provide the balance sheet and regulatory permissions required to support the development of virtually any financial product.

The end result is that all institutions, regardless of industry, are able to bring more competitive financial products to the market. Even better, some may even choose to white label these products to “de-risk” their main brand, creating new revenue streams for companies that decide to sell their solutions to other players in the market.

The BaaS market so far

Especially for smaller firms, a key benefit of BaaS is that it radically eases the path to market, making it easier than ever for businesses that might otherwise struggle to fund their ideas for tailored financial offerings. True BaaS propositions allow companies to run on their balance sheet and develop products without having to jump through certain regulatory hoops, or the hassle of applying for their own banking license. With this in mind, perhaps the most exciting development related to BaaS is the ability to democratize the financial services industry (FS).

To date, BNPL and payment solutions have played a major role in retail, but BaaS capabilities extend far beyond what current BNPL products can offer. Organizations can take advantage of a wide range of options and APIs when building their own product, and even better, they can do so without expensive in-house expertise. This is another essential factor, which significantly reduces the price to enter the market, making it much easier for new players to enter the industry with niche solutions.

Right now, the demand for such offers is growing. According to a recent Yobota survey, 72 percent of businesses said they have worked with technology vendors to launch new products or services in the past 12 months. An even greater number (79 percent) said their business has experienced a greater demand for more personalized financial services.

Who benefits from BaaS?

It is clear that the banking industry is ripe for further innovation. With more firms throwing their hat into the financial services space and harnessing the power of BaaS, there are a number of beneficiaries involved.

As I already mentioned, for sectors like e-commerce and travel that face tough competition, companies can reap the benefits of BaaS in terms of finding a niche in the market, beating out the competition and building revenue. In this environment, the ability to understand customers’ spending behavior and patterns is critical, and as such, delivering tailored offers that resonate with the clientele is a win-win for retailers.

Furthermore, as the BaaS model increasingly moves towards embedded finance, companies without a banking license can increase their naming power with branded financial offerings. This ensures that their product – be it a branded BNPL platform or a digital wallet – is targeted specifically at their customers and deeply embedded in their organisation’s ecosystem. From here, sellers are less likely to lose their customers at checkout, which is often the case when consumers are redirected to third-party vendors. Here, consumers benefit from a frictionless online experience and the security of banking services with a well-known brand name.

Similarly, the implications are huge for legacy banks. With a host of new providers entering the industry, the rise of BaaS will mean greater competition – and this is not necessarily a negative thing. On the contrary, the rise of BaaS gives established institutions the impetus needed to adapt their traditional stack to incorporate the changing needs of their consumers using the core banking capabilities of PaaS, especially in a digital context. Generally speaking, a competitive market means good news for consumer choice, where the mantra “the more the merrier” rings true. The more options there are to choose from, the more consumers will benefit from lower costs, an improved customer journey and greater overall financial empowerment from the brands they trust most.

Ultimately, the arrival of Banking-as-a-Service shows that the possibilities are endless in the fintech ecosystem. This is not necessarily a case of “out with the old and in with the new” and I look forward to seeing how consumers and brands can benefit from the bold new partnerships emerging from these new banking trends.

Image credit: amadorgs / Shutterstock

Ion Fratiloiu is head of commercial operations at Yobota. Starting his financial career at Deutsche Bank, Ion spent a number of years consulting in equity capital markets and leading sales growth for FTSE500 company Fiserv and core banking provider Thought Machine. He joined Yobota in 2021 to launch its commercial operations, lead the GTM strategy and build a diverse and multifaceted team to take the company to the next stage of growth.