Home / Banking Strategies / To BaaS or not to BaaS?

To BaaS or not to BaaS?

That is a question for banks seeking to offer financial services via APIs in a cheaper, faster and more transparent manner.

Feb 17, 2022 / Digital Banking / Technology

In the last five years, there has been a radical shift in the way financial services are offered globally. Banks and non-banks alike, are increasingly looking to embed banking as a service (BaaS) to provide clients holistic financial services for conducting their banking transactions, more conveniently.

By diversifying their traditional customer proposition, non-banks seek greater loyalty and advocacy as they aim for more inclusion in the financial ecosystem.

Goldman Sachs’ collaboration with Apple is a great example of drawing on deep industry expertise and a banking license coupled with modern technology to deliver BaaS capabilities. By building a new, cloud-based banking infrastructure and exposing APIs for developers, Goldman was able to integrate new financial products on top of the platform. This not only provides speed and flexibility to launch new financial products and services, but also helps accelerate revenue generation through new business lines from existing clients.

Over a period of time, traditional banks with a growing sense of urgency have joined the wave of non-banks seeking to expand their portfolio.

Both acknowledging the need to offer BaaS for several reasons. More than 50% of the global population is less than 30 years of age and this demographic expects a seamless banking experience. And the competition is intense from the start-ups, fintech and the big tech players also maneuvering for position against traditional financial services providers.

With changing regulatory policies and new innovative business models coming into play, simply being in the banking business no longer guarantees revenues or sustained growth. They must create a network and marketplace effect and place the service provider and the service seeker on a common platform to enhance customer experience.

So, what’s in BaaS for banks? BaaS creates a more level playing field for anyone who wants to offer financial services using APIs to bring the services in a cheaper, faster, and more transparent manner.

The most significant potential outcome of the BaaS model is greater financial inclusion. More than 50% of the global population is either unbanked or underbanked. Thanks to BaaS, this key segment can still get serviced. A case in point is Bank Rakyat Indonesia, which is leading the country’s digital banking revolution by tapping into a latent demand for convenient and instant digital lending products.

As leaders within their domain, banks can leverage APIs and other advanced technologies to gain a steady revenue stream to retain their competitive edge. Having built the infrastructure, banks already know the domain, the banking products and risk. They have the clientele and understand their preferences, although perhaps not to the same extent as Google, Amazon or Apple. Banks can translate this intrinsic wisdom to replicate their technology, banking products, risk assessment, processes and customer experience framework. They can then package and offer this replica on a cloud for all aspirants looking to provide BaaS.


The changing intersection of banking and technology

Personalization offers ‘tremendous opportunity’ for banks and credit unions

Attracting tech talent for the new digital banking world

The real deal with millennials, Gen Z and their phones

E-signatures: Answers to the 5 most common questions

In addition to engaging directly with customers, banks will have the opportunity to interact in the business-to-business space by collaborating with challenger banks and other emerging competitors to offer superior experiences to end customers. They could also have new, non-traditional partners – such as entertainment companies – looking to integrate financial services into their core offerings, but without the understanding or insight that a traditional banker brings.

A BaaS approach brings several advantages, including frictionless banking, greater convenience and the comfort of banking from home. This was especially evident during the pandemic. The success of new entities, such as Liv. bank, the United Arab Emirates’ first digital-only lifestyle bank, which targets millennials, points to the growing popularity of this trend. Real-time payments may also be advanced via BaaS via an amalgamation of services offered on the cloud.

Digital transformation will empower banks to stay relevant. In their bid to move from a pipeline to platform business model, they can leverage BaaS as a compelling innovation opportunity in the digital era.

Rajashekara V. Maiya is global head of business consulting at Finacle-Infosys.