Banking-as-a-Service: new possibilities and horizons

The development of innovative financial technologies, the emergence of flexible and fast-growing startups, along with the global course towards digitalization of the economy are changing the balance of power in the banking industry. It is developing towards a new way of business interaction synergy based on the BaaS (bank-as-a-service) model. How can you use this model to your advantage? We’ll try to figure it out.

What is it?

The Banking-as-a-service model is an innovative B2B service for banks to lease their infrastructure. It has already made a splash in the fintech market. BaaS allows a company to provide financial services without setting up its own bank or acquiring an existing one. 

As an example, consider Shopify, a software company that develops software for online and retail stores. More than 60% of its income comes from trading solutions, most of which are related to financial services (processing payments, etc.). This is a pretty new phenomenon on the market, but it is rapidly gaining momentum with the growth in the number of fintech startups and a change in the approach to managing financial institutions. 

The costs of maintaining and modernizing infrastructure are growing, and for some startups, they even seem overwhelming. Therefore, it becomes much easier to take a ready-made solution from a market player. At the same time, it is becoming more challenging to compete and, most importantly, more expensive. As a result, the search for new partners, the creation of synergy between companies from different industries or even competitors is the only possible strategy for further growth. 

In addition, new players are emerging fintech companies and startups ready to develop and bring new products and services to the market many times faster than banks. But they face another problem: they cannot provide many financial services without the appropriate permission of the regulator. This situation served as a driver for a new round of development of such a model for providing cloud services as BaaS. 

Banks in the clouds 

Cloud technologies provide convenient network access to various resources, from data storage systems to the provision of different business services. This offers quick access to the information you need, infrastructure solutions, and process scaling. 

Another important technology that allows the as-a-service market to develop is API. Many countries have embarked on a course towards creating a more open financial market that would foster competition and the emergence of new players. These are initiatives both in the field of open APIs and in terms of the corresponding “incentive” legislation and other measures that benefit fintech startups and other participants in the financial market. 

Subscription finance 

BaaS is a fundamentally new level of implementation of the cloud concept. A client (a business from a bank to a startup or a company from a non-financial industry) is provided not with technological capabilities but with full-fledged business functions in a subscription model. 

Suppose a bank becomes a client in the BaaS model. In that case, it receives a cloud core system with a product catalog and an automated banking system where basic credit and deposit products are introduced. If a fintech company becomes a client, it will already have to rent a computerized banking system with a banking license and operations on behalf of an operator or a payment bank. 

The BaaS model can also provide gateways to payment systems, including fast payment systems and even financial reporting as a service. But the main trend that is gaining popularity is the fintech marketplace. Within this format of cooperation, automation of marketing and risk analysis, underwriting, and billing for partnerships with non-financial organizations, as well as KYC AML as a service, can be provided. 

World technologies in your hand 

The benefits of using as-a-service models have been experienced by fintech businesses and large financial and technology companies, both customers and service providers. 

Many companies have focused their efforts on developing a BaaS strategy, such as Wirecard, Lemonway, BBVA. For example, the BBVA Open Platform will allow a bank to offer a wide range of BaaS-based products and services through the API of companies that want to offer financial products to their customers but do not want to become a bank. 

QIWI also offers different solutions for fintech companies and startups. Thanks to the developed API, the company aggregates more than 12 thousand merchants, in favor of which it can accept payments and act as a single payment gateway. 

Financial solutions for non-financial industries 

The ability to perform non-cash transactions quickly, conveniently, and safely allows you to create a unique customer experience, including in the non-financial sphere. There are many examples in the industry where companies that are far from the payments market created payment solutions, and a financial company provided the infrastructure. Now the demand from the market is being formed for innovative and convenient financial solutions. They should simplify business operations and improve the customer experience significantly. 

What’s next? 

The advantages of BaaS are indisputable. The integration of financial solutions will give a real business effect by optimizing employee labor costs and reducing transaction costs. The benefits obtained from the implementation of BaaS will allow companies to remain leaders in their segments.