What is banking as a service (BaaS)?
November 29, 2023 · 8 min read
November 29, 2023 · 8 min read
Banking as a Service (BaaS) is a modern financial services framework that allows non-banking businesses to offer banking services to their customers. By partnering with banks and integrating their APIs, companies can provide financial services without needing to get a banking license or subject themselves to the same strict regulatory scrutiny as licensed banks.
BaaS has gained popularity over the last decade, with the rise of financial technology (fintech) companies that aim to simplify and enhance money management for both businesses and individuals. It’s also inspired companies not traditionally associated with finance, such as supermarkets and airlines, to expand into the financial services space.
Banking as a service, at a glance:
Banking as a service (BaaS) is when a company partners with a licensed bank in order to provide banking services under its own brand name.
With BaaS, non-banks can offer services like payments, loans, and credit cards, without needing to get a full banking license.
BaaS platforms use Application Programming Interfaces (APIs) to securely transfer data between the BaaS provider and the underlying partner bank.
Many different types of companies within a range of industries can benefit from BaaS, including high-street retailers, supermarkets, airlines, and fintech startups serving both businesses and individuals.
BaaS differs from “Open Banking” in that goes beyond basic data aggregating, allowing non-banks to actually provide banking services directly through their platforms.
BaaS differs from “Platform Banking” in that it involves non-banks using technology to provide banking services, rather than licensed banks using technology to improve their services.
How does banking as a service work?
Banking as a service is only possible through the collaboration between banks and non-banks. A non-bank business (e.g., airline, supermarket, fintech startup, etc.) that wishes to offer banking services to its customers must partner with a licensed bank in order to give its customers access to the bank’s secure, compliant infrastructure of products and services.
Although the banking partner provides the underlying infrastructure, the non-bank can market the banking services under their own brand name. This is why banking as a service is also sometimes known as “white-label banking.” The BaaS provider markets the services as their own, while the fine print states that the core banking services are powered by a licensed bank.
Banking as a service relies on Application Programming Interfaces (APIs) to connect the non-banking company with the functionality of the collaborating bank. An API, built into a software interface through code, is a set of rules that allows different computer programs to securely and seamlessly communicate with one another.
In the case of BaaS, APIs enable data to seamlessly transfer between the non-bank's digital platforms or applications and the bank's secure systems. Here's how the process typically unfolds:
1. BaaS provider and bank work together to verify user - The user/customer logs into their account with the BaaS provider. Using APIs, the BaaS provider communicates with the bank to verify the user’s identity.
2. User initiates a banking request - The user/customer interacts with the BaaS provider’s digital platform to initiate a transaction or other banking-related request.
3. BaaS provider transfers request data to their partner bank - After the user’s/customer’s identity has been verified, the Baas provider securely sends the user’s request to the bank for processing.
4. Partner bank processes transaction and responds - The collaborating bank is responsible for processing the user/customer request in a secure, compliant environment. It then sends a response (e.g., approving or declining the transaction) back to the BaaS provider.
5. Request is completed - If the transaction is approved, the BaaS provider works with the partner bank to complete the user's request.
The way in which a bank’s API works in respect to BaaS will differ depending on the service that the non-bank wants to provide and the configuration of its own user interface.
Under the BaaS model, the BaaS provider and the collaborating bank share responsibility for the data security of their users, with each managing different aspects of the front- and back-end systems involved.
The BaaS provider is typically responsible for securely integrating the bank’s APIs, managing the user interface, and authenticating users when they log in. The partner bank is responsible for securely processing transactions, transmitting and storing sensitive transaction data, and maintaining a compliant banking infrastructure. Both entities make use of encryption tools, access controls (e.g., multi-factor authentication, one-time passwords, single sign-on, etc.), and other security measures in order to protect their customers from data breaches and fraud.
Benefits of banking as a service
Benefits for individuals
BaaS offers a range of benefits for individuals, which vary depending on the platform. For example, customers may enjoy the convenience of being able to consolidate their financial activities and accounts within a single BaaS-enabled personal finance app. Others may enjoy the rewards and perks that non-financial companies like airlines and supermarkets offer through their BaaS platforms.
Benefits for banking as a service providers
Non-banking fintech companies
BaaS has led to a rise in fintech businesses that aim to enhance financial services for both companies and individuals. For example, companies like Stripe and Marqeta use BaaS tools to allow their business clients to issue corporate cards branded with the client’s own name and logo.
An example of a fintech company aimed at individual consumers includes the UK-based Revolut, which partners with licensed banks to offer a suite of convenient banking services to individuals. Another example is the U.S.-based company Venmo, which allows U.S. residents to bypass clunky bank transfer processes and quickly send money to friends and family through a user-friendly app.
Without banking as a service, these fintechs could not exist, as their business models rely on the infrastructure of traditional banks to function.
Businesses that haven’t traditionally been associated with finance, such as supermarkets, property management firms, and airlines, can leverage banking as a service to expand their existing offerings and provide more value to their customers. BaaS also allows these non-banking businesses to collect useful data about their customers’ spending habits and preferences. This data can be used to tailor products and services to customers, leading to more sales and higher customer satisfaction.
Benefits for banks
It’s not just the non-banking entities and individual consumers that stand to benefit from BaaS. The collaborating banks have much to gain from BaaS as well. In partnering with non-banking companies, banks are able to access new customers that they may have never been able to capture through their traditional banking model. Banks are able to diversify their audience and expand their reach without the need for additional marketing and advertising.
In working with non-banking companies, particularly innovative fintech startups, banks are also exposed to new technologies and innovations within the industry. This can influence their own services and inspire them to keep up with the demands of the next generation of banking customers. Collaborating with fintech companies helps traditional banks remain competitive as the financial services industry evolves and advances.
BaaS vs. Open Banking
Open banking is another technology-driven model that brings certain financial service elements into non-banking digital spaces. However, unlike BaaS, open banking does not incorporate any secure, compliant banking processes. Instead, it simply allows non-banks to access and compile certain financial data from users in order to display it in a convenient, user-friendly way. For example, a budgeting app can use open banking to aggregate a user's transactions from multiple banks onto a digital dashboard as an easy money management tool.
Banking as a service shares some similarities with “open banking” but goes a step further by actually allowing customers to access and use secure banking services like payments, debit/credit cards, transfers, and lending, within non-banking apps or platforms.
BaaS vs. Platform Banking
Platform banking is another term that can be confused with BaaS, but in fact means something else entirely. Whereas BaaS is all about providing traditional banking services to the customers of non-banking businesses, platform banking is the opposite. It refers to when banks integrate the tools and technology of non-banks into their systems to improve their services for customers.
For example, a bank may add a fintech company’s personalised, AI-driven finance management tool within its online banking dashboard as an added perk for its customers. The bank, already equipped with the underlying banking infrastructure, adopts a fintech tool to improve the traditional banking experience.
BaaS and the evolution of financial services
The rise of banking as a service epitomises the changes that the financial services industry has undergone over the last decade. Technologies like BaaS are eroding the barriers that were once put in place by traditional financial institutions. Tasks that before would have required an in-person meeting at a local bank branch can now be done in seconds through a mobile app. Services that once seemed out of reach by most average people, such as investing and advanced financial planning, are now accessible to anyone with a smartphone.
Technology-driven platforms like BaaS have helped to make financial services more inclusive and empowered individual consumers and businesses alike. The difference between the financial services sector today compared with just a decade ago underscores the massive impact technology has had on the way people manage their money.
What is embedded finance?
Embedded finance just a simpler way of saying banking as a service. It describes exactly what BaaS does, which is that it embeds financial services into various non-banking platforms.
What is white-label banking?
White-label banking is yet another term that means the same thing as banking as a service. It’s derived from the practice of using a blank or "white-label" product that businesses can customise as their own (just as how BaaS gives non-banking businesses the opportunity to provide financial services under their own branding).
What industries can benefit most from BaaS?
A number of industries can benefit from adding banking as a service to their business models. fintech companies can use BaaS to provide a variety of financial services to businesses and individuals without needing to navigate the complexities of banking industry regulations. Retail businesses, airlines, and travel companies can use BaaS to add value to their customers’ experience while gaining new insights into their behaviours and preferences.
Another industry that’s increasingly adopting BaaS tools is the property sector, specifically “PropTech” (Property Technology) startups. These companies use BaaS to make managing the financial aspects of real estate more streamlined and convenient for homeowners, letting agents, and renters. For example, they might use BaaS to offer escrow services, mortgage applications, or simplified rental payments.
BaaS is a versatile model, with potential applications across a diverse range of industries. In an era where both digital and financial interactions are a routine part of daily life, BaaS can be applied to almost any scenario where money is involved.
What are some current examples of BaaS?
One current example of BaaS in the UK is the banking services offered by the Post Office. The Post Office is not itself a bank, but it offers its customers credit cards, personal loans, mortgages, and other everyday banking services by partnering with licensed banks, primarily the Bank of Ireland.
Another example is Wise, a fintech company that specialises in international money transfers and currency exchange. TransferWise is not itself a bank but partners with various banks and financial institutions to enable international payments for much cheaper fees than those charged by traditional banks.
With BaaS, who handles sensitive customer data?
Under the BaaS model, it is the licensed bank, not the BaaS provider, that verifies, processes and stores the customers’ sensitive banking data. However, the BaaS provider is still responsible for ensuring that its platform is compliant with industry regulations around data protection, notably the Payment Card Industry Data Security Standard (PCI DSS).
How are banking as a service providers regulated?
The way in which BaaS providers are regulated depends on the countries they operate in and the specific nature of their businesses. This can include being subject to certain anti-money laundering (AML), know-your-customer (KYC), and counter-terrorism financing (CTF) laws. However, BaaS providers are not subject to the same level of regulation and scrutiny as a fully licensed bank.