Building a bank, whether brick-and-mortar or digital-only, is no walk in the park. Regulations, resources, capital requirements, and infrastructure pose significant hurdles to overcome. 

However, digital finance is rapidly permeating every industry, with technology opening up a wide array of opportunities for both banking and non-banking financial institutions to offer an extensive range of products and services on their platforms. This streamlines customer experiences and aids in closing more deals. 

But is the process of establishing a complete banking infrastructure and obtaining independent banking licenses truly worthwhile? 

Few can afford the luxury of dedicating 2-3 years to build what is readily available off the shelf. As a result, non-bank companies are choosing to operate under existing licensed banks, leveraging their infrastructure, licenses, customer data, and other privileges. This is where Banking-as-a-Service (BaaS) enters the picture. 

Banking-as-a-Service has experienced exponential growth in recent years. In 2022, the global BaaS industry was valued at $541.62 million and is projected to reach $5.5 billion by 2033, exhibiting a remarkable CAGR of 23.3%. 

This trend extends to MEA (Middle East and Africa) and APAC (Asia-Pacific), where BaaS is expected to grow at a CAGR of 7.4% and 9.8%, respectively, between 2023 and 2029. 

But lets start with the basics.

 

What is Banking as a Service (BaaS) and where did it originate? 

Banking as a Service (BaaS) is a model in which banks and FinTechs utilize various banking services, such as account management, payments, cards, lending, and more, from third parties through APIs (Application Programming Interfaces). 

BaaS allows these third parties, including fintech startups, technology companies, and non-financial entities, to integrate banking functionalities into their own platforms or applications without the need to build the entire banking infrastructure from scratch. 

The use of white-label applications is by no means new most technology users have subscribed to some form of SaaS service for well over a decade. For BaaS, the opening of banking initiatives and the rise of fintech startups spurred growth at a time when the customer base didn’t even realize they preferred it. 

Regulatory changes, such as the Revised Payment Services Directive (PSD2) in Europe, played a significant role in driving the adoption of open banking and facilitating the sharing of financial data through APIs, ultimately paving the way for fintechs, banks, and technology firms to rise to the digital occasion, and supply newfound demand. 

The demand for a refreshed banking infrastructure has emerged as a means to open up the traditionally closed banking ecosystem, facilitating collaboration between traditional financial institutions and technology-driven disruptors. 

This collaboration enables the creation of new and enhanced financial products and services that cater to the evolving needs of customers. Furthermore, it allows non-banks to concentrate on their core business while the parent bank manages the infrastructure. 

 

BaaS. Open Banking. Embedded Banking. API Banking. What’s the Difference? 

Banking as a Service (BaaS), Open Banking, Embedded Banking, and API Banking are often used interchangeably but are intrinsically different. 

While they share similarities, they have distinct focuses and applications. 

  • Open Banking 

Enables licensed financial institutions and FinTechs to securely share customer data with third parties through APIs, allowing them to develop new financial products and services that promote competition and enhance the customer experience. Open Banking fosters transparency, innovation, and customer control over their financial data. And has been the underlying driver for financial services such as account aggregators.

  • Banking as a Service (BaaS) 

As mentioned previously, BaaS emerged from Open Banking. It allows licensed financial institutions to sell or rent their banking infrastructure and products to non-banking institutions. This, in turn, enables non-banking institutions to integrate specific banking features into their applications, platforms, or products, such as payments, account management, or lending, without having to build the complete banking infrastructure themselves. 

  • Embedded Banking 

Embedded Banking refers to the seamless integration of banking services into non-financial platforms or applications. It allows customers to access banking services within the context of their everyday activities, such as making payments within an e-commerce app, ride-sharing apps, travel booking sites, insurance products, and more. 

  • API Banking 

API Banking is the foundational technology that powers BaaS, Open Banking, and Embedded Banking. APIs enable different software systems to communicate and exchange data in a standardized manner. API Banking facilitates secure and real-time data sharing among financial institutions, third-party developers, and various platforms. 

 

How banks are using BaaS for growing revenue 

Before delving into the “how,” it’s important to recognize that not all banks can offer Banking-as-a-Service. Allowing third parties to access your infrastructure implies that you are operating on “shareable” infrastructure. 

Traditional financial institutions, powered by legacy infrastructure, often grapple with straightforward challenges like integrating new solutions into their existing systems due to their inflexibility. This inflexibility means that sharing their core functionalities and customer data would be nearly impossible. 

Consequently, many of these institutions are now transitioning to a platform model, which enables them to construct component-based banking infrastructure by bundling various APIs together. With a component-based infrastructure, they can offer subscriptions to other FinTechs and startups, creating new revenue streams. 

There are two fundamental ways in which licensed parent banks and FinTechs are utilizing their infrastructure through BaaS.  

  • Offering White-Label Banking Solutions 

This approach enables third parties to operate on the bank’s infrastructure while providing financial services under their own brand. In doing so, the bank generates revenue through subscription charges, transaction fees, and other revenue-sharing models, all while expanding the customer base and driving growth. This not only enhances their financial stability but also reduces dependency on interest income, thereby creating a more resilient and sustainable revenue mix. 

  • Expanding Product Portfolio 

As demand from non-bank entities increases, parent banks are well-positioned to develop and offer new and innovative financial products and services. By leveraging their existing infrastructure and expertise, mother banks can identify market gaps and create tailored solutions to address the evolving needs of their BaaS partners. 

Starling Bank serves as a true beacon of success in the BaaS landscape. Through its subsidiary, Engine, Starling Bank has achieved remarkable growth across Europe since its inception in 2014. Beginning as a Challenger Bank, it has rapidly evolved into a trusted institution for 3.6 million customers and over 510,000 Small and Medium-sized Businesses (SMBs). 

Starling Bank’s customer-centric approach not only fosters investor confidence but also attracts new stakeholders. Even during the challenges posed by COVID, the bank continued to secure funding, doubling its post-Series D valuation to £2.5 billion. 

As of May 2023, its profits have surged six-fold, accompanied by a significant rise in revenues. The bank’s lending offerings have also witnessed an upsurge, while deposits recorded a substantial 17% increase. 

 

Benefits of offering BaaS 

Aside from monetizing their infrastructure and resources, how else do banks benefit from BaaS? 

Accelerating Innovation 

Collaboration with non-bank partners injects fresh perspectives and disruptive propositions into the banking ecosystem. FinTechs’ agile approach and technological prowess drive innovation, enabling banks to offer novel services, enhance customer experiences, and stay ahead of market trends.

Ease of Penetration into New Markets 

Partnering with unlicensed non-banks and FinTechs grants access to previously untapped markets, both domestically and internationally. Banks can leverage the partners’ established customer bases, thus opening doors to demographics they may not have reached otherwise.  

Less Burden in Regulatory Compliance 

Non-bank partners often assume certain regulatory responsibilities, alleviating some of the compliance burdens for the bank. This collaborative approach allows banks to focus on core operations while navigating complex regulatory landscapes more efficiently. 

Lower Cost of Customer Acquisition 

Banking-as-a-Service (BaaS) offers financial institutions the potential to access a larger customer base at significantly lower costs. In the traditional banking delivery model, the cost of acquiring a customer is estimated to range between $100 and $200. In contrast, leveraging a modern BaaS technology stack can substantially decrease this cost, ranging from $5 to $35. 

Strategic Differentiation from Competitors 

Embracing BaaS differentiates banks from their competitors, positioning them as forward-thinking and customer-centric. The ability to offer innovative, specialized financial services through partnerships enhances the bank’s brand value and customer loyalty. 

 

Basics on how to create a BaaS system 

Successful implementation of BaaS systems is a blend of technology and business acumen. There are 8 fundamental pillars that BaaS setups need to focus on: 

  1. Clear market understanding and risk assessment: A successful BaaS journey begins with a clear understanding of your market potential and risk profile. 
  2. Infrastructure modernization: Institutions need to either transition from legacy systems to modular, API-driven architectures, or commit to an infrastructure transformation roadmap that allows them to build new capabilities over time. 
  3. Choosing the right BaaS products: Ensure the technology can support a variety of services such as account management, payment processing, handling loans, and other types of services is critical for a successful Go-To-Market strategy. 
  4. Monetization strategy: Organizations need to define how the BaaS system will generate revenue – fee structures, revenue-sharing models, and pricing tiers for partners. 
  5. User Experience (UX): Intuitive interfaces, real-time information, and efficient onboarding are key to the overall success of the proposition and require institutions to have a clear understanding of how the product is designed from the ground up. 
  6. Compliance and security: Implement strong authentication, encryption, and risk management mechanisms to protect customer data and transactions. 
  7. Analytics and insights: Implement data analytics tools to provide valuable insights to partners and customers.  
  8. Support and Maintenance: Provide comprehensive support to partners and customers using the BaaS system. 

 

How Codebase Technologies Supports FIs in Building & Integrating their BaaS offerings  

Successful BaaS implementation hinges on striking the right balance between technical expertise and a comprehensive understanding of the financial industry landscape. 

At Codebase Technologies, we assist institutions and organizations from across the banking and non-banking financial ecosystem in building BaaS infrastructures that can be easily monetized. This approach not only increases engagement with existing customers but also enhances the overall customer acquisition of new prospects. 

Using our component-based and API-driven platform, Digibanc, we empower banks to construct white-label banking infrastructure that can be monetized through subscription models. We provide our clients with a flexible approach to designing their revenue generation strategies. 

This approach unbundles their closed banking infrastructure, allowing third-party FinTechs and non-financial companies to access and integrate different banking components into their platforms. 

 

Closing Thoughts 

Banking-as-a-Service is not merely a technological shift; it represents a fundamental transformation in the way financial institutions operate, innovate, and compete. With BaaS, banks can diversify their revenue sources, drive innovation, expand into new markets, reduce operational costs, and ultimately position themselves for long-term success in the rapidly evolving world of digital banking. 

BaaS also provides banks with a unique opportunity to penetrate new markets, both domestically and internationally, with greater ease and cost-effectiveness. Through partnerships with non-banking entities and FinTech startups, banks can extend their reach to customer segments they may not have reached otherwise. This expanded market presence is a strategic advantage, allowing banks to capture new customer segments and diversify their customer base. 

With the support of Codebase Technologies team, banks can harness the full potential of BaaS and thrive in the digital age!