In an age where digital innovation is redefining traditional industries, banking functions are undergoing a significant transformation by adopting Banking as a Service (BaaS). This operational shift offers new opportunities for bankcard payment processing, financial institutions [FIs], fintech startups, and even non-financial companies to provide banking services without developing their own infrastructures.
As we explore what BaaS entails, its benefits, challenges, and future prospects, it becomes evident that it represents not just a trend but a fundamental change in how banking operates.
In every payment, there is opportunity. Now, such an opportunity is at the intersection where banking and payments converge. A paradigm shift is rapidly transforming Banking as a Service [BaaS] offerings.
Full payment operations and technology integration now exist on a single support platform that is optimized at scale through: i] payment acquiring / banking infrastructure; ii] underwriting and risk management; iii] governance with AML-BSA-FinCEN-OFAC; and iv] responsive customer service.
Small businesses starting up today may never interact with a conventional bank. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financial needs…to embed financial products into a single, seamless, convenient, and easy-to-use customer experience. – McKinsey, 2022
Banks have experienced a record $370Bn outflow of deposits in Q2 despite rising rates to attract them.
- KBW, 2023
The BaaS Commerce Engine is an innovative tech platform that seamlessly embeds acquiring [payment card acceptance,] banking [deposits,] and payables solutions. Imagine your payments partner helping you accelerate your accounts receivable, store your funds in an FDIC / NCUA-insured account with a revenue share on deposit interest, and then provide timely and accurate outbound payments to your suppliers and virtually anyone else. BaaS, with debit cards, lets merchants also earn income on interchange reimbursements for their payable transactions, further reducing their cost of money.
Optimized, BaaS lets a merchant launch services, scale with confidence, and drive value and growth through every money movement. BaaS provides scalable solutions and deployment of intricate local payment methods while remaining compliant within globally diverse regulatory environments.
What is Banking as a Service?
BaaS refers to integrating banking services directly into products offered by payment processors [and other FinTechs] through APIs [Application Programming Interface.] By leveraging cloud computing and modern technology, BaaS allows merchants to embed financial services such as payment processing, cash accounting and treasury management, lending solutions, and compliance functionality seamlessly into customer offerings.
BaaS model
Merchant Services | Payables | Banking & Treasury |
Full-featured POS payment acquiring accelerating cash flow, capturing revenue opportunities for the merchant. | Optimizing working capital and earning revenue share by leveraging a payables and treasury solution. | Embed financial operations for AR/AP reconciliation, Cash Management, and full transparency to liquidity. |
The BaaS Model takes traditional banking from brick and mortar and brings it into various online platforms. Merchants can now enhance Customer Experiences by providing relevant financial solutions tailored to their needs while focusing on their core competencies without becoming regulated banking entities themselves.
The Benefits of BaaS
Personalization of banking and other financial services is demanded by a cross-section of our society:
- 74% of consumers across all generations want a more personalized experience from their banks and financial institutions.
- 66% of FI customers are comfortable with their banks or credit unions using their data to provide a personalized experience.
- 70% are okay with FIs using AI for fraud detection.
- 48% of customers log onto their banking app or website daily.
- Accessibility permits startups and small businesses with limited capital to leverage existing infrastructure offered by larger banks and FinTechs. This creates more opportunities in several market segments, such as e-commerce that offers buy-now-pay-later options and incorporates payment plans, for example – all driven by embedded finance via BaaS.
BaaS providers offer ready-made solutions at competitive rates where costs are significantly reduced. BaaS partners benefit from lower overhead while gaining access to advanced technology and capabilities previously available only to established banks.
The rapid pace of FinTech innovation demands agility, while some traditional banks will struggle with legacy systems and regulations. Through a BaaS model, FinTechs now have Speed-to-Market as a competitive advantage.
BaaS allows us to tailor our financial services to meet the specific needs of our merchants. Customer Experiences [CX] demand a personalized and seamless interface where merchants can manage their finances without leaving an application they already use. With the ever-evolving definition of CX, this convenience fosters customer loyalty and increases our engagement with our merchants, and merchant engagement with their customers.
The financial industry is heavily regulated, and integrating banking services involves adherence to compliance standards set by regulators. Data security, anti-money laundering [AML] practices, know-your-customer [KYC] requirements, and other Bank Secrecy Act [BSA] regulations require careful selection of and collaboration with established BaaS partners to alleviate some regulatory burdens.
BaaS models, of course, require significant technology buildouts and data infrastructure for integration. Well-funded partnerships, as well as FDIC and NCUA insurance for deposits, are vital to any successful roll-out.
Risk Management in any financial institution remains at the forefront of governance and best practices. Underwriting and concerns for fraud, as well as identity theft through fraud, continue to evolve. Traditional banks find it difficult to onboard new customers simply by opening another new account. Deposit relationships and immediate access to funds seem to be mutually exclusive between FIs and depositors. For payments, merchants expect access to their funds immediately after the clearing and settling transactions. We may have also experienced receiving a phone call asking, “Where is my money?” only to learn there are deposit delays and risk holds due to concerns for fraud, merchants’ financial instability to fund chargebacks, and other delays in clearing checks or deposits via ACH. Of course, such delays have a collateral advantage to the FIs on the financial float [where funds are held pending clearance but applied internally to other cash management and treasury functions]. So, why delay merchants’ access to their funding while assessing excessive fees for services?
Artificial Intelligence (AI) has begun reshaping FIs through automation capable of analyzing vast data leading to better risk assessment capabilities. Fraud detection strategies go way beyond “Red-Flag” alerts and other risk parameters. Improved merchant support when combined within BaaS integrations will foster even richer service offerings. With overall improved efficiency driving lower costs, long-term and sustainable growth is likely for those who adopt BaaS into their business model.
So, moving on from here!
BaaS-enabled FIs, specifically payment processors, can successfully navigate ever-changing landscapes and prosper over market disruptors.
Banking as a Service represents not just an emerging trend but the evolution of redefining how Fis will financially engage merchants throughout the entire Commerce Cycle. This means operating with new technology, sustainability across all access points, meeting new and ever-changing CX, and delivering unique engagements never before experienced.
New markets will develop as payment processors adopt BaaS and Unified Commerce as standard offerings. FIs will remain more than steps ahead of traditional banks and credit unions with higher operational costs and inadequate infrastructure. Many banks and credit unions remain stuck on strategies to acquire new deposit relationships, generating new fee-based income, and merchant lending practices with inefficient underwriting and [needless] delays in application processing. Others are still drawn to the predatory Merchant Cash Advance market.
Merchants now have options to reduce their cost of money, earn revenue share on their deposits and payables, and solve the many problems previously associated with an archaic banking model. BaaS provides a unified and scalable solution. The potential for BaaS expansion is driven by evolving customer expectations for convenience and personalization. Who provides BaaS is less concerning than the accuracy and reliability of BaaS, which allows for the consolidation of all banking in one place.