What Exactly is Banking as a Service (BaaS)?
Banking-as-a-Service (BaaS), or white-label banking, is a model that allows non-bank businesses to provide financial services by leveraging an established financial institution’s capabilities and banking license, so they can better serve existing customers and attract new ones.
This makes it possible for FinTechs and third parties to offer digital banking services without needing to obtain a banking license or develop their own banking business, which is costly, time consuming, and out of reach for many FinTechs.
Examples of BaaS include credit card rewards programs that pay cash back on certain types of purchases, or airline rewards programs that serve up discounted — and even free — flights to those who travel frequently. A major advantage of this approach is that it encourages customer loyalty in a fiercely competitive landscape. FinTechs are largely responsible for these features, and it’s an avenue they need to pursue in order to stay competitive.
How Does Banking as a Service Work?
With BaaS, FinTechs and third party providers connect to a bank’s infrastructure via APIs, enabling these third parties to deliver new banking functionality and financial solutions to their customers via their apps and websites.
The third-party pays a fee to access the BaaS platform and leverage the financial institution’s license and capabilities such as lending and payment services, mobile bank accounts, debit cards, fraud management, and regulatory expertise.
How Does BaaS Differ from Embedded Finance?
Embedded finance is the seamless integrating of financial services into non native financial services apps and websites. In other words, it’s the front-end access to financial services, while BaaS is the back-end functionality that makes embedded finance possible.
One example of embedded finance is consumers being able to save for their goals right where they shop. For instance, a customer might return an item to Amazon and see the prompt, “Do you want your refund credited back to your credit card or do you want it deposited into your investment account?” With embedded finance, valuable financial services are woven into the micro movements of a consumer’s financial life, and something as simple as a retail return can help to facilitate financial wellness.
Banking as a Service vs Open Banking
Open banking and BaaS often get confused, but they are two different service offerings. Through open banking, FinTechs and third party providers are able to leverage financial data from traditional banks with the account holders’ consent. With BaaS business models, on the other hand, the bank offers the core platform and third parties build apps and functionalities on this platform. Through BaaS, third parties can access core banking functionality from financial institutions.
Banking as a Service Providers
Numerous BaaS examples exist where top financial institutions have enabled FinTechs and third party providers to leverage their banking expertise, products, and capabilities through APIs. These Banking as a Service providers include Bancorp Bank, Bankable, BBVA, Cambr, Clear Bank, 11:FS Foundry, Fidor Bank, solarisBank, Sterling Bank, and Treezor.
What Banking as a Service Means for FinTechs
Banking providers offering BaaS platforms continue to grow as more FinTechs see the benefits of BaaS and white label banking, and how it allows them to quickly build their own financial products leveraging the existing infrastructure of established financial institutions.
Banking as a Service makes embedded finance possible, enabling FinTech startups and non-financial organizations to streamline their customer experiences and empower their customers to invest, apply for a loan, get insurance and more, in as few steps as possible.
As Banking as a Service and embedded finance models become more popular, you can expect to see more choices in:
- customized credit and debit cards
- savings and financial wellness apps
- investment services
- online accounts
- lending and credit products
- one-click loans
- buy now, pay later options
Envestnet | Yodlee is deeply experienced in banking as a service and embedded finance models. As independent financial data aggregators for financial institutions, wealth management firms, FinTechs and other innovators, we provide a trusted and secure ecosystem by offering responsible access to consumer-permissioned data.
We can help you explore your options for leveraging BaaS platforms and embedded finance solutions. We’ve even partnered with Productfy to deliver embedded finance solutions into your next big idea. Learn more.