Banking as a Service: The Ultimate Guide

The Banking as a Service (BaaS) market size is expected to grow to $34.6 billion by 2032, at a CAGR of 26.4%. In 2023, it was just $4.2 billion. Why such a leap forward? BaaS cuts through the red tape and allows businesses to easily integrate financial features, such as payments or money transfers, directly into their products and services. This creates a win-win situation for both businesses and their consumers.

Previously, non-financial companies had to become regulated financial institutions and develop extensive technical infrastructure to offer financial features. Today, BaaS provides a straightforward solution, making access to financial services easier than ever.

But what exactly is Banking as a Service? Is it the same as embedded finance and open banking? What benefits does it offer, and how do you choose the right provider? Read on to get the answers and learn more insights!

Key takeaways:

• Banking as a Service enables businesses to offer financial features in their products without a banking license.
• There is a wide range of benefits that BaaS comes with—it helps businesses expand their offerings, improve customer experience, and reduce costs.
• Choosing the right BaaS provider is crucial for success; that’s why factors like security, pricing, and service range should be considered.

What is Banking as a Service (BaaS)?

BaaS is a business model that connects the infrastructure of traditional banking with the innovation and agility of fintech. It allows any organization to provide banking services to its customers. And all of this without getting a banking license or developing a financial infrastructure. 

It’s possible by partnering with licensed banks or financial institutions. As a result of this partnership, a non-banking company can offer its customers various financial services: from payments and loans to insurance, investments, and more.

Let’s take Apple as an example here. While not being a bank, Apple provides its clients with a credit card—the Apple Card. To do so, it cooperates with Goldman Sachs, one of the biggest invested banks in the world. 

How does Banking as a Service work?

So, what does the process of BaaS look like? When a non-bank company, fintech startup or a third-party provider wants to offer banking services to its customers, they connect with a licensed bank that offers such services. The bank has the necessary infrastructure that can be easily accessed by non-banking organizations through APIs. 

With the help of these APIs, a company integrates financial products, like payments or account opening, into their own platform or app. Once integrated, it can offer banking services under its own brand. The result? It not only simplifies regulatory compliance, as the licensed bank handles regulatory requirements but also enhances the customer experience.

Key players in the BaaS ecosystem

The partnership between banks and non-banks works in different ways. It depends on how much banks, fintechs, and other businesses are involved in the process. However, before we move on to exploring the main models that are shaping BaaS, let’s explain something else. To really understand how these partnerships operate, you need to know who’s who. 

So, a provider is a licensed bank that sells its financial tools (APIs), and a distributor is a business that buys and uses these tools in their apps and platforms. An aggregator, on the other hand, is a matchmaker bundling tools and services from various banks for better deals. 

The BaaS models

It’s possible to distinguish a few BaaS models:

• Provider-only model: It’s the simplest and most cost-effective model. Banks leverage their existing infrastructure and regulatory compliance to offer basic banking services to businesses for a fee. These companies then adapt such services to their own needs and create tailored products for their customers. 
• Provider-aggregator model: This solution acts as a marketplace where banks connect their BaaS services through aggregators. They offer a unique mix of services that individual providers can’t really match. As a result, businesses can easily compare different options and find better deals or a wider range of features, all in one place. 
• Distributor-only model: Here, the focus is on non-bank businesses that incorporate banking services directly into their own platforms and apps. They prioritize enhancing their core business by adding banking services that complement their existing offerings. They operate independently and don’t collaborate with other providers or aggregators. 
• Distributor-aggregator model: While the most flexible, it’s also the most complex model. Distributors team up with aggregators to offer a broader range of financial products through a single integration point. This expands the market reach and makes it simpler for businesses to get the BaaS solutions they need. For instance, an e-commerce platform works with a few BaaS providers to offer integrated lending, payment, and insurance services to its sellers through a single integrated solution.

Is BaaS the same as embedded finance and open banking?

At this point, you might be wondering if BaaS is actually the same as embedded finance and open banking. Well, while being closely related, they are not the same. 

BaaS vs. embedded finance  

In short, BaaS provides the building blocks (APIs) for financial features whereas embedded finance uses them to create a smooth user experience where financial services feel somewhat invisible. Together, BaaS and embedded finance make financial services more accessible and convenient for everyone.

Open banking vs. BaaS

How about open banking then? Doesn’t it closely resemble BaaS as well? After all, both rely on APIs. BaaS and open banking have a lot in common, yet, they have different purposes.

Benefits of Banking as a Service for businesses

BaaS comes with many advantages, from improving customer experience and regulatory compliance to reduced expenses and faster time to market. And these are just a few examples. Let’s take a look at how Banking as a Service can really benefit your business.

Enhanced customer experience

BaaS lets customers interact with products in a better way. Today, by bringing bank services to apps and platforms, companies enable their customers to experience smoother and more convenient processes. For example, when using a retail app with payment options included, customers can easily complete financial transactions without leaving the app. 

What’s more, with real-time data and advanced analytics that come together with BaaS, businesses can create financial products that cater to individual customer needs. This leads to a higher level of comfort and builds customer loyalty.

Increased customer lifetime value

Studies have shown that incorporating BaaS functions into SaaS platforms increases customer lifetime value by two to five times. BaaS offers customers multiple payment options and financing options that boost sales, stabilize cash flow, and make higher-priced products more accessible. All of this makes customers more likely to come back, purchase the products, and even spend more.

Faster time to market

Companies that want to include banking features in their products don’t need to build their own banking infrastructure. That would require additional resources, a team with specialized skills, and time. Instead, they can team up with BaaS providers. This way, they skip the lengthy development process and quickly launch new financial services. Consequently, they gain a significant advantage, getting ahead of competitors.

Compliance with regulations

Understanding banking regulations may be difficult, but following them can be even more challenging. Luckily, there are BaaS providers who manage regulatory compliance so that businesses offering financial functions can stay compliant. Such businesses don’t need to have their own extensive in-house resources. BaaS providers take the entire compliance burden on their shoulders so that businesses can focus on their core activities and avoid fines for not aligning with strict financial rules. 

Reduced expenses 

With BaaS, fintech companies can avoid the high costs that come with developing and maintaining their own financial systems. This allows them to invest more in innovation and customer acquisition.

Innovation and new revenue streams

BaaS fosters innovation by opening doors to cutting-edge technology. With this at hand, businesses can experiment with various financial products to develop something that meets the evolving customer needs. This could involve offering embedded financial tools within their existing platforms or creating entirely new financial product lines. By doing this, companies can tap into new revenue streams and stay competitive. 

Studies show that 41% of businesses introducing embedded finance options are driven by the potential for higher earnings. They also see it as a chance to launch new products and business models.

Choosing the right BaaS provider: different approaches

BaaS providers play an important role in the development of digital products and services—they significantly influence the success of your venture. Although critical, selecting the right provider is far from easy. To make an informed decision, you first need to understand the three main approaches to choosing a BaaS partner.

Key considerations for selecting a BaaS provider

Unfortunately, when choosing a provider, many business owners rely on recommendations or superficial research. The result? They might end up with a provider that doesn’t fit their business model or region, has basic features, or is unreliable. 

All of these factors can lead to technical errors, weak security, and bad customer support. That’s especially concerning given that 62% of consumers who encounter transaction problems neither repeat the attempt nor return to the company. 

Take a look at the important aspects you should consider before selecting your BaaS provider. Making the wrong decision at this point is the first step to driving customers away. So, choose wisely.

Reputation and track of record 

One of the most important factors to take into consideration is the BaaS provider’s experience. Check if they have a proven track record in offering the services you need. Ask them about their experience, request examples of their work, and look for referrals from other companies they’ve worked with. This will help you understand their technical skills and reliability before deciding to partner with them. After all, nobody wants to cooperate with a provider that has doubtful experience and reputation.

Banking license

The licensing status of a BaaS provider determines the range of products available for integration. So, make sure you check that before making a choice. 

Some BaaS providers are Electronic Money Institutions (EMIs). It means they can help embed payment services such as transferring funds between accounts, settling purchases, and issuing electronic money. Others have a full European Central Bank (ECB) banking license. What does it mean? It simply allows them to offer a wider range of financial products and services to their partners.

Speed to market 

Today, time is money in every sense of the word. Let’s say you have an idea to revolutionize your industry with embedded finance, but getting it launched can take months. So, by the time you reach the market, the window of opportunity might have closed. That’s why quick implementation and fast time to market stand out as the main priority for 35% of businesses.

A BaaS provider with a streamlined onboarding process and readily available APIs simplifies integration and lets you save valuable time. The faster you get to market, the sooner you can start reaping the benefits of your innovative idea.

Range of services

Understand your needs and compare them with the solutions offered by a BaaS provider. As we all know, every business is unique and has different needs. Some might want to improve customer experience with integrated payment options, while others may wish to offer new financial products. So, it’s really important to identify what you need now and in the future and check the range of financial features the provider can offer. These may include payments, lending, account management, currency exchange, and more.

A good BaaS partner should grow with you. That means not only meeting your current needs but also supporting your business as it expands and adapts to market changes in the future.

Budget and pricing

Choosing a BaaS provider that fits your budget is just as important as finding the right features. After all, the cost of their services ultimately impacts your customers. However, going for the cheapest option may not always be the best choice in the long run. Take into account the overall cost, including fees for extra services or support. That matters because if any unexpected fees appear, they can hurt your reputation and drive your customers away. 

There are a few things you can do to find the most value per dollar spent, though. Look for transparent pricing models with no hidden costs so you can stay within budget. Ideally, the pricing structure should scale with your business growth, meaning you won’t be overpaying as you get more successful. Finally, compare the features offered by different providers to ensure you’re getting good value for your money.

Infrastructure security

Security is important. This especially holds true given that 62% of people are concerned about fraud and see it as an inevitable risk of online shopping. Therefore, you need a BaaS provider that prioritizes protecting both your business and your customers’ sensitive information. 

What you can do is dig into their security infrastructure—check what encryption standards they use, data protection policies they enforce, and cybersecurity measures they have in place. It’s crucial that the provider has continuous security monitoring to identify and address threats quickly. Also, make sure they have a clear incident response plan in case of a data breach or leak.

Customer support

Another important factor you shouldn’t forget about is reliable customer support. Let’s face it, things often don’t go as planned. What in case you encounter a technical problem that disrupts your financial services offering? That’s when a fast and competent support team becomes indispensable.

It’s good to find a provider that offers multiple support channels and it’s easy to contact them. The quality of their support is also important. Do they provide timely responses from dedicated professionals who understand your needs? Your provider should have resources and guides to help you troubleshoot issues or answer questions. With a responsive and helpful support team, you can minimize downtime and ensure a smooth experience for your customers.

Use cases: How businesses leverage BaaS

BaaS is transforming industries, there’s no doubt about it. It allows companies to easily integrate financial services into their existing platforms. Among a wide range of companies, here’s how some well-known brands are using BaaS to revolutionize their products and services.

Shopify 

As a top e-commerce platform, Shopify uses Banking as a Service to offer various financial services to merchants. These services include payment processing, capital loans, and other financial tools built right into the Shopify platform. With BaaS, Shopify can provide a complete solution for merchants, helping them run their businesses more efficiently.

Amazon

The retail giant Amazon uses BaaS to offer more than just payment processing. For instance, Amazon Lending provides loans to sellers and merchants on its platform, helping them grow and making the Amazon ecosystem stronger.

Zoom

Zoom uses BaaS to facilitate seamless in-meeting payments. Imagine sending a quick and secure payment to a colleague for a virtual consultation—BaaS makes it possible, enhancing the user experience and unlocking new revenue streams for Zoom.

Uber

The ride-hailing giant Uber uses BaaS for a seamless financial experience for both users and drivers. Through a BaaS partnership with Barclays and Green Dot, Uber provides its drivers with tools to deposit, track, manage, and move money. This functionality gives drivers greater control over their finances. Moreover, with BaaS, Uber can process millions of transactions securely and efficiently, giving users a smooth and cashless payment experience. 

Team up with Neontri

Would you like to use BaaS but don’t know what to start with? Reach out to Neontri—we will support you in integrating BaaS into your business. We have certified specialists with over 15 years of experience and know-how to help you navigate all the complexities and ensure a smooth integration.

Conclusion

BaaS is revolutionizing finance. However, it’s more than just an innovation; it’s reshaping how banks and tech companies work together. It brings a bunch of advantages, allowing non-bank businesses to offer financial services in their products.

However, to fully benefit from BaaS, businesses must carefully consider several important factors before choosing a provider. Only then can they streamline operations, expand market reach, and stay competitive.

FAQ

How secure is a BaaS platform?

Security is a top priority for BaaS providers. To protect sensitive financial data,

robust security measures are implemented. These include encryption, multi-factor authentication, and regular security audits.

How long does it take to integrate BaaS into a fintech platform?

Integration time depends on the complexity of the services and the fintech company’s existing infrastructure. So, to fully integrate BaaS into your fintech platform, you might need anywhere from a few weeks to a few months. Direct partnership with a banking partner may need up to 24 months, whereas choosing to work with a BaaS platform allows you to start in a matter of months.

Are there any risks associated with using BaaS?

Using BaaS might come with some risks like dependency on the BaaS provider, regulatory compliance challenges, data security concerns, and potential service disruptions. However, partnering with a trusted BaaS provider may mitigate these risks.