What is BaaS and how does it add value to banks and their corporate customers? – Chapter 1

Outline -

• What is Banking-as-a-Service?
• Three Models of Banking-as-a-Service
• How is BaaS evolving as a concept?

Over the past few months, in literally every other client meeting I had, and all the conferences that I have attended in the post-Covid era, I have heard the terms Embedded Banking, Open Banking and Banking-as-a-Service almost consistently.?It was hence a pleasant co-incidence that I was deeply involved in my firm’s go-to-market strategy on a comprehensive Banking-as-a-Service platform – I had the enviable opportunity of speaking to a wide variety of bankers, consultants, analysts and market gurus on this topic, and writing a blog on this hot topic was the natural next step!

Banking-as-a-Service is a new concept already gaining momentum, especially in the corporate banking space. It is also creating quite a stir among small and medium enterprises and leading financial institutions. Banks have realized that with the advent of digital technologies, the customer base has been growing exponentially due to providing convenience, increased customer satisfaction, and better customer experience.

1. So what exactly is Banking-as-a-service?

Banking-as-a-Service (BaaS) is the ability to embed financial products and services directly within the clients’ ecosystem as they serve their customers.?BaaS provides the framework that allows banks to provide embedded finance and embedded banking products on their clients’ digital engagement platforms such as e-commerce or marketplaces.

2. Three Models of Banking-as-a-service -

Banking-as-a-Service, or BaaS, is a new model for enabling customers of the bank to own the digital banking services to their end clients. In my initial market conversations, most of the use cases leaned towards a straight-forward “embedding” of banking services into a non-banking ecosystem, but over time, my team and I realized that the concepts were a bit broader, and we took the liberty of classifying them into 3 models, which may even potentially expand further in the future.

These three models are –

1. Direct Embedding,
2. White-Labeling, and
3. Enabling Non-Banks

• Direct Embedding is the simplest and the most commonly used model for BaaS. In this model, the BaaS provider (the bank) simply embeds their banking services into the customer's existing applications. This allows the customer to use the BaaS provider's services without having to leave their current application.
• White Labeling is a more complex model for BaaS, with a slowly, yet steadily increasing rate of adoption. In this model, the BaaS provider creates a white-labeled version of their banking services that the customer can leverage. In addition to basic embedding, the customers of the bank can now become the visible face of the banking products to their end clients and own every stage of the experience from prospecting, on-boarding, transaction processing, statements, account maintenance, etc.?While the bank is semi-detached from the end-client / account holders, it is still involved in the process as the owner of the accounts on their books and enables full lifecycle processing.
• Enabling Non-Banks is a more recently evolving and not so frequently encountered model of BaaS, but is gaining some popularity in recent times. In this model, the BaaS provider enables non-banks to provide banking services to their end clients.?These non-banks hold the accounts on their books (as opposed to the bank holding it on their books in model #2).?The bank’s role here is specific to managing the transaction processing and posting lifecycle as a “banking services enabler”, despite the fact that the accounts are not held in their books

3. How is BaaS evolving as a concept?

It is important to understand that the evolution of BaaS is not really an overnight trend, but something that has built up over time.

In the past, banks, in addition to their own branches, enabled their products and services using their self-service channels like the ATMs, online banking, mobile, wearables, etc., which they owned and managed.?The evolution in technology and a more adaptive and shared ecosystem created an opportunity to “embed” banking services into any non-banking channel.?This is where the whole concept of API-Banking led a differentiated form of thinking around how services could be enabled without a lot of dependency on the bank’s own digital channel solutions.?I like to think of this as a true transformative paradigm shift from traditional API banking services into a more productive ecosystem enabled through the BaaS platform offerings.

This is just the beginning since the pace of ongoing innovation in BaaS is giving rise to other possibilities and opportunities. Everyone is scrambling to innovate with more complex models that are eliminating (or diminishing) the fine lines between product offerings, that are being challenged to merge and meet newer money management needs for today’s business clients.

BaaS is no longer at a “Why-do” stage of maturity and is at the “What-more-can-we-do” level currently.

About The Author –

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Balakrishnan Narasimhan

Senior Vice President and Head of Solution Consulting - Digital, Payments and Cash Management - Americas

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Stay tuned for more details in Chapter 2 of this blog…. Coming soon…