The Rise of Banking as a Service Explained

Date Published: 21 Jul 2022
Last Updated: 14 Sep 2022

There’s no doubt that the Internet has completely revolutionised many once traditional industries.

With many products and services now digitalised, it’s safe to assume that the future of many of them will exist primarily online. One such industry that has seen rapid growth in the past decade is financial technology (or fintech for short).

Once time-consuming and monotonous personal finance tasks are now as simple as a few touches on a banking app to complete. Gone are the days of queuing to see a cashier at a bank branch; nowadays, most financial needs of customers can be met by less than 10 touches on their personal smartphones. To illustrate just how influential fintech has been, a decade-long study in Britain recently found that a staggering 93% of respondents in early 2022 used some form of online banking. This is an increase of 61% from the beginning of 2007:

Data by ~Statista

With the fintech industry growing every year, constant innovations are producing new opportunities to make finances easier to manage. One such creation is ‘banking as a service’, or BaaS for short (not to be confused with ‘backend as a service’).

What is Banking as a Service?

Although BaaS can be tricky to define (as a result of its modular design and constantly evolving nature), it can be generally summarised as the provision of banking-related products and services through specific third-party providers.

What exactly does this mean? Specialised BaaS-related providers can now facilitate the application and provision of previously exclusive traditional banking products, services and software that can be used by all different types of businesses.

This means that, in conjunction with a BaaS-related provider, businesses can benefit from using traditional banking-related services such as: accepting online payments, accepting alternative payment methods like cryptocurrencies, multi-currency accounts, card issuing, linked accounts and more, to use in their own business ventures.

The ultimate benefit of utilising BaaS for businesses would be to provide a wider range of payment options for their customers, as opposed to regular payment standards (typically cash and credit/debit cards).

The sales of banking-as-a-service (BaaS) platform solutions are expected to total 2.8 billion dollars by the end of 2021 and are likely to reach 12.2 billion dollars by 2031.

A BaaS example:

The example below further displays how BaaS solutions can be employed by all types of businesses; no matter their niche or industry.

Imagine you’re a small retail brand looking to significantly increase your customer sales. One of the most straightforward ways to do this is to make paying for your products as accessible as possible.

How precisely can you do this? By partnering with a BaaS provider, you can integrate traditional banking application programming interfaces (known as ‘APIs’ for short) into your own business.

One example of a traditional banking API that is being widely adopted by businesses in recent years (most likely as a result of the pandemic) is ‘buy now, pay later’ applications.

A study conducted in early 2020 found that one out of three UK consumers used a buy now, pay later scheme to fund a purchase.

So, by employing a BaaS provider, businesses would be able to offer a wider range of payment methods than just regular credit/debit card readers, which would ultimately result in  an increase of customers, sales and profits for the business over time.

How Does BaaS Work?

Buy now, pay later schemes are just one type of payment method that can be utilised by businesses in conjunction with a BaaS provider. It’s important to note that BaaS is highly modular, and thus can be highly tailored to a business’s individual needs.

Even if you’re already sold on the idea of utilising BaaS for your business, it is encouraged to identify ways to make your customers’ payment transactions easier.

For instance, if you’re heavily involved in the digital space, you may want to consider offering cryptocurrencies as a form of payment. This would likely boost your sales and open the door to new customers who otherwise wouldn’t have bought your products.

How does the BaaS funnel work?

To provide a clear understanding of how a typical BaaS process works, below is a helpful illustration of all the parties involved in a typical BaaS arrangement and how they interact to help create more payment opportunities for a business’s customers:

As shown in the diagram, the funnel for a BaaS starts with traditional banks offering their core API banking services and software to pure BaaS providers.

The BaaS providers then sell the banks’ API to third parties and businesses. This then grants the third party access to traditional banks’ systems so that they can either design and launch their own financial product or service or simply integrate an existing bank’s system for themselves.

BaaS providers then charge these third-party clients a monthly fee for access to the BaaS platform or charge a la carte for each service used.

What is Banking as a Platform

Banking as a platform (BaaP), also known as platform banking, banking as a platform or BaaP, is the opposite of BaaS.

As already established, the BaaS model means that banking institutions enable third-party businesses to provide a wider range of financial services to their customers than standardised payment methods.

BaaP, however, enables third-party businesses (typically fintech and non-financial companies) to provide their services to banking institutions.

What this means is that non-financial third party can essentially sell back their own services or ‘rent’ them to a bank. This is because, by utilising the bank’s original APIs, the third-party companies can then develop their own unique APIs and services that a bank would have otherwise not created as a result of lack of investment and time.

Some examples where third parties have produced unique APIs and rented them back to banks include cinema tickets, home insurance and charity donations within financial apps.

The Benefits of BaaS

Although briefly mentioned above, below are some specific and main benefits of adopting a BaaS system for businesses:

1. Ability to accept different currencies and non-fiat payments such as cryptocurrencies:

A BaaS solution can facilitate the acceptance of all different types of currencies globally.

A business can pre-select and tailor which currencies would best suit their potential customers for payments, including cryptocurrencies such as Bitcoin and Ethereum.

2. Ability to accept international payments without difficulty:

Alongside the ability to accept a variety of currencies, businesses can enjoy the benefit of accepting international payments from customers spanning the globe without any difficulty.

This widespread payment accessibility would open a business’s opportunity to the worldwide marketplace and customers.

3. Increased customer trust and insights

In terms of reputation and trust, it’s a win-win scenario for both a bank providing their API software and a third party utilising it.

For banks, if they collaborate with a third-party player, they gain new customers and further increase their brand recognition.

For third parties, they will be able to advertise (with permission) their partnership with a traditional bank. This will help instil confidence and trust in the minds of potential customers of third-party businesses who may have otherwise been sceptical about buying from a potentially less-known business.

Third parties will also be able to significantly benefit from insights into their customer preferences and spending habits.

With this knowledge, third-party businesses would be able to create customised payment solutions for their customers and overall accommodate them better than without a BaaS system in place.

A more targeted marketing approach, whereby customers feel like they’re being understood and listened to more, will generally always lead to increase sales and conversions.

4. Get ahead of competitors

By utilising a BaaS system, third parties businesses will undoubtedly have an edge over their industry competitors as they’ll be able to, not only better pertain to their customers’ purchasing needs, but also be able to accept a wider variety of payment options and currencies all around the globe.

5. Superior customer experience

At the end of the day, the ultimate purpose of a BaaS system is to create a superior customer experience.

Customers nowadays heavily favour and appreciate businesses who can offer purchasing flexibility as wages are uncertain and inflation is increasingly rising across the planet.

Therefore, having as many channels for your customers to pay for your products or services will almost always be worth the cost of a BaaS provider.

Why is BaaS the Future?

As mentioned at the beginning of the article, there’s no denying that the future of many prominent industries is online.

Last year in 2021, the number of internet users worldwide stood at 4.9 billion, which means that almost two-thirds of the global population is currently connected to the world wide web.

As this number continues to rise, so does the potential for more customers to buy third-party business products and services.

However, this can only be achieved if the third party has the necessary API and software in place (provided for by a BaaS provider) in order to meet this increasing global demand.

The last thing a business wants is potential sales not being realised because they don’t have the banking software required to accept the corresponding payments.

What’s more, customers’ expectations are always increasing, and the time expected to wait for goods and services is simultaneously decreasing.

We live in a world of next-day deliveries and food at your doorstep, so naturally, customers will gradually expect instant payment services to be added to the list.

Most importantly, customers want and expect a great user experience. If they don’t feel as though they’re getting it, they’ll happily go elsewhere to a rival business to find it.

BaaS with Monneo

Monneo is a BaaS provider that can specifically tailor a BaaS system so that your business can better accommodate your customers’ payment needs.

Lili Metodieva, Managing Director of Monneo, has stated in a recent interview that, “This is a major step forward for Monneo and means our partners can take advantage of the infrastructure Monneo has built over the past few years. Having our own API opens up the banking services.”

Whether it’s integrating global currency payments, crypto, buy now pay later or other services, a BaaS provider such as Monneo can do this for you swiftly and effortlessly.

If you’re interested to learn more about Banking as a Service with Monneo and our revolutionary API you are welcome to contact Monneo here.

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