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What is BaaS (Banking as a Service)?
Banking as a Service, known as BaaS, allows consumers to access the financial services of banks and other third parties from the convenience of a smart device. Examples of BaaS include initiating transfers between banks, depositing checks from a smartphone, and online shopping with a debit or credit card. Financial institutions act as the facilitator between third party providers and the end consumer. For example, Zelle and CashApp are now available through many banks.
In addition, BaaS has expanded to reach every consumer, including both individuals and businesses. Businesses are now able to leverage virtual cards for multiple employees through the bank app, pay bills to different businesses through the app, and apply for new financing agreements online.
How Does BaaS Work?
BaaS generally involves four parties: a licensed financial institution, a BaaS provider, an end user, and a third-party brand or fintech company. The financial institution will need to approve the BaaS provider before it can implement the financial service products. Then, the BaaS provider will facilitate communication between the fintech company and the financial institution through APIs. Finally, consumers will be able to utilize the services of the third party through the bank’s system.
Many financial institutions realize the importance of BaaS, making strides toward removing the BaaS provider. This is done when the bank is able to support third party companies through their own software and APIs. This leads to a competitive advantage for banks that are looking to attract more connections for their users to enjoy.
What are the Benefits of BaaS?
BaaS provides many different benefits for both financial service companies and end users. The first benefit for consumers is convenience. With BaaS, consumers have access to a wide variety of payment options, making transactions effortless and quick.
Furthermore, financial service businesses that have leveraged embedded finance on their platforms are seeing more customer loyalty and revenue. Customers are drawn toward financial service businesses that offer convenience, oftentimes paying more for those services.
Financial institutions are also seeing additional revenue from third party commissions by opening up their platforms for other financial service businesses. Moreover, innovation helps position banks and other financial institutions for long-term growth and success when they are able to consistently meet consumers’ changing demands. Financial institutions are also able to leverage the insight they gain from consumers’ spending habits to tailor more financial services to their needs.
What are the Disadvantages of BaaS?
There are a few disadvantages that should be considered. Implementing the integration features of BaaS presents a stiff upfront cost for financial institutions. Banks need to ensure they have the software capabilities to house these transactions, calling on the need for consistent updates and regular maintenance.
Finding the right third-party integrations presents another issue for financial institutions. Banks should evaluate consumer preferences to find strategic alliances with outside financial service providers. For example, if a bank finds that customers want to pay their electricity bills through the banking app, they should reach out to local utility service providers to set up integration features.
BaaS is reworking the way consumers engage in financial transactions and access their information. Positioning your financial service to capitalize on this new market opportunity takes careful consideration of all factors.