The traditional banking landscape continues to be disrupted by the rise of new business modes like embedded finance, the response to larger social changes, and the emergence of Banking-as-a-Service (BaaS). Banks must change if they want to stay competitive, and BaaS offers an innovative banking model which addresses the rapidly evolving needs of customers.
What is BaaS?
BaaS is the provision of complete banking services, including payments, loans, and deposits, through specialized cloud-based API platforms, enabling non-financial companies to offer financial products embedded into their own offerings. These platforms leverage the secure and regulated technical and financial infrastructure of licensed banks, enabling the delivery of financial services at the point of customer need.
Who does this involve?
- Consumers of BaaS: Companies that own the end-customer interaction and aim to seamlessly integrate banking services into their customer experiences without the need for a banking license or regulated infrastructure
- BaaS enablers are organizations that provide one or more modular banking services to consumer-facing organizations via APIs and act as an intermediary
- License holders or banks leverage their licenses to offer BaaS enablers to have access to the underlying payment rails, compliance capabilities, and general banking financial infrastructure.
BaaS builds on Open Banking initiatives and creates new revenue streams for banks and other institutions who can consume and offer BaaS via APIs and share data with third-party institutions. It provides scope for both revenue growth and cost savings, enabling third-party providers to assist non-financial companies with ready-made solutions.
Banking As-A-Service (BaaS) Market size was valued at USD 637.40 Billion in 2022 and is projected to reach USD 6,943.49 Billion by 2030, growing at a CAGR of 32.9% from 2024 to 2030.”Verified Market Research (2023)
When a bank collaborates with a third-party provider, it gains new customers. It can also discover general customer preferences, such as purchasing habits and budgetary requirements. Banks can then use this data to create tailored promotions and payment innovations such as digital wallets, request-to-pay services, and embedded loan products such as Buy Now, Pay Later.
Open Banking has kickstarted the development of financial APIs, with changes in regulation and infrastructure driving the change in customer expectations which create the demand for the resulting products.
What is needed to succeed?
BaaS requires a technology provider with expertise and banking capabilities to service customers through seven features.
- Openness and interoperability: Banks and BaaS facilitators must adapt APIs to evolving regulatory requirements, including developer portals with advanced documentation and pre-integration with third-party technology providers.
- Modularity:BaaS enablers must permit a plug-and-play BaaS model supporting the need for unique products to be implemented for various types of BaaS consumer.
- No-code/low-code hyper-personalization: A license holder’s offering must support brand-level customization with flexibility, based on deep configuration, extensibility, a user-friendly platform, and standardized tools for best practice reuse.
- Hyper-scalability, resilience, and availability: The ability to easily add or remove brands and to scale according to business volumes is critical for BaaS providers. In embedded banking, the instant economy needs 24×7 availability. Brands consuming BaaS want strong resilience with near-zero outages.
- Security: BaaS involves sharing consumer and financial data with other stakeholders, needing secure technology for compliance with data privacy laws.
- Data aggregation: BaaS providers must aggregate real-time transactional data to maximize revenue potential while maintaining compliance, and enable customized offers for brands and license holders.
- Agility and time to market: : BaaS enablers need agility in scaling APIs, personalizing products, and expanding into new territories while reducing time to value by enabling license holders to design product definitions, configurations, and APIs on the same platform.
Businesses require a wide range of functionality, including payments, compliance, origination, and financial crime mitigation. Banks and license holders should be able to use the same underlying infrastructure to manage both their own operations and to provide BaaS.
To ensure that solutions are pre-integrated and accessible to clients, BaaS requires collaboration between technology suppliers and BaaS infrastructure providers, such as API aggregators, payment initiators, and card issuers. Banks must offer their BaaS solution using a SaaS architecture, operating in parallel to their normal infrastructure if needed.
BaaS potentially offers many benefits for financial institutions, both in the short term and as a pathway to long-term transformation. By embracing BaaS, banks can adapt to evolving customer expectations, create innovative financial services, and explore new revenue streams.
Temenos provides industry-leading banking technology, enabling banks to adopt the BaaS business model. Additionally, with its SaaS offering, the Temenos Banking Cloud utilizes hyper-scale cloud providers to support BaaS plug-and-play consumption, allowing providers to cater to diverse brand needs and scale for growth in the next phase of their digital evolution.