What is banking as a service (BaaS) and why is it becoming more and more popular worldwide?

There is research that the BaaS market would grow to 11.34 billion by 2030—nearly five times more than it was in 2020. What is BaaS, and why is it regarded by bankers as one of the major developments of the upcoming years?

How does BaaS operate?

A business model known as "banking-as-a-service," or BaaS, involves licensed banks offering banking infrastructure, goods, and services to other businesses, including non-financial ones like retailers and logistics providers. These services are then offered to end consumers by the latter, frequently under their own brand.

Risk management, security, and regulatory compliance fall under the purview of the BaaS solution provider. A business that makes use of this kind of service can use the API to give its clients access to loans, cards, bank accounts, and payments. This enables you to avoid wasting time on regulatory requirements and save a substantial amount of capital expenditure.

What advantages does BaaS offer everyone?

The BaaS model enables banks and other licensed financial institutions to make money off of their current infrastructure, regulatory licenses, and risk management knowledge by offering these services to new partners. This enables you to expand your consumer base and diversify your sources of income.

BaaS can also be used by banks and fintech firms to totally give up on end-user activity. As a result, businesses that use BaaS solutions can focus on their core competencies, like customer service or user interaction, and launch new offers to the market faster and with fewer barriers to entry because they don't need to raise additional capital or go through a lengthy licensing process. Infrastructure development and risk management are primarily carried out by regulated organizations.

BaaS fosters innovation and advances the fintech ecosystem by encouraging cooperation and partnerships between financial institutions and non-financial businesses.

Five Banking-as-a-Service Examples from Various Industries

1. One excellent illustration of how BaaS can support market expansion and the usability of fintech services is Revolut Neobank. Revolut uses an API architecture that makes it easy to quickly connect different financial services. Fintech was able to swiftly penetrate the marketplaces of over 40 nations and territories as a result. However, the company also had to deal with limitations on this kind of business model: in the UK, Revolut had to get a banking license in order to offer further services.
2. EQ Bank is a Canadian bank with a focus on real estate finance and investment services. EQ Bank was able to swiftly join the market and greatly increase its customer base because of BaaS.
   The business soon saw that a plan with a bright future required more than just giving its clients high interest rates. Customers of EQ Bank now have access to daily payments, cash withdrawals at ATMs, rapid transfers, and more thanks to the integration of BaaS from Berkeley Bank, in addition to a savings account.
3. The tech giant's financial offering, the Apple Card, was introduced in 2023. The business gave depositors a staggering 4.15% yearly income; no other bank offers this benefit. Additionally, the technology company's integration of banking APIs makes it possible to obtain and use the card with just a few clicks.
   Apple's example demonstrates how incorporating financial and payment services, such savings and installment loans, into the ecosystem of a non-financial business enhances user interaction and boosts consumer value.
4. Karat: This startup provides financial tools for social media content providers in collaboration with Visa. Karat seeks to provide a financial infrastructure for a new group of business owners who are frequently unserved by conventional banking institutions.
   Social media artists now operate like businesses and earn substantial sums of money. Nevertheless, a large number of these companies are unregistered, do not pay taxes, and are ignorant of payroll. As a result, traditional banks frequently refuse to give them company accounts or loans.
5. Fiverr is a website that links businesses or entrepreneurs with independent contractors. For this, Fiverr charges a commission, which is a straightforward way for the platform company to make money. However, adding new payment services to the ecosystem will allow you to earn more money.
   With the introduction of BaaS, freelancers on the platform may now accept payments more quickly and easily through the Fiverr Revenue Card, a Mastercard debit card. Previously, freelancers on the platform had to link bank accounts and PayPal details to their profile in order to receive payment for services given.

As you can see, BaaS products have enormous potential to boost revenue and enhance user engagement not just in banking but in a variety of other sectors.