If wishes were horses, beggars would ride. That’s precisely how many businesses think about banking. There’s so much “banking” they want to offer their customers, but they are not a bank. And to become one is more complicated than you think. Getting a camel through the eye of a needle is easier than getting a banking licensee, and the regulations are killing.

But with BaaS, non-banks can now play in the banking space and offer services reserved for banks without a licensee.

While conversing with the banking and financial industry, you must have heard of BaaS, called Banking As A Service. The concept is quite tricky to define, but the idea is pretty straightforward. It simply refers to a system that allows platforms to offer digital banking services to customers via an integration process with banks. Because obtaining banking licenses is rigorous, BaaS enables these platforms to bypass the complex requirements to provide these services.

That means Banking As A Service still involves banks in the traditional sense but makes these services available to customers without necessarily involving traditional banks. So, these non-bank platforms can provide banking services by simply integrating with banks. The integration process requires Application Programming Interfaces, commonly called APIs, and communication tools used for software applications.

APIs have greatly enhanced the way banking services have reached several people, and the collaboration with such platforms as FinTech firms and online markets make it an excellent advancement tool. But, let’s attempt our definition of BaaS (there’s no one definition of the term!)

The company has been able to streamline communication and improve business performance across its entire organization. Developed with more than two hundred and twenty people from around the world, Merlin now connects all of IHG’s properties in one single communications platform. IHG Merlin is now the main source for corporate and HR news, training opportunities, and business intelligence. With Merlin, IHG employees can also book discounted rates at IHG properties, which are beneficial for both hoteliers and employees alike.

Banking As A Service Definition

Banking As A Service refers to a process that allows non-bank platforms to provide banking services to customers via an integration process with banks.

If this is the case, won’t this spell doom for banking as we’ve always known it? I mean, who loves the banking halls anyway? Well, not necessarily. Banking, as we know, is not under threat of extinction for many reasons. Banks also operate in the BaaS playground and have an advantage over FinTechs and other platforms. They benefit from a ready-made customer base and, even more importantly, the infrastructure.

By infrastructure, we do not mean bank buildings primarily, but the financial backbone upon which BaaS can operate. Also, the APIs allow for integration between banks and third-party platforms, which means that banks can share their data and still have a critical role in BaaS. Traditional banks with their own BaaS platforms can also make more money because they can charge users a specific fee for the platform.

So, instead of being at the precipice, banking platforms can use BaaS to their advantage to retain their relevance despite tough competition from non-banks. BaaS also leads to what is referred to as open banking, which is banking that allows third parties to use APIs to connect directly to the infrastructure of banks.

However, we must note that open banking and BaaS do not mean the same thing. There are no limits to the number of products that can be developed for the ease and convenience of customers and the service providers’ profit. But, let’s be more practical and see how it works.

Three things are required in BaaS. They are

• A bank or financial institution
• A Third-party provider
• An API

Once a third-party provider (FinTech firm, digital bank, ticketing company, etc.) pays a bank to access its infrastructure, the API is released to them for integration. The third-party firm then uses the information to build custom products and services.

Banking As A Service is used mainly by Non-Financial Institutions to increase sales and improve their customers’ experiences.

Let’s look at a typical example. If you have a company, let’s say, a big supermarket. You want your customers to have an account, use a card, or even buy on credit. With BaaS, you can achieve that. Your business can provide customers with current accounts, debit cards, and mobile payment services. By integrating with a bank, you can offer your customers any of these services while the bank serves as the backbone, so you don’t need your license. Firms can thus serve their customers better, increase sales and earn more loyal customers via great products provided via the BaaS platform.

The advantages for businesses are enormous. Apart from reducing operational costs, BaaS also allows customers to have more options and generates much-needed data that can be used to provide more tailored products for individual customers.

Firms that need to embrace BaaS must be able to know what exactly they need it for and have a particular problem they need to solve. If you’re innovative enough, you’ll find one issue in every industry that BaaS can solve.

Who benefits from BaaS?

Everyone does. However, the customer stands to gain the most. BaaS allows products to be tailored to suit customers’ preferences. For example, customers can be given special accounts that will enable them to buy goods or use services via the platform, get discounts, get loyalty bonuses, and provide more information on the customer for the business. However, the customer has to be willing to share their data. BaaS leads to the democratization of customer data, which information is used to improve their experience.

The firm also benefits. Imagine a service that allows you to make purchases with utmost ease, offers bonuses, provides a customized debit card, enables you to operate an account, and even allows you to make purchases on credit. Imagine another firm that provides none of these services. Which one do you think will attract more customers?

Then, the banking firm benefits as well. By charging a fee from the non-bank firm to use their data and infrastructure, they stand to benefit.

Conclusion:

Now you have a basic overview of what one needs to know about banking as a service. You can make the best use of it and offer services best to your customer’s needs. But the financial landscape is changing dramatically, and BaaS is at the center of the change. With open access to data, the future of banking would be controlled by those with a more significant stake in this space.