What is Bank as a Service?

Bank as a Service (Baas) is a model that allows fintechs and virtual banks to offer access to standard banking services by connecting to the banking system using APIs. What exactly does it involve? How does it differ from so-called “embedded  banking”? Answers to these and other questions are found in this article.

What is Bank as a Service?

Bank as a Service is a model that originally referred to a situation in which a technology provider provides an end-to-end platform for operating a bank (Bank in the Box), which allowed it to run quickly and relatively cheaply. Moreover, the customer, which was a bank, paid the technology provider a subscription based on the number of actual customers or accounts opened. As a result, fees increased proportionately as the business grew.

In the era of open banking, however, the term Bank as a Service has changed its meaning and now refers to a collaboration between fintechs and banks that involves providing the ability to “rent” an account, card, or payment. As a result, the fintech can focus on developing the idea it has implemented and the rest remains with the bank that operates it. This is made possible through the use of APIs that allow fintechs to directly and quickly connect to bank systems to implement complete business processes. As a result, fintech, through the use of standard banking products such as an account, card, or loan, brings a new solution to the market that contributes to the development of financial services.

Advantages of using BaaS strategy

It is important to note that using the Banking as a Service model is a solution that benefits both fintechs and the traditional banks that provide them with their products. In the former case, it is worth noting that thanks to BaaS, fintechs have the opportunity to quickly implement their solutions on the market, and thus verify whether the business idea is accurate. It does not have to worry about bank regulations or meeting capital requirements, which not only shortens the time to market, but also reduces the costs of the process. As a rule, the implementation time of the solution is reduced to a few months, and costs can be reduced by up to 80%, depending on the case. As a result, fintechs can focus on growing their business instead of wasting time creating solutions that banks can provide.

What are the benefits of using a BaaS strategy for banks? First and foremost, it prevents the loss of customers who could be acquired by fintechs. By working together, banks provide their customers with the highest quality products and services, which not only increases the number of people served or their loyalty, but also allows them to diversify their revenue streams.This is very important from a business perspective.

BaaS vs. embedded banking

BaaS is not the only trend that is gaining popularity in the financial world. Another example would be what is known as “embedded banking,” or embedded finance. In this case, it’s a model of incorporating banking or insurance products into a company’s core business that has nothing to do with banking. An example of such a solution can be Orlen Pay application, which allows you to pay for fuel at the station without having to go to the store. These types of solutions are becoming more and more popular because they allow even more convenient use of products or services, which so far have not been associated with banking. Another example of embedded banking could be Allegro’s deferred payment model, which allows you to make purchases on credit without having to apply for a loan from a bank. This is not only convenient, but also much faster than getting a loan and making the purchase separately.

In conclusion, it should be said that BaaS is a model that will certainly gain popularity in the near future. This is due to the fact that, like the so-called “embedded banking”, it allows to develop modern financial services in cooperation with traditional banks.