With the increasing prevalence of digital services across many industries, there has been an insurgence of new technologies reshaping the way many companies function, including those in banking. This rise in online services is opening older computer systems to the potential of startups, third-party access, and democratic data processes. These changes will enable greater transparency with your clients, and put data in their hands.
One of the new platforms that have emerged from this digital growth is Banking as a Service (BaaS). It serves as an essential component in open banking initiatives and will help your business provide clients with improved financial transparency. This guide will take you through what BaaS is, how it works, where development is headed, and how to incorporate it into your technology platform.
What Is Banking as a Service?
While the definition of BaaS has been muddled through interchangeable terminology and overuse, the central idea remains the same. It’s often likened to Banking as a Platform (BaaP), and while the two are different, they are alternatives to solve the same issue. Banking as a Service and Banking as a Platform will both bring your banking services into the digital space.
Banking as a Service is a strategy to enable banking services digitally through the use of an Application Programming Interface (API). It provides financial technology service providers — also known as fintechs — and third-parties, with direct access to bank systems. In short, it’s a secure method of allowing access to financial data and functionality for outside providers.
By opening up the connection through APIs, it allows you to improve upon the regulated infrastructures of providers and create a channel for open banking. BaaS falls under the umbrella term of open banking, which essentially is the name for any strategy where a bank provides internal data or functionality access for third-parties through open APIs. In these relationships, other companies treat the bank as a service provider.
Banks invest a significant amount of money in developing, building, and evolving their various infrastructures, each of which provides specific functionality. In a financial institution, the primary functionalities include holding money in accounts, remittance processing, and payment processing. The infrastructures can be complicated and costly to develop, so when third-parties and fintechs want to offer financial services, they typically collaborate with banks to use their pre-developed infrastructure.
Legacy banks can get a head start on accommodating the oncoming digital progression and demands of customers by integrating BaaS. To begin the process, a third-party provider or fintech pays to gain access to the platform banking system. Then, the bank with the BaaS allows the third-party provider to hook-in through their APIs. Once they are in, they will be able to create banking products, and offer new services through the platform’s systems.
Open Banking vs. Banking as a Service
While open banking and BaaS are often linked, they aren’t the same. Open banking is an umbrella term under which BaaS exists.
Open banking, as it relates to U.S. financial practices, provides a solution to acknowledge the demands of customers. Banks have an inherent need to remain competitive and provide an integrated experience. The open banking format allows financial institutions to venture into integration, allowing third-parties access to customer data and building a foundation for further growth.
Banking as a Service is a platform within an open banking model. It takes that foundation and expands it, allowing banks to offer access to functionality. By offering this extension, BaaS creates a more seamless experience for customers. To put it technically, open banking provides read-only data, while BaaS provides read and write data. This means open banking allows a tech company to pull data about bank accounts (such as balances and transactions), while BaaS allows a tech company to actually open new accounts at the bank.
As data access and open banking become the standards in the industry, more and more institutions will have to adopt the open model, and as a result, BaaS. If you plan on using it to your bank’s advantage, it’s beneficial to begin integrating it as soon as possible.
Future of Banking as a Service
Banking as a Service is expected to continue to grow. Currently, a small number of companies have integrated BaaS platforms in a way that is meaningful to the customer or provides them with higher-value services.
Beyond the borders of the U.S., several countries have been moving towards an open banking standard, even putting regulations in place. Sharing data and creating access to infrastructure is slowly becoming the new demand from customers, and open banking and BaaS work to fulfill those expectations. Banks who are more tech-savvy than others and act now will have the advantage of creating banking as a platform early. The sooner you adopt the open baking and BaaS models, the more on top of the game you will be.
By implementing open banking and BaaS, financial institutions can expect to become highly competitive in their industry, and to tap into a new revenue stream through platform monetization. It also allows legacy banks to create new connections with fintechs and establish mutually beneficial partnerships. Showing that your bank is on top of the latest digital trends will convince more third-party institutions that you are well worth a partnership.
Banking as a Service Providers
For banks that offer BaaS, there are two primary denominations — those that offer solely BaaS (what we call “pure BaaS”), and those who also provide other retail services.
Pure BaaS Providers
Some of the top pure BaaS providers include:
- SolarisBank: SolarisBank is a startup company based in Berlin. The company is considered a tech company, but they also have a banking license and run a BaaS platform, which allows them to offer full digital access to customers.
- Bankable: A startup based in London, Bankable uses its BaaS platform to enable financial institutions, fintechs, and corporations to create payment solutions. They give each company access to resources such as a virtual ledger manager, digital banking services, e-wallets, and payment card programs. They also have a partnership with Visa.
- Cross River Bank: U.S. based Cross River Bank (CRB) has approximately $1.5 Bil in assets. They combine traditional banking services and the offerings of a technology company. Cross River combines a comprehensive suite of products into a BaaS, encompassing lending, payments and risk management
- 11:FS Foundry: UK-based Foundry is a firm developing a platform to provide banking upgrades and overhauls at a lower risk, shorter time to market, and decreased expense. It improves upon the archaic infrastructure that caused many to avoid taking on any upgrades.
- Cambr: Developed by StoneCastle and Q2 (a core banking provider) in 2018, Cambr offers full-stack banking services, and the largest platform for distributed deposits in the U.S. It also offers underlying infrastructure solutions, such as industry experience, tech assets, and valuable banking relationships.
- ClearBank: UK-based ClearBank provides solutions for financial institutions, fintechs, and FCA-regulated companies to develop services. They are considered somewhat of a bank for other banks. More specifically, they grant access to secure banking services, payment systems, and core solutions.
BaaS Providers With Retail Banking Services
When it comes to non-pure BaaS offerings, some of the top companies include:
- Starling Bank: Starling Bank entered into the world of BaaS after expressing their concerns with the outdated transaction banking system. They now use their BaaS platform to provide retailers, brands, and fintechs with the ability to create financial solutions that suit their company’s needs.
- Fidor Bank: Located in Germany, Fidor Bank designs, tests and creates customized banking projects for clients, focusing on areas such as market strategy, risk management, and customer service solutions. Their proprietary BaaS is called fidorOS, or fOS for short.
- Green Dot: A leader in prepaid debit cards, mobile banking and tax refund disbursement, fintech Green Dot recently integrated BaaS into their company. They use the platform to provide end-to-end infrastructure for their clients.
- BBVA: While many companies on this list are startups, older institutions are also getting in on the shift towards open banking and BaaS solutions. Banco Bilbao Vizcaya Argentaria, or BBVA for short, is one of the largest financial companies worldwide. Based in Spain, BBVA created their digital banking platform in 2018 with the help of BaaS. Through their APIs, third-parties can gain access to services like card issuance, money moving, and several other tools.
Build Your Fintech Tools With Hydrogen
While there has been a clear shift towards BaaS and API-based solutions for financial institutions, many companies still aren’t modernizing their services. Hydrogen wants to help firms evolve into the digital space. Hydrogen integrates with leading BaaS providers and other banking APIs globally, orchestrating all of your digital banking needs.
With our modular, global APIs and a professional team of engineers, designers, and product owners, we can help take your business to the next level. Hydrogen is the only platform you’ll need to build sophisticated financial applications and products.