How Banking-as-a-Service Transforms The Roles Of Banks & Fintechs


banking-as-a-service conceptDigital transformation continues to propel the banking and financial services industry. With increased access to new technologies and capabilities, there has been an influx of financial services offered by non-banking companies in recent years.

Banks and non-financial organizations alike are progressively seeking solutions that integrate financial products and services seamlessly into pre-existing applications and operations. However, most companies do not possess the licensing required to operate their own banking services. This is where Banking-as-a-Service is transforming the industry.

The transformational arrival of fintechs have led to increased competition from non-traditional players. Banks must find ways to compete with or integrate with fintechs and non-bank competition, which requires an investment in new technology platforms and integration to existing, legacy core banking platforms.

As a result, banks are experiencing an increased need to develop alternative income streams to offset these required investments. As banks push toward higher technological integration and scalability to meet customer demand, the industry is fertile for adaptation of Banking-as-a-Service.

Banking-as-a-Service (BaaS) is an effective way for licensed banks to bridge the gap between their current technology platform and where they need to be. In order to do so, banks can enhance their legacy systems and internal processes by sourcing products provided by fintech firms. Additionally, banks have the ability to provide non-bank businesses with end-to-end packages of financial products and services.

This allows non-banks to provide their own branded accounts, payment services, debit/credit cards, and loans. Customers do not need to actively engage with, or oftentimes even know, the bank who is serving BaaS providers.

Instead, they may conduct their business directly with the fintech company, even if that company does not have licensure as a banking services provider. For organizations in the fintech sector, Banking-as-a-Service creates a potential opportunity—but also some unique challenges if not approached strategically.

A Brief Overview Of Banking-as-a-Service

Banking-as-a-Service on keyboardBanking-as-a-Service (BaaS) is a solution that provides banks the ability to provide banking services to non-bank organizations. BaaS empowers fintechs and other non-bank companies to offer banking services without having to navigate the challenges of attaining a banking charter.

While the financial industry is evolving toward an era focused on connected infrastructures and shared data, many financial institutions are hesitant to innovate. This shift toward BaaS will require organizations to adopt new capabilities, technologies, and business models.

BaaS technology was developed to expand financial services, offer improved experiences to consumers and augment operations. For non-bank companies, BaaS unlocks the potential for highly specialized services that were previously unattainable without a banking license. The increased demand for embedded finance has driven the recent surge in BaaS offerings.

Organizations across the board are searching for solutions that offer the ability to integrate their financial products seamlessly into their pre-existing services and applications. Now, they may work together with a licensed banking provider to bolster both businesses by offering financial products and services that were previously out of reach.

Banking-as-a-Service allows non-bank companies to offer perks like buy now, pay later or even loans for purchases, expanding their potential reach and profits. Non-banks that implement BaaS have the ability to improve revenue through cross-selling and build out their customer pool, while deepening their pre-existing relationships with customers and saving costs.

Non-banks relying on BaaS experience agility in services offered, enabling quick pivots to new sectors and expansion of existing programs to adapt to customer needs and demands. The banks that support these endeavors experience simultaneous growth alongside their partners.

How BaaS Is Helping Transform The Future Of Banks & Fintechs

As banks begin to modify their practices to incorporate more non-banking client integration, they are undergoing (sometimes substantial) technological transformation. Those interested in growing toward a BaaS strategy can expect:

Implementation Of Application Programming Interfaces (APIs)

api implementation with banking-as-a-serviceApplication programming interfaces (APIs) are protocols utilized by two software applications to communicate with each other. Given their functionality, APIs play a fundamental role in extending banking and financial service capabilities to third party organizations.

The ability to implement an API into existing third party platforms and infrastructures can vastly improve user experience and enable seamless connectivity between fundamental systems.

Reducing Vulnerabilities & Threats Through Advanced Security Protocols

Banks may find that they do not currently have the security needed to competently integrate with non-banks. Enterprise-grade security features such as multi-factor authentication requirements, brute force attack protection and data encryption are all vital pieces of the puzzle. Additionally, some

BaaS vendors may also implement regular penetration testing and/or social engineering on their software. The companies engaging in BaaS are bound by legal mandates regarding the handling of confidential data, but many elements of a business may be vulnerable to attack outside of these limits.

Competent internet hygiene on the parts of both the business and the clients to whom it serves content ensures that vulnerabilities and threats are diminished as much as possible. When a breach does occur, BaaS integrated companies must be swift to respond with comprehensive vulnerability protocols that mitigate the damage and preserve critical infrastructure.

Gaining A Competitive Edge By Reducing Time To Market

Financial organizations are able to get an edge over their competition by reducing their overall time to market. A strategic approach to Banking-as-a-Service can provide current customers and potential new customers with a more efficient and secure platform before competitors are able to offer similar services.

The adaptability and agility provided by Banking-as-a-Service equips companies to make quick adjustments to strategy or amend their offerings in accordance with demand and interest. What takes one company months to develop and can be accomplished in a fraction of the time through fintech partnerships.

How To Start Planning Your Organizations Transition To A BaaS Platform

baas systemUnderstanding how to make the transition from general banking to integration as a BaaS platform is a multifaceted question. The good news is that organizations do not need to do these calculations on their own. Financial IT strategy consultants can offer unbiased, third-party views of where a company is currently vulnerable or not yet equipped with the tools it needs to succeed as a BaaS provider.

Most commonly, banks will work with consultants to transition their systems toward greater cybersecurity and a more streamlined interface that connects seamlessly with other products. However, the exact changes that will be needed will vary from company to company.

APIs, bolstered cybersecurity and tailored technical upgrades targeting competitive niches are all potential fertile grounds for improvement in the Banking-as-a-Service sector. Financial IT strategy consultants are versed in industry trends, tactics that have proven fruitful in the past and areas in which further development is needed before funding can produce results.

Reach Out To The Financial IT Strategy Consultants At Hartman Executive Advisors

At Hartman Executive Advisors, we understand that Banking-as-a-Service is a fertile field for potential growth, but also a challenge when it comes to integration and IT strategy. Companies do not need to make determinations about their capacity or integration of BaaS on their own. Reach out today to speak with an experienced consultant about how this fits into your business strategy.


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