November 16, 2022

Banking as a Service (BaaS): The new future of banking

Do not get left behind. Leverage Banking as a Service to anchor your brand in current and future markets.

Banking is one of the oldest institutions in the world. It’s a well-established concept built upon centuries of proven practices. Today, the banking ecosystem stands as a crucial economic pillar facilitating the distribution and circulation of funds worldwide. However, this $2.7 trillion commercial industry is quickly changing under heavy evolutionary pressure from innovative new ideas. Banking as a Service is one such idea that’s boldly challenging the staple institutionalization of the financial industry and redefining the future of banking.

What is Banking as a Service (BaaS)?

Banking as a Service or white-label banking is a business model that enables fintechs and non-financial organizations to offer financial services like those available in commercial banks.

The best way to explain what BaaS is and how it works is through an example. Let's assume you run an online retail business. Providing a robust payment system like a debit or credit card would smoothen transactions on your site, improve customer loyalty, and generate valuable customer spending data. You can even go a step further and offer loans to boost your shoppers’ purchasing power, creating even more customer touchpoints and fostering long-term business relationships.

Although providing said payment and lending services would greatly enhance customer retention, income generation, and data analytics, you’ll need a bank license to make it happen. Such licenses are not easy to come by. Your business must meet a myriad of strict legal/industrial requirements and standards to be considered for a banking license. It would be too high a bar for an online retailer and, quite frankly, not worth the effort and expense. This is where BaaS comes in.

BaaS involves a traditional bank and a BaaS provider. The BaaS provider integrates the bank's infrastructure and licenses into your business’s portfolio using applied programming interfaces (APIs) and webhooks. This allows you to legally provide banking services under your own brand without needing a bank license or sophisticated financial management systems.

BaaS vs. open banking vs. platform banking

Banking as a service is often confused with open banking and platform banking. While these three modes of banking are similar in many ways, they are fundamentally different. Open banking is an API integration allowing companies to use bank data for their financial services. On the other hand, Banking as a Platform or platform banking is basically the opposite of BaaS. In platform banking, the bank blends third-party services with its offerings via APIs; these may be fintech or totally non-financial services.

Images by Loanspark

Why is BaaS the future of banking?

The future of banking is a hot topic of debate in financial and economic circles. The one thing experts seem to agree on is that the banking paradigm is shifting, mainly due to disruptive trends such as BaaS and open banking. Non-financial companies and fintechs are increasingly becoming big players in the banking arena. This very trend made one of the top agendas in the recently concluded annual Boston Fintech Week and Money 20/20 conferences.

Michael J. Hsu, the administrator of the federal banking system and CEO of the Office of the Comptroller of the Currency (OCC), was recently quoted as saying, “Bank-fintech partnerships, they're here to stay… This is the future, so, let’s do it right.” He was speaking as a follow-up to earlier remarks after observing the increasing rate and sophistication of fintech-bank partnerships.

So, yes, BaaS is the future of banking, or a major part of it anyway. And it’s all because of these two reasons:

Solid foothold and promising outlook

BaaS is deeply rooted in the rapidly-growing fintech space and is the heart of alternative lending. In fact, BaaS is the engine powering most financial mobile apps and web platforms available today. While digital banking is not exactly new, BaaS is a more practical approach to driving much-needed innovation in the financial sector.

Banks are archaic institutions that have been historically conservative in their methods and principles. But the commercial landscape has changed drastically since mainstream internet and personal computing. On top of that, there’s a growing demand for alternative financial products to those available in banks, especially when it comes to commercial lending. So, there’s a lingering need for more progressive banking solutions befitting modern financial demands.

In essence, BaaS allows fintech companies and alternative lenders and bankers to define what banking really means to their businesses and customers.

The future of Banking as a Service is bright too. According to one report, nearly two-thirds of U.S. banks and credit unions entered a fintech-bank partnership in just the past three years, and more are planning to follow suit. Meanwhile, an analysis of the BaaS sector shows a rapidly growing market poised for a 17.2% CAGR between 2022 and 2027.

To give you some idea of just how disruptive BaaS is, here are four examples of highly successful BaaS-powered neobanks (challenger banks) with substantial shares of the financial market:

  • Chime – The most popular neobank in the U.S. It provides fee-free banking service to its 12+ million users. Chime generated nearly a billion dollars in 2021 and is currently valued at $25 billion.
  • Mercury – Empowers start-ups through banking, payment, and credit opportunities. Mercury currently works with 100,000+ companies spread across 195 countries.
  • Varo – Offers fee-free banking perks to more than 4 million users. It recently received a full-service national banking charter from the OCC, officially making it a bank.
  • Ally – Has over 10 million customers and a wide range of personal banking services. Like Varo, Ally started as a neobank and has since grown into a full-fledged bank.

Impressive value chain

Banking as a Service presents incredible value to all parties involved. BaaS is a win-win-win-win system of banking.

The first win goes to the bank offering its infrastructure and license through APIs. The bank gets a new source of revenue and access to niche markets through affiliate financial services. Second, hosting and servicing the APIs keeps the BaaS provider in business. The third win is arguably the most significant. Non-bank organizations, basically any business, can bypass banking regulations and start offering premium financial services to their customers. In return, embedded finance boosts business income, market insight, and customer loyalty. And at the end of the chain, SMBs gain access to favorable, convenient, and inclusive financial solutions away from the bureaucracies of big banks.

This long value chain is what attracts most banks, fintech players, and entrepreneurs to Banking as a Service. And since the trend has really taken root, BaaS has become a powerful bargaining chip in financial markets and other commercial industries as well.

Images by Loanspark

The future of Banking as a Service and how to become a part of it

Executive Editor at American Banker Penny Crosman envisions a world of "invisible banking” by 2025. Crosman demonstrates that the future of banking is BaaS-powered embedded finance, where customers can obtain financial products from companies, businesses, websites, and apps that have nothing to do with finance in the first place. This is already happening today.

Embedded finance is a 54.3-billion-dollar industry on a steep 16.4% annual trajectory over the next decade. This is one of the biggest banking revolutions, attracting big and small players across all industries. Don’t get left behind — it’s time your enterprise became a part of this future too.

You can jump on the embedded finance revolution with business lending solutions by teaming up with Loanspark. Loanspark’s Business Lending as a Service (BLaaS) enables you to customize and launch value-added funding products for your customers. Our co-branded partnership is white-label banking at its best. We handle all the technical logistics of creating a new lending product, ensuring it suits your clientele and brings tangible value to your business. Best of all, you’ll market the offer under your own brand while it’s continuously powered by Loanspark.

Partnering with Loanspark is the easiest and quickest way to launch new B2B funding offers without incurring any overhead. Embedded finance is undoubtedly the future of banking, and Loanspark is your gateway to being part of that future. Call us today to get started.

Lastest blog posts