If you’re unfamiliar with the jargon used within the FinTech space, the conversation can sometimes feel overwhelming. A term which comes up very often is “Banking as a Service” (BaaS). Everyone wants to learn more about it, and the truth is that BaaS can bring many benefits to your business.
Once businesses know more about the benefits that BaaS holds, they tend to give BaaS preference over creating their own solutions. A lot of people confuse open banking and BaaS, and even though they might seem the same, there are some key differences.
What exactly is BaaS and how does it work?
To put it simply, Banking as a Service is a financial service provided by non-banks. They offer core financial services to their clients by integrating with banks through APIs. Non-banks – for example, fintech and other businesses – build these products on top of the traditional banking infrastructure.
It allows businesses to make use of existing technology without having to create a new solution themselves, which saves them both time and money. It also gives them peace of mind knowing that the solution is fully functional, already has a support team, and will provide a good user experience for their clients.
Another benefit of making use of BaaS is that you do not need to acquire a banking licence, which is required when a business deals with transactions.
If you choose to make use of BaaS, your provider will be the one who is required to have a banking licence. Once again, saving you time and money.
What is the difference between Open Banking and Banking as a Service?
Open banking and BaaS often get confused with one another, but there are many key differences between them. Open banking can be viewed as a type of banking service, and BaaS can be seen as a product that allows businesses to provide financial services to clients.
Here are the main differences between the two:
Open banking provides third parties access to the data and credentials of banking customers. This means that the data of an account holder is shared across many platforms.
This creates a more efficient way to get tailored services that are unique to you. Because your information gets shared across many platforms, it creates real-time updates, and better access to financial services—this has allowed many banks to provide digital financial services.
It has also removed the traditional banking experience where you are required to physically go to a branch and transact with a banker.
Thanks to the innovation behind open banking, personal finance has gone from reactive to proactive.
It allows third parties to provide better suggestions of services tailored to the needs of the client, purely through analysis of the account information.
Some of the suggestions that third parties might make to users of open banking include:
• Customised investment plans
• Real-time updates on your profile, based on your spending habits
• Price comparison features
• Savings notifications
• Budgeting tips
Banking as a Service
As mentioned above, BaaS allows non-banks to provide financial services. Usually, where the two are confused is when the term “third party” is mentioned.
The key difference between the two is that open banking allows third parties access to client information. Banking as a Service allows third party access to banking functionality to provide solutions to their clients.
Here are some examples of Banking as a Service:
• Online customer onboarding
• Artificially intelligent automated investing platforms
• Ability to transfer money to a person while using their phone number
• Marketplace for financial services such as insurance
• Personal fiscal management tools
The main benefits of BaaS
Once again, the biggest benefit that BaaS holds is the amount of time and money that you save as a business. This is due to the fact that you don’t have to spend money or time developing a solution.
Best of all, when making use of BaaS, your business can focus entirely on your brand and overall messaging. This creates a competitive advantage because it provides you with the opportunity to start trading sooner.
In today’s increasingly competitive markets, increased client trust and retention are also critical. Businesses may use trust to grow their client base by incorporating a Banking as a Service offering. The work put in to incorporate a trustworthy, regulated, and completely compliant financial solution is the source of confidence.
Furthermore, when businesses integrate with Banking as a Service, they have access to a lot of client data. Long durations of usage have yielded this awareness. As a result, it may assist consumers in developing new and tailored services to address unique concerns. Automatic reconciliation, for example, for small and medium-sized business transactions.
Through BaaS solutions, your business can leverage and create new opportunities that all work to create better payment, banking, and in general, product experiences.