The banking and financial service industry has rarely ever seen as much change in the past as it has seen this decade. With the advent of FinTech in the banking industry, the way financial service-providing companies operate has dramatically changed. From creating innovative ways to conduct finances to embracing the world of digitalization in managing finances, it has seen a drastic transformation that’s only striving to improve the banking business model.
As traditional banks and credit unions are moving towards financial technology, they are now embracing all financial novelties like banking as a service and embedded finances that will allow them to create a white label banking platform.
If you’re in the financial or banking industry and wish to be at the same pace as the digitalizing world, then you should know that Banking-as-a-service Market is predicted to reach $11.34 Billion by 2030.
This post will tell you all about the new improvements in the industry. From discussing banking as a service and banking as a platform to learning about embedded finances, examples of use in every sector, and all of its trends and opportunities, we discuss it all in this post, so fasten your seatbelt, because this ride is short but comprehensive!
What is Banking as a Service?
BaaS or Banking-as-a-Service provider can be defined as the financial model that provides banking processes to non-bank businesses-as-a-service using the existing licensed bank infrastructure with modern API platforms.
Or simply put, here the licensed banks can incorporate their digital banking system in the products of non-banking organization. This way, these organizations can offer their clients banking services like accounts, loans and debit cards without asking them to obtain a banking license themselves.
However, people usually confuse banking-as-a-service with banking-as-a-platform. They are two separate but financially beneficial banking innovations. You now know what banking-as-a-service is, let’s learn about banking as a platform.
Banking-as-a-platform is completely opposite to banking-as-a-service. Here, the former means that banks and non-banks use banking models to provide financial services, whereas the latter, banking-as-a-platform means technology businesses or FinTech organizations provide services or rent them out to banking institutions.
Benefits of Banking as a Service and Banking as a Platform
Whether you’re in non-bank industry or the financial service industry, you can take advantage of one or the other. Here are the advantages of banking-as-a-platform and banking-as-a-service.
Advantages of banking-as-a-service
The financial and banking organizations can benefit in several ways from BaaS, but some notable advantages include:
- Improvement in Revenue Sources
- Enhanced Customer Insights
- Help in Saving Costs
Advantages of banking-as-a-platform
While there are numerous benefits of banking-as-a-platform, but the most prominent ones include:
- Minimizes Cost and Time of Development
- Provides Customized Banking Financial Services
- Offers the Utilization of Existing API Catalogs
Examples of Banking as a Service and Banking as a Platform
Example of BaaS:
If you consider the example of Amazon, that is a big retail store working worldwide. It offers its frequent clientele with loyalty points. However, first, they ask their clients to join their loyalty program. This retailer can partner with a banking facility and make their facility high profile by offering its shoppers credit at the point of sale or even making deposit accounts for customers. With the right partnership with a Banking-as-a-service provider, this retailer can even provide its own bank accounts without going through the inconvenience of acquiring a banking license.
As technology is advancing, so is the shopper experience. With these deposit accounts, not only will Amazon be able to reach its clientele effortlessly and understand their shopping behaviors but also strategize their retail plans according to the data they receive. This makes their interface streamlined and gives them an upper hand over their competitors.
One example of Banking-as-a-platform can be seen in Wells-Fargo, a big banking giant based in San Francisco, famous for its use of technology in all its banking procedures. It was one of the first ones to adopt the banking-as-a-platform in its module and all local banks followed its example.
Wells-Fargo utilized the technology platforms to its advantage by streamlining its customer experiences by minimizing the acquisition costs by a notable margin. By utilizing APIs to enhance their authentication processes and online security, this bank also implemented an open banking platform. Therefore, other banks can also take the help of third-party technical platforms and enhance their banking processes.
What is Embedded Finance?
When non-financial organizations seamlessly adapt and integrate the banking financial services in their system, it’s called embedded finance. This smooth union between non-financial entities and banking-as-a-service has transformed the way we deal with finances and businesses.
With the adaption of embedded financial services, many conventional methods of banking have been disrupted. Formerly, all financial interactions like taking loans and making payments were conducted by using banks. But now, that’s considered as a practice of the past.
Now, all non-bank organizations offer and conduct financial services by connecting FinTech and banks to their platform by using APIs. No matter what industry you are in, you can now incorporate the banking services to your program without much hassle and conduct all kinds of monetary services, even going to lengths as allowing your clients to pay in installments, mostly known as Buy now, pay later,
Embedded Finance Examples
There are several examples and ways embedded finances are incorporated into modern banking processes. Some of the most important examples are:
At times, cash payments look like a lot of money to part with, which makes people reconsider paying and buying stuff. Embedded payments make the procedure easier. In place of digging into their pockets for cash, customers can simply push a button on an app and pay for their goods.
Some places that have embraced this method of payment are ride-sharing apps which include Uber. After completing a ride, instead of paying to the driver with cash, you complete the transaction on the app.
Previously when you needed a loan, you had to apply at a bank and wait some days for it to get approved. But now, you acquire a loan with just a tap and recieve money directly at the point of purchase. Some places who have incorporated this system are Klarna and Afterpay. Both the programs loan out directly and then split the money back in an equal amount over several months.
Seven Trends of Banking-as-a-Service:
All banks and organizations operating in the financial technology field and looking to work with FinTech to improve their facilities need to look out for seven of these trends in the banking-as-a-service area to move forward in the financial industry:
- Customers Demand a More incorporated, integrated, and Seamless Experience
- Boost the Demand for Improved Financial Technology
- Rise in Open Banking
- Exploring New Revenue Sources
- Adapting technological Capabilities
- Transforming the Trust Level in Financial Corporations
- Industry-Focused Applications
Challenges and Opportunities for Digital White Label Banking Services
Even though the financial organizations are welcoming the digital world, they still won’t be able to bring innovation in a night, there are many challenges that they will face. So, to get digital white-label banking right, some critical things to think about your organization’s financial goals are:
- Will adding the banking financial services to your products make sense in the overall user experience?
- Does it have a strong brand or an experience hook behind it to back it up or is it just an innovation project?
- Will integrating the BaaS application give you a chance to win against your competitors?
- Will integrating this technology reach more volume and justify our build?
- Does our organization have the volume to work with a bank and adopt the Bank-as-a-Service offering?
Many institutions struggle with the decision of what products should they offer on BaaS platforms. But once they answer the above questions according to their organization, these challenges seem to turn into opportunities that take their organization to a higher level!
How do banks search for new revenue models?
Looking as the banking organizations can go into decline when there are no businesses working with them, banks keep actively searching for industries to work with and exploring alternate sources for profitability. They mostly seek scalable business models.
How does embedded finance gain traction?
Banking, when it’s on the phone is much easier than visiting a bank for every transaction right? Therefore embedded finance in the shape of mobile banking has been attracting a lot of traction and is set to be worth over $138 billion by 2026!
With the advent of BaaS platforms and strategy, banks have formed an unrealistic structure of cost and have completely transformed the financial service structure. If this continues, there will be a significant improvement in how banks work today and a lot more smooth experience for their clients.
Well, we hope that this post was useful to you and aided you in understanding the modern finesses of Fintech and banking, for a more thorough demonstration don’t wait to contact us for a consultation today!