Banking as a Service is your bank’s future. You need new customers. You won’t reach them with your branches, and website.
Prospective customers hate the whole branch experience: The hours, the locations, the long wait times, the paper shuffling, the inconvenience, and the general feeling of going 30 years back in time.
Embedded Finance
You don’t need a physical branch to do “banking”. You might have an app, but how much does it help? There are 9,000 banks and credit unions in USA alone, and your app looks a lot like theirs.
Your bank’s products and services can be integrated directly into non-financial platforms, products, and services. When someone goes to Amazon.com or H&R Block, those giant brands can offer deposit accounts with your small-to-mid-sized bank. The digital on-boarding experience begins inside a third party app.
This seamless integration enables non-bank businesses to offer bank-like services to their customers. For example: Your tax prep software can create a bank account on the spot to receive your refund and even provide a refund anticipation loan. From payment processing to lending, embedded finance is transforming how consumers and businesses interact with financial services.
By integrating financial services into everyday applications, businesses can offer a smoother and more convenient experience for their customers. Non-banks can generate additional revenue by offering financial products and services. Embedded finance makes financial services more accessible to a broader audience, including those who may not have access to traditional banking services.
Banking as a Service aka “BaaS”
BaaS allows banks to offer embedded finance products through non-bank partners. The BaaS model allows third-party providers to connect with banks’ systems via APIs to build their own financial products. This means that companies without a banking license can offer banking services such as payments, loans, and account management, all powered by a licensed bank’s infrastructure.
To be clear: The banks themselves are legally offering deposits and loans directly to the non-bank customers. Your plumber cannot accept deposits covered by FDIC insurance. Only banks can do that. But Mario can make a bank account available to his customers in a “Mario branded” experience.
Banks can build their own “direct” API ecosystem along with all the risk, compliance, operations, and monitoring infrastructure to support BaaS partners. Banks can also choose to rely on third party platforms as intermediaries providing the necessary infrastructure & regulatory compliance for non-financial companies to offer financial services. Again, the chartered bank continues to have full responsibility for controls and compliance, but a third party platform can provide tremendous support in meeting these requirements.
Key Components of BaaS
- API Integration: BaaS relies heavily on APIs (Application Programming Interfaces) that allow third-party developers to access banking services.
- Compliance and Security: BaaS providers ensure that all financial services comply with regulatory requirements and maintain high security standards.
- Scalability: BaaS platforms are designed to scale with the needs of the business, allowing them to offer financial services to a growing customer base without extensive infrastructure investment.
- Cost Efficiency: Companies can offer financial services without the need to invest in banking infrastructure and regulatory compliance.
- Innovation: BaaS enables businesses to innovate quickly by building and deploying financial products faster.
- Focus on Core Business: Businesses can focus on their core competencies while leveraging BaaS providers for financial services.
BLAST – BaaS Launch as a Service
BaaS is a huge opportunity, but it must be done properly. There are lots of ways to get it wrong. Regulators do not have an appetite for corner-cutting and rookie mistakes. If you’re re-wiring your house, hire an electrician. If you’re launching a BaaS business, bring in experienced professionals who built it before. Call SOT Advisory. Have a BLAST.
Trends to Watch
- Increased Collaboration: Expect more partnerships between banks, fintech companies, and non-financial businesses to offer integrated financial solutions.
- Personalized Financial Services: With access to more data, businesses can offer personalized financial services tailored to individual needs.
- Regulatory Evolution: As the landscape evolves, regulatory frameworks will adapt to ensure the safe and secure delivery of embedded financial services. There will be a shakeout as “corner cutters” find themselves unable to meet regulator expectations.
Challenges and Opportunities
- Regulatory Compliance: Navigating the complex regulatory environment remains a challenge for businesses offering financial services.
- Data Security: Ensuring the security of customer data is paramount as financial services become more integrated.
- Market Competition: The rise of embedded finance and BaaS will lead to increased competition, driving innovation and better services for consumers.
Conclusion
Embedded finance and Banking as a Service are transforming the financial industry, making it more integrated, efficient, and accessible. As technology continues to advance, the future of banking will be characterized by seamless financial services embedded into every aspect of our lives. Companies that leverage these trends will not only enhance their customer experience but also unlock new revenue streams and opportunities for growth.
