Complete guide on Banking as a Service

2024

Learn everything about what is banking as a service, how it works, the benefits and use cases of BaaS, and if it is suited for your business.
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5 min read

Banking as a Service ( BaaS) is a fintech innovation that facilitates collaboration between banks and fintech and non-fintech organizations.

The global BaaS market is growing. It was valued at USD 540.86 billion in 2022 and is projected to reach USD 3863.91 billion by 2030. The market is expected to grow at a CAGR of 28.78% from 2023 to 2030.  

The industry is growing tremendously—thanks to the fintech players entering the market, technological advancement, and fast digital transformation. 

Financial services are constantly changing and evolving with respect to the innovation of new products, channels, partnerships, and opportunities. Banking as a service plays a crucial role in all of these. 

In this article, we’ll cover everything about banking as a service and how you can get started. 

But before that, let’s understand what exactly BaaS is. 

What is banking as a service (BaaS)?

Banking as a service, or BaaS, is an end-to-end approach in which a third-party organization accesses the bank’s system using an API. 

This approach allows third-party organizations to build innovative financial solutions using the bank’s regulated already existing infrastructure while enabling open banking services.

All of these can be achieved without building a robust banking infrastructure or obtaining a banking license. 

How is banking as a service different from traditional banking?

Traditionally, the function of a bank is to hold money, process remittances, and process payments. 

This is a complex procedure with many compliances and regulations in place. 

Hence, banks need to invest a lot in building their secured infrastructure system. 

This complicated process of the existing banking system often leads to roadblocks. 

Fintech companies have identified these roadblocks and have built innovative solutions to steer clear of these roadblocks. 

Instead of building the solutions from the ground up, fintech and nonbank companies partner with banks to offer innovative financial solutions that address the pain points of the end customer.

How does banking as a service (BaaS) work? 

BaaS usually involves three major players. Let's understand the role of each: 

Player #1: Banks

Banks offer their existing infrastructure, including servers and communication hardware, as an “infrastructure as a service” (IaaS) layer.  

Since banks already have licenses for banking services, they lend their banking system to the BaaS providers. 

An example of a bank would be Goldman Sachs or Emirates NBD.

Player #2: Banking as a service provider

The BaaS platform provides a software layer that ensures data is safely communicated between the fintech or non-fintech company and the bank. 

This layer is also known as the middleware or the BaaS layer. 

You can imagine the BaaS layer as a piece of Lego blocks plugged into the fintech company. 

This BaaS layer is API-based and requires constant monitoring to ensure secure operations. 

Different BaaS providers offer different banking functions like payouts, lending, card issuing, personal finances, etc.,

Player # 3: Fintech and non-fintech companies

Finally, there are fintech and non-fintech companies that interact with the end users.

Any organization that wants to integrate these financial services into its platform needs to plug into a BaaS platform. 

However, it needs to be compliant with the BaaS platform as fintech services are provided through these platforms. 

For example, an online ticketing platform that wants to integrate an online payment mode for its customers can do so with a BaaS model. 

What are the use cases of banking as a service? 

Banking as a service has multiple use cases across the industry. Let’s take a deeper look at each of the following: 

Online banking

  • Fintech and non fintech companies can offer the facility of online banking to their customers using BaaS. 
  • These user-friendly products can serve as a better alternative to traditional baking. 
  • To make it more valuable, these companies can create apps that let the customer track their transactions, account balances, savings, etc. 
  • Since there are usually no hidden fees, it offers better customer satisfaction. 

Investment services

  • Non-fintech and fintech organizations can use the BaaS model to help their customers automate finances and invest in assets.
  • For example, they can rebalance the portfolio according to the customer’s investment portfolio and help them get low-cost personalized investments. 
  • They can also cater to the various investment needs of the customer. 

Debit and credit card offers

  • The BaaS model can allow non-banks and fintechs to offer debit and credit cards to their customers. The Apple Credit Card is a perfect example of this.
  • It enables customers to receive real-time updates of all their transactions right on the app. 
  • Customers also receive it at a low-interest rate, which works well to attract new customers. 
  • Many companies make it further lucrative by offering cashback deals on their credit and debit cards. 
  • Sometimes, these cashback offers don't come with an expiration date, meaning customers can use them to buy products or services whenever they want. 
  • Needless to say, this strategy boosts customer satisfaction by a few notches at the end of the day. 

Loans

  • Through the BaaS model, businesses can lend their customers funds to facilitate purchasing a product or a service. 
  • For example, an e-commerce company can offer an easy EMI option to purchase an expensive item, or a travel portal can offer single-click loans to book a travel package. 
  • Another common use case is the Buy Now, Pay Later option, where customers can choose and schedule their payment at their convenience. 
  • With a user-friendly app, customers can easily keep track of their monthly EMI payments. 

Customer identification verification

  • Payment failure can cause reputation risk for the brand, and it might get labeled as a 'high-risk merchant.' 
  • However, the payment failures can be reduced by conducting bank account verification. 
  • The BaaS platforms verify their customer's bank accounts before initiating a transaction, which reduces the chances of payment failure. 
  • This also works well in the case of bulk payments for multiple payment modes. 

Why is banking as a service growing? 

The Middle East and Africa (MEA) BaaS market is estimated to grow at a CAGR of 7.40% between 2024 and 2029, reaching $65.51 billion in 2024 and $100.53 billion by 2029.

Let’s look at some key factors for the rise of banking as a service: 

Customer demand

The first and most apparent reason for the rapid growth of the BaaS industry is the customer demand for integrated financial services. 

As technology develops and customers become more tech-savvy, the demand for holistic and user-friendly financial products increases. 

Thinking from the perspective of businesses, from small-scale to large enterprises, every organization now aims to offer a wholesome customer experience and increase loyalty. 

BaaS is making it possible to build an integrated ecosystem where the customer doesn't need to look for another product to fulfill their financial requirements while brands can excel in offering top-notch customer satisfaction. 

Several fintech players are also specifically targeting small businesses as their potential customers. 

Startups and SMEs have started leveraging for a simpler banking experience.

Growth of the fintech industry

As we already know, the fintech industry is growing at a rapid rate across the globe, and the scene is no different in the MENA region. 

The MENA fintech market size is predicted to be valued at USD 47.68 billion by 2029 from USD 18.07 billion in 2024. 

As we have mentioned before, fintech companies need to integrate with the banking system. 

And since it's impossible for a fintech company to obtain a banking license or meet the compliance and regulations requirements, the BaaS model is going to be the only way for fintech companies to operate in the market.

Regulatory requirements

API usage across banking infrastructure is becoming a regulatory norm in many geographies. 

Making APIs public can increase competition among banks, so it makes sense for banks to embrace the BaaS model. 

This model helps banks increase customer satisfaction while integrating with fintech and non-fintech organizations, allowing them to leverage unique tech solutions to meet customer demands. 

Banking revenue

As McKinsey reports, the banking sector is currently at an important juncture. The banking sector's price-to-book value is at an all-time low by one-third the value of other industries. 

While banks have thrived and have shown improvements, margins are still sinking — down more than 25% in the past 15 years. It's expected to fall further to 30% in the next ten years. 

Traditional banks can't afford this. They need to consistently stay profitable to survive. 

Integrations with non-banks and fintech organizations have opened up new revenue opportunities for banks and their product growth. 

Advantages of banking as a service for banks

As mentioned, banks generate extra revenue as open banking becomes the norm, where banks allow third-party financial institutions to use their infrastructure through APIs. 

On the one hand, fintech and tech companies lead innovation with speed, while banks have garnered customer trust over the years. 

Additionally, banks also have funding capabilities that they can leverage. 

So, together, banks and fintech companies can identify many innovative solutions to solve customer needs while generating revenues for themselves. 

While BaaS helps banks generate additional revenues, it also helps them save costs. 

Since the technology investment is done by the fintech companies, banks don't need to invest separately in technology. 

Rather, they have readymade access to the technology using which they can make further investments and forecast profitability. 

By collaborating with a fintech company, banks can gain new customers. 

With these new customers, banks get access to new customer insights, such as their preferences, buying behavior, and financial requirements. 

Banks can use these insights to create more tailored products and better target their customers. 

Advantages of BaaS for non-banks and fintech players

The most significant advantage of BaaS for non-banks and fintech organizations is complete access to customer information and banking infrastructure without the need for a banking license, which involves an enormous amount of investment. 

Moreover, it’s practically impossible to comply with all the government policies and compliances for non-bank organizations, and hence, the BaaS model works as the best option for these institutions. 

Finally, for non-bank and fintech players, innovation and speed to market are the main focus. “Becoming a bank” will simply divert their attention. 

Thus, the BaaS model becomes a handy solution for non-banks and fintech players. 

Fintechs and non-financial organizations can directly integrate with banks and have a faster go-to-market strategy with innovative products.

Banks not only have a massive infrastructure, but they also have a large customer base and customer trust in their stride. 

Data says that the UAE ranks second globally and first in Asia in consumer trust in banks, which was at 84% in 2022. 

By partnering with banks, non-fintech and fintech organizations can leverage customer trust and increase their customer base. 

Advantages of banking as a service for end-customer

BaaS brings healthy competition in the financial industry. The result? We are seeing many innovative financial products that increase financial transparency. 

As more fintech players enter the market, they are more committed to solving specific customer pain points, while new-age banks are making it easy for businesses to obtain loans. 

The result is that customers now have easy access to specific financial products that solve their pain points and are relevant to their needs. 

Some may argue that customers have always received bank loans, so what's the big deal here? 

The answer is instant customer gratification for today’s tech-savvy customer. 

As more tech companies enter the financial space, we can only expect to see a rise in this trend. 

So, yes, BaaS has many advantages. 

But what does it hold for future growth? 

Are companies and banks expected to face any challenges going forward?

Let’s find out:

Challenges of banking as a service (BaaS) 

There are several challenges in implementing the BaaS strategy. Some of these include:

Modernizing the traditional banks

The biggest challenge in implementing a BaaS strategy is that most traditional banks are outdated and lack the infrastructure to support modern technologies. 

This can be a major hindrance when integrating a third-party API. 

Changing roles of players in the industry

As more fintech players enter the financial domain, banks are gradually losing the customer trust they had for years. 

On the other hand, many companies like Apple Card have built huge customer trust and are now entering the financial domain. 

Many companies also offer white-labeled products that can confuse the end customer, which can lead to a loss of trust. 

A strong API strategy

Creating financial products using the bank’s infrastructure is a huge task that requires a strong API strategy for the end customers to navigate easily. 

However, many organizations fail when it comes to creating a solid API strategy. 

Companies need to keep in mind that when creating an API strategy, their end goal should be ease of integration. 

It should be able to deliver maximum value with minimum friction in the integration process. 

It can be safely said that the future of the BaaS industry largely depends on how third-party organizations can streamline and standardize the global API strategy. 

The future of BaaS is promising 

The future of BaaS is promising, and you, too, can embrace it in your business.

Leverage the BaaS model and enable your business growth with solutions like Payby. 

Payby increases your revenue with customer-first, innovative, and secure omnichannel digital payment solutions.

Sign up today

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