How banking-as-a-service (BaaS) works and industry outlook
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Across industries, digital transformation is democratizing data to enable greater transparency. New technologies are opening up legacy systems to emerging startups and third parties and, in some cases, putting data directly in the hands of consumers.
In financial services, Banking-as-a-Service (BaaS) platforms have surfaced as a key component of open banking, in which banks provide more financial transparency options for account holders by opening their application programming interfaces (APIs) for third parties to develop new services.
Fintechs have been encroaching on incumbent institutions in the banking game - but by moving into the BaaS space, tech-savvy legacy banks can turn this looming threat into an opportunity.
What is banking-as-a-service?
BaaS is an end-to-end process that allows fintechs and other third parties to connect with banks' systems directly via APIs so they can build banking offerings on top of the providers' regulated infrastructure, as well as unlock the open banking opportunity reshaping the global financial services landscape.
Techy-savvy legacy banks can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure. In a matter of years, access to this level of information will become table stakes for digitally native customers - so banks that begin now will be ahead of the curve, and likely rewarded with high demand.
How does banking-as-a-service work?
The BaaS process begins with a fintech or other third-party provider (TPP) paying a fee to access the BaaS platform. The financial institution opens its APIs to the TPP, thereby granting access to the systems and information necessary to build new banking products or offer white label banking services.
In addition to getting ahead in open banking, legacy institutions that launch their own BaaS platforms are also opening up new revenue streams. The two main monetization strategies for BaaS include charging clients a monthly fee for access to the BaaS platform or charging a la carte for each service used.
Top banking-as-a-service companies
Here are the top BaaS platform providers broken out into purely BaaS-focused fintech players and retail banks that have launched their own BaaS platforms:
Pure BaaS providers:
BaaS providers with B2C operations:
- Starling Bank
- Fidor Bank
Banking-as-a-service industry outlook
A number of countries have already begun introducing open banking regulations, indicating that the financial services industry is moving toward an era where shared data and infrastructure will become consumers' new expectations.
Tech-savvy legacy banks that create their own BaaS platforms now will not only get ahead of the open banking opportunity before their competitors, but also unlock a new stream of revenue by monetizing their platforms.
In the UK, the new revenue potential generated through open banking-enabled small- and medium-sized business and retail customer propositions was £500 million ($700 million) in 2018, per PwC - and Business Insider Intelligence expects that to grow at a 25% compound annual growth rate to reach £1.9 billion ($2 billion) by 2024.
Beyond adding a new revenue stream, developing a BaaS solution also allows legacy banks to establish relationships and forge partnerships with emerging fintechs - thereby keeping themselves ahead of the trends that will inevitably follow once BaaS and open banking become mainstream.
To stay on top of today's (and tomorrow's) digital trends, Business Insider Intelligence is launching Banking, our newest research coverage area tailored for decision-makers in the financial services industry.
This new offering is designed to keep you up to date on the biggest industry shifts and shakeups, with coverage including BaaS and open banking, consumer and business banking, mobile and online banking, digital account opening, and neobanks.