Banking-As-A-Service Explained in 50 Bullets: Definition, Trends, and Forecasts for 2025

July 8, 2024
Fintech Staff writer
Banking, FinTech, Platforms
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In under fifty bullet points, this article covers the basics of banking as a service (BaaS), its benefits to financial institutions, and top BaaS providers. We also cover the regulatory frameworks influencing BaaS adoption across industries. Our Financial Technology Insights on BaaS is an in-depth introduction, shedding light on how BaaS functions as a link between more conventional banking services and the contemporary online economy. This Fintech article explores the revolutionary possibilities of BaaS and its influence on the global financial services industry.

What is Banking-As-A-Service or BAAS?

BaaS is a strategic technology-driven approach involving third-party integrations and service providers, such as fintech companies. These integrate with a bank’s system through application programming interfaces (APIs). In addition to facilitating open banking services, this aids organizations in developing novel financial services on top of the regulated infrastructure of the provider bank.
By facilitating communication between banks and third parties through application programming interfaces (APIs), Banking as a Service enables third-party organizations to capitalize on existing banking services. These APIs can access Banking services by fintech companies, programmers, developers, and non-financial businesses.
BaaS is also known as white-label banking because the non-bank provides banking services through their branded product.
In addition to Solaris Bank, ClearBank, RailsBank, and Starling Bank are also part of Europe’s expanding BaaS scene. In addition to their current offering, well-established financial institutions in the US, like BBVA, are also launching BaaS projects.
Paying a fee to utilize the BaaS platform is the first step in the BaaS model for fintechs, digital banks, and other TPPs. To facilitate the development of new banking products or the provision of white-label banking services, the financial institution offers up its application programming interfaces (APIs) to the TPP.
This subset of embedded finance goes by a few other names, one of which is embedded banking.
One kind of BAAS is cloud-based, and the other is API-based.
A handful of regulatory agencies, including the SEC, OFAC, and the Financial Crimes Enforcement Network (FinCEN), are liable for enforcing these rules and regulations.

BAAS Players

Why is Banking-as-a-Service Important for the Industry?

We have distilled the benefits of using Banking-as-a-Service applications to understand their importance in the industry. Here are the benefits of BAAS:

Banking as a Service (BaaS) enables the developers to focus on the application’s front end while using pre-existing backend services without creating anything from scratch. Because many vendors supply both BaaS and serverless computing, there are significant distinctions between the two methods.
API-driven facilities support cross-selling possibilities via BaaS. It helps enterprises generate new revenue streams. Businesses may streamline app creation and distribution using BaaS by separating data and business logic.
Companies can innovate far more when they leverage APIs, both internally and from outside sources. An enormous increase in clientele can result from developing goods and services that use API ecosystems.
Startups can expand their operations without engaging heavily in infrastructure because of the scalable nature of BaaS. Startups can respond quickly to changes in the market, which helps them grow and has a greater effect on the financial system as a whole.
By utilizing open APIs, BaaS allows banks to provide customer-centric banking products. Through these APIs, a wide range of financial services may be easily integrated into third-party apps, providing users with a more tailored and effortless experience.
Businesses can provide the best financial services thanks to their partnerships with BaaS providers. You can make and receive payments, take out loans, and save money efficiently without requiring special infrastructure. In addition to generating new income sources, it helps in new acquisitions while retaining existing customers longer.
BaaS enables companies to increase their revenue by opening up options for cross-selling through API-driven features. BaaS also allows businesses to segment business logic and data by provisioning new app development pathways.
Businesses benefit by utilizing their proprietary and third-party APIs. Products and services built using API ecosystems have a larger consumer base in the market.

BAAS Trends

Multiple companies rely on BaaS providers, like marketplaces and neobanks. This is often referred to as “embedded finance” when a software platform incorporates financial services offered by a BaaS provider into its core capabilities.
Market share in the Banking-as-a-Services industry is modest. In the Banking-as-a-Service industry, numerous players fight for a limited number of customers. Companies are focusing on broadening their product lines through innovation to meet the increasing demand. Companies both at home and abroad are expanding their reach in the market by winning new contracts and penetrating untapped niches brought about by innovations in technology and consumer products.
Enhancements to fund transaction services in the United States and some developing nations also contribute to the growth of the Banking-as-a-Service (BaaS) sector. One example is the October 2023 acquisition of Bond by the financial technology giant FIS. FIS offers various services to banks and retailers worldwide, including core banking and payment acceptance. The exact value of the acquisition was not announced.
Integrated finance is currently available on many platforms in the form of payment processing, ACH access, or wire transfers via a payment provider. With the help of a BaaS provider, platforms can expand their product offerings to include more financial services.
The Banking-as-a-Service (BaaS) Market is being propelled by the following main factors: a) The increasing number of people using digital banking services b) Improvements in the services for the transfer of funds in several emerging nations.
The primary target market for BaaS products is retail banking. Another sector exhibiting remarkable growth with BaaS products is point-of-sale (PoS) financing.
Digital wallets, peer-to-peer lending(P2P), and payments are just a few examples of the new digital solutions that have emerged as a result of the ever-expanding financial technology landscape.
The modernization of finance is being facilitated by licensed financial institutions collaborating with non-banking businesses, which has multiple benefits for both businesses and customers.

BAAS Statistics

Over the next five to ten years, the total addressable market (TAM) of BaaS providers in the European Economic Area and the United Kingdom is expected to increase significantly, reaching a value of approximately €90 billion to 105 billion by 2030- Mckinsey
More consumers banked digitally: 61% interact weekly on digital channels-PWC
Consumer digital payment processing conducted by payments specialists grew by more than 50 percent between 2015 and 2022. Mckinsey

BAAS Examples

Uber BaaS provides debit cards to its partners and drivers. The company has partnered with Green Dot Bank to expand its BaaS offerings in the marketplace. With these cards, drivers can withdraw their daily earnings and shop at participating stores. Furthermore, these cards offer payback advantages to drivers.
One practical application of BaaS is the partnership between OpenPayd and Caxton, a foreign exchange fintech company. Once upon a time, all of Caxton’s transactions—worth more than €1 billion—went via a single corporate account. Virtual IBANs, made possible by OpenPayd’s BaaS stack, could be assigned to each one of their platform users.
Citizen is another example of a platform that aims to streamline and expedite payments between buyers and sellers. Intending to eliminate the need for physical cards, codes, and applications, Citizen joined forces with us to gain access to our virtual IBANs and real-time payment rails. To offer these services, Citizen could have easily integrated OpenPayd’s solution into its existing platform, eliminating the need to develop new financial architecture.

BAAS Forecast 2025

From 2024 to 2029, the Asia-Pacific region is expected to experience the fastest compound annual growth rate (CAGR). Some financial institutions choose to establish an in-house BaaS section, while others choose to forge partnerships with BaaS platform providers to ease the fintech adoption.
As a result of its efficiency and scalability, cloud computing is quickly becoming the preferred method of BAAS, and it could account for as much as 75% of the total.
Booking management, user profiles, and interaction with third-party services like weather and maps are all areas where applications in the travel sector might utilize BaaS.
Media apps can make use of BaaS for authentication, content delivery, and user preference management to provide more tailored suggestions.
You can use BaaS to optimize routes, manage inventories, and track shipments in applications that deal with supply chain management and logistics. Applications inside the government can take advantage of BaaS to facilitate citizen engagement, data management, and public-private communication.

Conclusion

Going back to our first research, it is clear that BaaS represents a major paradigm change in the sector since it both democratizes banking capabilities and sets a new standard for the delivery of financial services. The significance of BaaS goes well beyond improving operational efficiency and customer pleasure; it signals the beginning of a new age of technological innovation and financial inclusion. Compliance, risk management, and cybersecurity will play a vital role in keeping BaaS a viable and reliable model for the banking industry going forward as rules adapt to these changes. With more and more of the old barriers surrounding banking being gradually dissolved in favor of a more integrated, customer-centric approach, the future seems bright for BaaS and an industry ready for additional innovation.

FAQs

How does Banking as a Service operate?

For a charge, non-financial organizations can gain access to a licensed bank’s data and functionality through BaaS. To include banking features, including transaction processing, into their products, these enterprises can take advantage of these capabilities.

What is the business model of Banking as a Service?

In the BaaS paradigm, non-banking enterprises’ digital services are integrated with those of banks that have the appropriate banking licenses. Through this partnership, non-banking businesses can provide banking services through their online platforms.

How is BaaS integrated into existing systems?

Common methods of integration include Application Programming Interfaces (APIs), which provide two-way communication between the platform used by the company and the services offered by the bank. This guarantees that the integration procedure will go off without a hitch.

Who can use BaaS?

Any business, from fintech startups to large retailers, can leverage BaaS to offer financial services to their customers.

Is BaaS secure?

Yes, security is paramount in BaaS. Banks providing these services adhere to stringent regulatory standards and use advanced security measures to protect data and transactions.

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