Banking-as-a-Service (BaaS) is the most recent in a long line of technology-enabled initiatives aimed at saving traditional banking, particularly smaller banks and credit unions. Given the pressures on small and midsize financial institutions’ margins, connecting to new consumer settings will become increasingly important in the future.
While traditional financial services haven’t changed due to regulation, the way these services are delivered is the difference between scaled customer acquisition and static customer retention. Customer development in the coming decade may be dependent on employing technology to access new ecosystems, many of which will be outside of typical geographic footprints.
As users of all ages want better digital experiences, fintech companies will continue to seek out BaaS partners who can demonstrate scalability. A technology stack, a chartered financial institution, an audience or focus, and a set of required functionality are all important factors to consider while defining BaaS. These two definitions help to clarify what BaaS is today:
- BaaS is a technology stack that enables brands, fintech, and anybody else that wants to integrate financial services into their business to access modular banking specializations via licensed banks and deliver a specified set of functionalities to a target audience.
- Banks have long been regarded as process automation pioneers, but in today’s digitized, customer-driven financial services sector, they are slipping into the background. Traditional banking is being disrupted around the world, and banks must rethink their services to match the demands of today’s device-obsessed customers.
A community bank with an open and API-driven design can fuel some of the most advanced fintech across the country as they are able to charter the most powerful and defensible asset a regulated financial institution of today has.
If you want to build your bank or partner with a banking partner, here is a comparison between the two;
- Regulatory Burden
Traditional banking would require a banking licence from a local regulator and also needs high ongoing compliance requirements. BaaS, on the other hand, does not require a licence and only minimal compliance requirements are required.
2. Product Development
While traditional banking requires a whole legal department with IT accountants, controls and IT developers, BaaS only requires API and a skilled developer.
3. Customer Acquisition
Traditional banking can be easier to gain client trust, resulting in a larger customer base and the ability to empower and upsell them. With BaaS, some clients may be hesitant to sign up if you collaborate with a bank, and you will need to educate them on the banking procedure.
4. Customer Experience
Having a comprehensive awareness of your bank’s standards will make resolving consumer difficulties and resolving large-scale problems much easier. Your exposure is limited when you operate with a bank partner, which can make it tough to handle some consumer issues. That’s why you need to be sure you’re working with someone who knows what they’re doing.
It all comes down to why you want to provide financial services. If you’re a merchant trying to expand your business by offering financial services, collaborating with a BaaS provider should suffice. But if you are on a mission to reinvent banking and finance it might be worthwhile to start your bank.