As competition in the payments ecosystem is riling up between traditional and challenger banks, reshaping core systems and technologies of traditional banking is long overdue. When talking about future-proofing banks and financial services, the term Banking-as-a-service is starting to come up a lot. But what is banking as a service all about and how is it reshaping the industry?
So let’s kick things off easy; banking as a service is the provision of complete banking processes such as loans or deposit accounts. Providing them as a service using a bank’s existing license and secure infrastructure with a modern api platform from a specialized vendor. These providers partner with those banks and then Banking As A Service allows almost any brand to embed financial services into its customer experience, like building blocks!
Examples of brands using banking as a service include Uber money, Apple Card and many many other brands. Even the likes of Monzo, Chime and Revolut use banking as a service as a way to provide better, faster, and cheaper financial products, simply because they don’t have to build an entire infrastructure underneath it. So it really is a game changer.
The global banking-as-a-service market size was valued at $2.41 billion in 2020, and is projected to reach $11.34 billion by 2030, growing at a Compounding Annual Growth Rate (CAGR) of 17.1% from 2021 to 2030. Because banking-as-a-service is an end-to-end process which enables executing all financial services through an API or cloud platform, pretty much any business can become a banking provider with nothing but a few lines of code. That’s why BaaS is also often referred to as white-label banking.
So, is Banking as a Service the same as Open Banking?
No, not really. The two models often get confused, as open banking also involves banks connecting to non-banks via API. However, the models serve entirely different purposes. In BaaS models, non-bank businesses integrate complete banking services into their own products. In open banking models on the other hand, non-bank businesses merely use the bank’s data for their products.
Finally, we believe that Banking as a Service is key in future-proofing legacy banks and replacing obsolete systems that some of the traditional banks still rely on today. Especially when specializing in one market rather than trying to cater to every segment.
From your perspective, what are the biggest drivers behind the success of banking as a service?
Apple’s push to secure a spot in the payments ecosystem is still going strong. Or at least that’s the plan — executing on it may be … well, not that simple. This is because Apple has been making moves to build a network of merchants, among the most critical components of the payment value chain … with functionalities that are already out there in the market.
If you’ve even moderately kept an eye on any payments related news source, there’s no way you have not been bombarded with the Buy Now Pay Later craze in 2021. Almost all the widely known payment players in the field who could partake in the BNPL craze… actually did. We are quite sure that you have heard about the likes of; Klarna, Affirm, and Afterpay, but industry Giants such as Mastercard, Paypal, Visa, Square, Monzo, Revolut, Amazon, and even Walmart, are all offering BNPL options at checkout or are partnering with BNPL companies to offer this service to their customers. Even mighty Apple is climbing aboard.
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