An explanation of banking as a service and its market prospects.


By Angela Bao

June 15, 2022

Banking as a service is an intermediary between fintechs and traditional banks. (Photo credit): Getty Images/Violeta Stoimenova

An explanation of banking as a service and its market prospects.

Overall, consumers are increasingly digitally oriented, and that includes the financial sector. In their 2022 U.S. Retail Banking Customer Satisfaction Study, consumer research firm JD Power found that nearly half of bank customers have transitioned to digital-first banking relationships. This change is partly due to customer dissatisfaction with the lack of personalization of banking services and the inability of banks to make their customers feel supported in times of financial crisis.

However, banking as a service (BaaS) can change this paradigm. The global BaaS market is expected to grow by more than 25% by 2027. BaaS enables traditional banks, fintechs and consumer-facing non-bank businesses to seamlessly integrate and deliver customizable products and highly targeted to their customers.

What is banking as a service?

Banking as a service is essentially technology integrated financing, that is, when a non-bank company provides financial services ranging from digital wallets, bank accounts, buy-it-now and pay-later services. For example, Starbucks is a great example of a non-banking business embracing integrated finance: its customers can use its app to pay for items and even store cash balances on their Virtual Starbucks Card. Another form of in-app financing that many people have probably seen is when grocery stores or supermarkets also have in-store bank branches.

BaaS is the “back-end” of embedded finance. It allows non-banks to connect with a financial institution via Application programming interfaces, or APIs, which is software that acts as an intermediary between two systems and allows them to “talk” to each other. Often these APIs are provided by another party that specifically provides banking platform APIs.

Traditional banks have historically provided both the banking systems and the distribution networks for these products and services. However, as BaaS grows in popularity, Deloitte classified four main “ecosystems” in BaaS.

    1. Supplier only

    Legacy banks fall into this category. They provide traditional banking services and products such as debit card issuance, account opening checks and loan underwriting which they provide directly to the consumer or a fintech partner.

    2. Supplier-Aggregator

    Many fintechs are service aggregators: they have a core business that offers payment processing to their customers but also offer APIs so that their customers can create their own financial services for their own customers. “Supplier-aggregators” can deepen relationships with their distributor customers by offering integrated financial products and services, which then enable these distributors to increase customer loyalty.

    3. Distributor-Aggregator

    Mobile wallets are a great example. Users can open accounts at various institutions, connect their accounts, and then integrate a simple mobile wallet into a comprehensive personal finance tool. “Distributor-aggregators” can increase customer and transaction volume by providing an enhanced customer experience, as well as banking-like services without having to become a bank.

    4. Reserved for distributors

    Many retailers offer products intended to drive point-of-sale conversions (i.e. major retailers’ e-commerce platforms using buy-it-now and pay-later). “Distributors” can increase customer loyalty through rewards offers, increase transaction volume and point-of-sale conversions, increase customer data, and provide greater product diversification.

BaaS in action: BayaniPay and East West Bank

Los Angeles-based fintech Bayani Pay was established to serve Filipino professionals working in the United States, with the eventual goal of serving the larger Asian American community. BayaniPay is a mobile financial technology company that offers fee-free money transfers between California and the Philippines, through partnerships with East West Bank and BDO Unibank, the largest bank in the Philippines.

Through its app, BayaniPay provides digital checking accounts, no account minimums and Visa debit cards with rewards and offers, which have been made possible by enabling East West Bank’s digital banking services as BaaS. Digital account openings also make it easier to open bank accounts for new customers, especially new immigrants.

“Being able to deliver secure, compliant banking services to startups like us is really hard to do – it’s something that would normally take us two years,” says BayaniPay Founder and CEO Winston Damarillo. “Through the eastern West Bank, I get the shortcut. And this allows the bank to grow dramatically without investing significantly, and we are able to attract as many customers as possible to your initial circle. Eventually, the hope is that these customers will then use other banking products and services.

BaaS: enabling banks and fintechs to become one

Damarillo adds that as financial services become increasingly digitized, fintechs and traditional banks are beginning to meet in the middle, with BaaS as the essential foundation.

“Banks are good at cash flow, capital adequacy, compliance and security, and all that stuff,” Damarillo says. “Fintechs are good at adapting to the customer, and this partnership is very, very important. I think we’re in this phase where banks and fintechs are working together, and that’s a good thing. This will accelerate the benefits of banking for as many people as possible. »


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