Banking as a Service

With the emerging number of new banking and Fintech business models that are joining the scene, it can be hard to distinguish them apart. The term “Banking as a Service”, especially, can be confusing to some and raise questions. This guide is here to help you through the terminology of the new banking business models in our complete overview. We will cover:

  1. Banking as a Service
  2. Open banking
  3. Platform banking

What exactly is Banking as a Service?

Banking as a service can best be described by the following example. Picture for an instant that you are the manager of a coffee shop. There is fierce competition, and you would like to reinforce your customers loyalty. If there was an option to offer your customers a debit card, loyalty points could be given to them whenever they pay with their card. Then they would interact with your brand each time they use their card. You can then have an enhanced understanding of your customers by studying their spending habits and offer them more personalised services.

Boosted income and progressive customer experience can be achieved in tons of ways by non-banks by offering their own banking services. However, if banking services are to be offered successfully every government in the world commands you to own a banking license. Such licence is challenging to acquire due to the systemic relevance of banks to the functioning of the economy. Obtaining a licence enforces most importantly compliance with strict regulations on banking secrecy, money laundering and deposit protection, just as a starting point as well as significant capital requirements. This is where Banking as a Service comes to play.

Banking as a Service (BaaS) represents a model in which certified banks integrate their digital banking services directly into the products of other non-bank businesses. This way digital banking services such as mobile bank accounts, debit cards, loans and payment services can be offered by a non-bank business, (such as your coffee shop) without needing to purchase a banking licence of their own.

APIs and webhooks connects to the banks’ server and with that of the coffee shop, enabling your customer to access banking services directly through your coffee shops website or app. The customers money is never touched by your coffee shop, it acts simply as a go-between, meaning any of the regulatory obligations a bank has to fulfil it is does not have to complete.

Therefore, BaaS means most businesses can become a banking provider with only a few lines of code. It is often labelled white-label banking, since the non-bank brand is delivering the banking services. As well as solarisBank, other contributors in Europe’s growing BaaS scene include ClearBank, RailsBank and Starling Bank. In the US BaaS is also being launched by established banking titans, initiating projects next to their existing offering, such as BBVA.

Is Banking as a Service the same as open banking?

The two are often muddled but no is the answer. Open banking likewise involves banks linking to Non-banks via API. However, there are entirely different purposes for the models. In open banking models, non-bank businesses simply use the bank’s data for their products. In the industry, these non-bank businesses are called third party service providers (TPPs). In BaaS models, non-bank businesses integrate whole banking services into their own products.

For example. Prominent TPPs are Financial Managing Apps that benefit from open banking. They allow you to better oversee your finances by collecting the data from all of your different bank accounts into one application. This can improve your spending behaviours and help you achieve savings goals. The app needs to pull transactional information from all of your bank accounts in order to cumulate the data. This is completed via an API integration to the banks’ systems.

Quite frequently this API integration is delivered by an additional party. These are considered the intermediaries in connecting the banks with TPPs (like the Financial managing apps) and are classified as API banking platforms. They provide the actual API level that layers on top of the bank’s system that permits the stream of information between the bank and the TPPs. Some noticeable models in the German market include players like finleap connect, Ndigit and Fintecsystems.

A crucial thing to consider though, the TPPs are not able to complete banking services (such as lending or taking deposits), as they are not holders of full banking licences. They are merely supplying account information from your existing bank accounts to clearly display transactions and collate all information in one source.

What about platform banking?

Platform banking is a completely different entity. This refers to banks who want to extend their present offering, so they integrate services from other fintechs. For example, a bank might want to enable their customers to access investment products from the same account from which they do their day-to-day banking, so they integrate a robo-advisor into their website/app to do this. This can therefore be described as the inverse of Banking as a Service. The bank owns the customer and services are intergrated from fintechs, in the platform banking model. In the BaaS model, the customer is owned by the fintech/non-bank and the banks services are intergrated.

This Platform banking method is repeatedly used by the banks as a protective tactic to stop losing their customers to forward-thinking fintechs. They can retain their customers in their network, by integrating the fintechs’ facilities into their platform even if it ends up giving over the majority of the revenue to the fintech.

We hope this has simplified the jumble of technical jargon and business models in the growing and evolving banking and fintech world. With constant new pioneers coming to the scene the banking setting is in constant change so keep your eyes peeled and stay up to date on industry developments.