What is Banking as a Service (BaaS) and why it’s important to businesses

Customers are always on the lookout for solutions to enhance their daily lives, and businesses, in turn, are constantly seeking ways to drive value. Banking as a Service (BaaS) offers a unique opportunity to do both. In fact, a recent study found that 83% of customers prefer to access financial services directly through the SaaS businesses they already use rather than traditional banks¹, highlighting a growing demand for businesses to integrate financial tools and services into their offerings. 

By integrating financial services, these businesses can meet the growing demand of their customers, create new revenue streams, and strengthen their competitive position. Here we’ll discuss how you can use BaaS to do this, while also enhancing customer experience and increasing brand loyalty.

Key takeaways:

• Banking as a Service extends banking capabilities to non-financial businesses, allowing you to integrate and offer financial services to your customers.

• To speed up time-to-market of your offerings, you can leverage the financial infrastructure and expertise of a Banking as a Service provider.

• By offering integrated financial services, you can generate new streams of revenue, increase customer lifetime value, and expand to new markets.

What is Banking as a Service?

Banking as a Service is a solution that lets you offer a wide range of financial services and products to your customers through your business. It expands the capabilities of traditional banking by providing flexible, scalable, and accessible financial products and services for non-banking businesses to offer to their customers. Instead of building these capabilities from scratch, you can partner with a fintech company or BaaS provider and use their existing infrastructure.

With BaaS, you can offer a variety of financial services like multi-currency business accounts, card issuing, and lending to your customers. This means your customers can access customised financial products directly within your website or application, instead of relying on their traditional bank. Using BaaS, you can natively embed financial services to improve the user experience, making it easier to meet the unique and changing needs of your customers.

What’s the difference between embedded finance and Banking as a Service?

Embedded finance is a term that refers to the general integration of financial services into the products of non-financial businesses through the use of pre-existing infrastructure. 

Banking as a Service is a specific subset of embedded finance, where the infrastructure provided lets non-bank entities offer traditional banking services to their customers. This can include local account opening, card issuing, and lending. With BaaS, businesses can build on top of the provider's financial infrastructure and have the flexibility to tailor their ‌‌services to meet specific customer needs.

Embedded finance and BaaS solutions are provided through APIs, acting as digital connectors between the services and your business. This ensures a seamless and integrated financial experience for your customers, allowing them to access these financial services without leaving your business’ website or application.

How does Banking as a Service work?

Banking as a Service is a model where a provider or fintech lends out connections to its functionalities to non-financial businesses for a fee. Businesses then use these elements to integrate financial services capabilities into their products.

There are multiple mechanics behind how BaaS works, with the essentials being:

Partnerships

BaaS begins with a partnership between your business and your chosen BaaS provider. This provider leverages its strategic relationships with leading banks and financial institutions and gives you access to a suite of financial services, like local currency accounts and card issuing.

API integration

You can natively embed BaaS using the provider’s various APIs, like payment APIs or open banking APIs. Your development team integrates these into your existing systems, allowing your business to securely communicate with the BaaS provider's infrastructure.

Customisation and configuration

With BaaS, you can customise and configure financial services to fit your brand, business, and customer needs. For example, you can issue branded payment cards or create a user interface that matches your website.

Customer onboarding

Your customers can create accounts, link their existing business bank accounts, or add funds directly to your financial products, i.e. a digital wallet. The BaaS provider also takes care of the Know Your Customer (KYC) verification process to ensure compliance with anti-money laundering (AML) and other regulatory requirements. By leveraging the BaaS provider's KYC processes, you can streamline the onboarding experience for your customers while maintaining the highest standards of security and compliance.

Regulatory compliance

On top of KYC, the BaaS provider handles the broader regulatory and compliance aspects of the financial services, ensuring that your business operates within legal boundaries, both globally and locally. This reduces the risk of non-compliance with regulations like the Payment Card Industry Data Security Standard (PCI DSS) or General Data Protection Regulation (GDPR), which can be challenging for businesses as they expand operations across borders.

Transaction processing

Once your customers are onboarded, they can start using the financial services you offer. Every transaction, whether it’s a transfer or account management action, is processed through the BaaS provider's system. The provider has security measures in place to make sure transactions are secure.

What are the benefits of using Banking as a Service?

Banking as a Service offers significant advantages over traditional banks for businesses interested in offering financial services.

Faster time-to-market

By accessing pre-existing financial infrastructure through APIs, you can significantly cut down the time it takes to launch new financial products. This means you can respond quickly to market demands and customer needs, getting your offerings to market faster and staying ahead of the competition.

New revenue streams

BaaS lets you monetise financial services. For example, you could issue branded multi-currency payment cards to your customers and charge a small fee on each transaction processed, opening up new revenue opportunities.

Easier global expansion

You can easily scale your operations by using the financial licences and banking relationships of your BaaS provider. This makes entering new markets and offering localised financial products easier since you don’t have to set up a traditional banking presence.

Increased customer stickiness

By embedding financial services directly into your offerings, you enhance user stickiness. This integrated approach encourages customers to rely on your business for multiple services, reducing churn and increasing their lifetime value as they continue to use your offerings for various financial needs.

Greater competitive edge

BaaS can help you stand out in a crowded market by offering unique financial solutions tailored to your customers’ needs. This competitive advantage not only attracts new customers but also strengthens brand loyalty among your existing users as you grow your offerings.

What are some common use cases for Banking as a Service?

Banking as a Service offers a wide range of applications that can change how your business operates and engages with customers. For example, you can:

1. Let your customers create domestic and international accounts with local bank details

2. Enable your customers to receive, hold, and manage funds in their accounts

3. Help your customers convert held balances at interbank foreign exchange (FX) rates

4. Facilitate bank transfers to pay supplier invoices

5. Issue physical and digital corporate expense cards

6. Provide loans and lines of credit to your customers

How can Banking as a Service work for a business?

Businesses can use BaaS to build your own products on top of the pre-existing financial infrastructure and financial licences of a BaaS provider. This means that instead of having to navigate the complex and time-consuming process of getting your own banking licences, handling the associated compliance responsibilities, and building the necessary financial infrastructure from scratch, you can focus on bringing new services and products to market faster.

For example, a travel management business can use BaaS infrastructure to build and offer products that simplify the travel experience for users, like travel disruption assistance, lost luggage financial support, and local payment solutions.

• Travel disruption assistance: In case of flight cancellations or delays, the travel management business can instantly give refunds to travellers by directing loading refunds onto a virtual card with their branding. The traveller can then use the card to book other accommodations or transportation to their destination.

• Lost luggage support: The business can offer instant emergency cash disbursements to travellers who have lost their luggage, letting users have access to funds to purchase essential items while they await the return of their belongings. For example, after a user reports lost luggage to the travel management business, the support team can quickly verify the situation and issue a virtual card for the user, loaded with an authorised amount of funds. These funds can be used to buy necessities like clothing or toiletries.

• Local payment solutions: The business can offer customised local payment solutions for travellers, like multi-currency wallets or physical travel cards. These wallets or cards can be preloaded with funds that are converted to the specific currency of their travel destination. The business can allow travellers to set personalised spending limits for their wallets or cards, with notifications being sent to travellers as they approach these limits.

By building these products with BaaS, the travel management business also ensures that all financial activities performed by their travellers are compliant with local and international regulations, including KYC and AML checks. The BaaS provider handles these compliance obligations.

Things to look for when getting started with a Banking as Service

Getting started with Banking as a Service involves understanding your specific financial service needs and target market, as well as researching and selecting a BaaS provider that aligns with your goals.

Here are a few key things to look out for in BaaS providers.

Do they offer other financial services?

Consider whether the BaaS provider offers a broader range of embedded finance services beyond the core BaaS offerings. Additional solutions, like payments or global treasury management, can help you adapt to new market demands and scale your offerings.

What robust security measures do they have in place?

What kind of security features do they use to ensure systems and data are protected? Key aspects of strong security include data encryption methods, compliance with industry standards like SOC 1 and SOC 2, and secure communication protocols like HTTPS and SSL.

Are they compliant with international and local regulations?

Assess their compliance with relevant international and local regulations, including adherence to standards like GDPR, PCI DSS, and KYC guidelines. This ensures you’re able to protect sensitive customer data, prevent fraud, maintain a strong brand reputation, and avoid non-compliance penalties.

How and where are they licensed?

Understand their global coverage – specifically, in which countries and jurisdictions they hold financial licences. This information is key to ensuring that you can operate smoothly, confidently, and legally in the markets you do business in now, and the ones you may target in the future.

Enhance your financial offerings with Airwallex Banking as a Service solution

Unlock more value for your business by building your own global financial products and services with our Banking as a Service solution.

With powerful and flexible APIs, you can programmatically create domestic and foreign currency accounts in 60+ countries. Your customers can easily collect, convert, and hold multi-currency balances. They can also send fast, cost-effective payouts, or spend funds using brand-issued multi-currency cards.

Airwallex holds 60+ licences and permits from financial bodies across the world. Our secure and compliant infrastructure gives you the confidence to embed feature-rich financial products into your business offerings, creating new lines of revenue and enhancing the user experience.

Sources:

1. https://www.airwallex.com/report/scaling-embedded-finance