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

Customers are always looking 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 banks, highlighting a growing demand for businesses to integrate financial tools and services into their offerings.¹

By integrating financial services, these businesses can meet their customers' growing demands, create new revenue streams, and strengthen their competitive position. Here, we’ll discuss how you can use BaaS to do this while 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 the 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 revenue streams, 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 your customers a wide range of financial services and products through your platform. 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 your customers various financial services, such as multi-currency business accounts, card issuing, and lending. Customers can access customized 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 meeting your customers' unique and changing needs easier.

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

Embedded finance refers to the general integration of financial services into the products of non-financial businesses using pre-existing infrastructure.

Banking as a Service (BaaS) is a subset of embedded finance. The infrastructure provided lets non-bank entities offer traditional banking services to their customers, such as local account opening, card issuing, and lending. With BaaS, businesses can build on the provider's financial infrastructure and 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 your customers a seamless and integrated financial experience, 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 in which a provider or fintech lends 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 or open banking APIs. Your development team integrates these into your existing systems, allowing your business to communicate with the BaaS provider's infrastructure securely.

Customization and configuration

With BaaS, you can customize 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 oversees 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 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 providing financial services.

Faster time-to-market

Accessing pre-existing financial infrastructure through APIs can significantly reduce the time it takes to launch new financial products. This lets you respond quickly to market demands and customer needs, bring your offerings to market faster, and stay ahead of the competition.

New revenue streams

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

Easier global expansion

You can quickly scale your operations using your BaaS provider's financial licenses and banking relationships. This makes entering new markets and offering localized 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 attracts new customers and 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 their own products on top of the pre-existing financial infrastructure and financial licenses of a BaaS provider. This means that instead of navigating the complex and time-consuming process of getting your own banking licenses, 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 users' travel experiences, such as travel disruption assistance, financial support for lost luggage, and local payment solutions.

• Travel disruption assistance: In case of flight cancellations or delays, the travel management business can instantly refund travelers by loading refunds onto a virtual card with their branding. The traveler 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 travelers who have lost their luggage, giving users 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 authorized amount of funds. These funds can be used to buy necessities like clothing or toiletries.

• Local payment solutions: The business can offer customized local payment solutions for travelers, like multi-currency wallets or physical travel cards. These wallets or cards can be preloaded with funds converted to the specific currency of their travel destination. The business can allow travelers to set personalized spending limits for their wallets or cards, sending notifications to travelers as they approach these limits.

By building these products with BaaS, the travel management business also ensures that all financial activities performed by their travelers 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 and 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 broader 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 security features do they use to protect systems and data? 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 can 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 licenses. 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+ licenses and permits from financial bodies worldwide. Our secure and compliant infrastructure gives you the confidence to embed feature-rich financial products into your business offerings, creating new revenue streams and enhancing the user experience.

Sources:

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