When leveraged properly, Banking-as-a-Service (BaaS) presents many valuable opportunities to non-bank businesses and existing banks, insurers, and other businesses in the financial services industry.
However, given that it is a relatively new concept, some organizations may not yet be familiar with its advantages.
Similar to the way Software-as-a-Service (SaaS) allows users to subscribe and use web-based software programs and applications without having to buy them up front and install them on their machines, Banking-as-a-Service allows non-financial businesses to offer financial services to their customers on demand by partnering with banks and other financial institutions that possess the regulatory certifications to operate in the financial space.
This creates a unique symbiotic relationship that benefits not just the service provider or the financial institution, but also the end-customer. Below are a few of those advantages:
1. BaaS Expands Customer Reach For Both the Bank and the Service Provider
In today’s one-click world, businesses know that customers will flock to the ones that can offer them the most seamless and streamlined experiences.
In especially competitive markets, offering financial services on top of the products that your company already sells is one of the most effective ways to bring them that convenience.
Say for example that you are a clothing brand, facing tough competition in your category. You can boost revenue and strengthen your customers’ loyalty by offering them a debit card that will give them points and rewards every time they use it to purchase something from one of your stores.
With financial services analytics, your organization will be able to track their spending habits and preferences, too, thus enabling you to more deeply understand them and offer them more personalized services. These qualities of life improvements can help attract new customers and keep existing ones coming back for more.
For financial institutions, teaming up with a non-bank business presents an opportunity to reach a greater number of customers without spending too much.
According to experts, traditional customer acquisition usually costs financial institutions between $100 to $200. Through BaaS, that cost is drastically reduced to as little as $35.
It also allows the bank to offer its services to underserved segments of the population who may not be able to access the aforementioned services due to missing documentation or geographical factors.
2. BaaS Encourages Collaboration Between Incumbents and Fintech Innovators
It is a known fact that the rise of fintech disruptors and innovators has unnerved even the largest financial institutions in the world.
In January of 2021, Jamie Dimon, CEO of JPMorgan Chase—the largest bank in the United States by total assets—said that the organization should be “scared —less” of fintech companies, further emphasizing the need to be “quicker, better, [and] faster” than these nontraditional financial organizations. Instead of feeling the squeeze, though, a bank—even a small one—could utilize BaaS to its advantage.
The idea is to collaborate with fintech, not to compete with it. Designing and distributing financial products are part and parcel of what banks do daily.
To accomplish it, they work with providers in an intricately connected technical, business, and operating model. It is an undoubtedly costly process, one that is only compounded by the fact that banks also have to pay to maintain pace with ever-changing regulatory requirements.
However, despite spending billions of dollars, they often cannot build a brand- and developer-friendly APIs. By leaning into BaaS, a bank can instead work with a fintech company with those capabilities in exchange for letting that company use their facilities.
The bank can even profit from the relationship by monetizing BaaS, turning the fintech into a customer.
3. BaaS Reduces Digitization Costs for Incumbents
It is no secret that some incumbent financial institutions are currently embroiled in a struggle to assert their relevance as the world increasingly becomes more reliant on digital technologies. They are not performing as well as they should, held back by inefficiencies brought on by using outdated technological assets.
Meanwhile, challenger banks that have fully embraced digital are offering the very same products and services to a wider customer base at a significant fraction of the cost.
Fintech companies are also coming in to crowd the pool, some of them having obtained the necessary banking licenses required to offer BaaS to non-bank businesses looking to give those options to their customers.
In response, incumbents are investing billions of dollars into digitization just to bring their existing business models into the 21st century. However, instead of merely transforming the old, it may be more effective to abandon tradition for something new. BaaS allows incumbents to embed their products into a more diversified group of digital platforms, including e-commerce, health, retail, travel, and more.
Fintech will likely continue to democratize finance, and BaaS will certainly be helping it along. Embracing this new way of doing business might prove just the ticket to surviving in an increasingly competitive financial environment.
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