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The Future of Finance: Banking-as-a-Service

June 15, 2022
Banking-as-a-service is a middle man between fintechs and legacy banks. (Photo credit): Getty Images/VioletaStoimenova

An explanation of banking-as-a-service and its market outlook.

Across the board, consumers are becoming more digitally oriented—and that includes the financial industry. In their 2022 U.S. Retail Banking Customer Satisfaction Study, consumer research firm J.D. Power found that nearly half of banking customers have moved to primarily digital-centric banking relationships. That shift is partly due to customer dissatisfaction over the lack of personalization in banking services and banks’ inability to make their customers feel supported during times of financial stress.

However, banking-as-a-service (BaaS) can change that paradigm. The global BaaS market is projected to grow by over 25% by 2027. BaaS allows legacy banks, fintechs, and consumer-facing nonbank companies to seamlessly integrate and provide customizable and highly targeted products for their customers.

What is banking-as-a-service?

Banking-as-a-service is essentially the technology embedded finance, which is when a nonbank company provides financial services that can range from digital wallets, to bank accounts, to buy-now-pay-later services. For instance, Starbucks is a prime example of a nonbank company providing embedded finance—its customers can use its app to pay for items and even store cash balances on their virtual Starbucks card. Another form of embedded banking that many people have likely seen when grocery stores or supermarkets also have in-store bank branches.

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

Legacy banks have historically both provided the banking systems as well as the distribution networks for those products and services. However, as BaaS gains popularity, Deloitte has categorized four primary “ecosystems” in BaaS.

    1. Provider-Only

    Legacy banks fall under this category. They provide traditional banking services and products such as issuing debit cards, account opening checks, and underwriting loans that they either provide directly to the consumer or to a fintech partner. BaaS can help “providers” scale at lower costs and earn incremental revenue by providing banking services directly to their distributors’ customers.

    2. Provider-Aggregator

    Many fintechs are provider-aggregators: they have a core business that offers payment processing to their clients but also offer APIs so that their clients can create their own financial services to their own customers. "Provider-aggregators” can deepen relationships with their distributor customers by offering integrated financial products and services, which then allow those distributors to increase customer stickiness.

    3. Distributor-Aggregator

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

    4. Distributor-Only

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

BaaS in action: BayaniPay and East West Bank

Los Angeles-based fintech company BayaniPay was created to serve Filipino professionals working in the United States, with the eventual aim of serving the greater Asian American community. BayaniPay is a mobile-based fintech company that offers zero-fee remittances between California and the Philippines, enabled 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 were made possible by embedding East West Bank’s digital banking services as BaaS. Digital account openings also make it easier for new customers—especially new immigrants—to open bank accounts.

“The ability to provide secure banking and compliant banking for startups like us is really hard to do—that’s something that would normally take us two years,” says BayaniPay founder and CEO Winston Damarillo. “Through East West Bank, I get the shortcut. And this allows the bank to expand dramatically without investing significantly, and we’re able to get as many customers as we can into your initial circle.” Eventually, the hope is that those customers will then use other banking products and services.

BaaS—allowing banks and fintechs to become one

Damarillo adds that, as financial services becoming increasingly digitized, fintechs and legacy banks are starting to meet in the middle, with BaaS as a key foundation.

“The banks are good at treasury, capital adequacy, compliance and security, and all that stuff,” Damarillo says. “Fintechs are good at customizing to the customer—and that partnership is very, very important. I think we're in that phase where banks and fintechs are working together, and that's a good thing. That will accelerate the benefit of banking to as many people as possible.”