December 30, 2021

Banking as a Service Guide

Carla McMorris

How Banking as a Service Accelerates Fintech Services

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What is Banking as a Service?

Banking as a Service is a model that empowers non-bank companies to integrate digital banking services into their products and services. Globally, Banking as a Service is at USD 356.26 Billion in 2020 and is projected to reach USD 2,299.26 Billion by 2028, growing at a CAGR of 26.33%. Before Banking as a Service, only licensed banks could offer services such as deposit accounts, loans, credit cards, and payment services to consumers and businesses. With Banking as a Service, companies can integrate directly with a bank that offers Banking as a Service, or with technology platforms that partner with banks and other providers.

Technology platforms that offer Banking as a Service provide customers with easy to deploy APIs so developers can directly integrate customizable financial services into their products and services. Companies pursue banking services integration with the goal of retaining customers, boosting engagement, and increasing revenue. Airlines can offer their frequent flyers mobile deposit accounts with branded debit or credit cards. Apps can embed payments services so end users don’t have to input their card numbers for every transaction. 

Because the Banking as a Services platform acts as an intermediary between the company and the bank, they can support regulatory requirements like compliance and KYC.

How does Banking as a Service work?

It begins with Application Programming Interfaces (APIs) which allow different applications to communicate with one another. APIs from a licensed bank are integrated with almost any type of company --a digital bank, a fintech company, a traditional company, or technology platforms that provide financial services for multiple companies. They pay a fee to the licensed bank (or the Banking as a Service platform) for access to the technology that makes it possible to develop branded financial products, called white label banking products, like deposit accounts, debit and credit cards, loans, and other services.

What is Embedded Finance or Embedded Banking?

Sometimes thought of as the future of finance, Embedded Finance or Embedded Banking are banking services provided by non-bank companies. Banking as a Service empowers Embedded Finance services. 

Companies from traditional sectors like retailers, big tech, automobile manufacturers, and telcos are embedding banking services into their products and services, helping their customers complete transactions in one engaging experience. 

Popular examples of Embedded Finance programs are ride-sharing apps like Uber and Lyft where you complete your transaction in the application without having to present a debit or credit card to the driver. Big tech companies like Google and Apple are expanding their offerings with Embedded Finance to include digital wallets, payments, lending services, and card services for their customers.

What is the Banking as a Service business model for banks?

For the banks that have invested in modernizing their technology and building out capabilities like APIs to enable banking as a service, there is an opportunity to improve their business models. Banks can charge nonbanks for access to their APIs either on a fee schedule or by service. As their nonbank customers grow, so do the revenues for the bank.

What is Multi-banking?

Multi-banking stands for Multiple Banks. When technology platforms offer Banking as a Service partner with more than one bank, they can offer their nonbank customers more flexibility and additional services, like increasing interest rates and increasing FDIC coverage on deposits. 

What are the opportunities for Banking as a Service?

For Consumer Brands

Consumers are demanding seamless experiences that integrate services like retailing and banking, ridesharing and payments, airline services, and credit cards into fast, one-tap applications. As more companies work with Banking as a Service providers to integrate customized banking services, they’re likely to gain higher customer engagement and loyalty.

For B2B Brands

Checks still play a dominant role in the B2B payment landscape, but more and more companies are looking to replace traditional back-office and customer-facing systems with integrated banking services. By leveraging Banking as a Service, B2B companies can develop modern banking services, build efficiencies from faster payments methods, integrate new products like loans and cards, and drive new revenue streams from interchange as they boost customer engagement and loyalty.

What is Open Banking?

Banking as a Service thrives because of Open Banking. 

Open Banking is a system where banks open their APIs to allow access to financial information by third parties. This system opens the door to financial transparency which helps fintechs develop better applications. For example, Open Banking makes it possible for a neobank to track its customer’s spending (with their permission) to help them manage their budget. Open Banking also puts pressure on financial institutions to keep their APIs current so third parties can easily and efficiently access their services for the development of their applications.

Banking as a Service Guide

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Carla McMorris
December 30, 2021

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