Banking as a service (BaaS) is simplified access to bank functionality and opens a new world of possibility for banks to provide third parties with access to core systems and functionality which can be integrated into third-party products and applications. From a bank’s perspective, BaaS allows third-party software providers to access bank functionality through APIs, so it is innovative from both a technical and business viewpoint.
Banking as a Service also empowers third parties to offer bank products – such as deposits or loans – without having to become regulated. Banks can generate new revenue streams beyond their traditional customer base through a combination of setup fees, recurring fees or revenue sharing agreements.
Overall, the financial world is abuzz about Banking as a Service (BaaS) and opportunities around embedded finance solutions. It's everywhere in the market, but what does it mean for you and your bank? While fintechs, neobanks, bigtechs and other non-traditional players are jumping in and taking on services banks typically provide, many banks have been slow to respond and could risk losing revenue and market share to this new breed of competitors.
What are Banking as a Service Embedded Finance Solutions?
Banking as a Service embedded finance is not necessarily a new concept. It has been available in one form or another for a number of years. Today, it has evolved into a cloud-native solution that automates and embeds payments and card services to provide a seamless customer experience. What makes it relatively easy to get started is access to an API library, like FIS’ Code Connect. Product development that used to take months can be accomplished in days or weeks and it can be done cost-effectively. Another major difference between yesterday and today is the volume of available offerings and the growing number of organizations that are currently expanding the integration of banking services within their apps.
A recent article explains that embedded finance involves the merging of a non-financial service provider, such as a retailer or ride-sharing company, with a financial service, such as payment processing, lending, or insurance. With embedded finance, small and large businesses can pay people remotely, get paid remotely, and avoid having to handle actual paper checks or go into a physical location to cash a check.
BaaS is not a fad – BaaS is the Future
Banks and credit unions of all sizes are seeing the value of extending embedded services through third parties, according to an American Banker article. Banks can broaden their customer bases, develop new revenue sources in the form of fees from third parties and stay relevant as big tech and fintechs offer consumers high-concept apps. Additionally, private equity firm Lightyear Capital estimates that banks that capitalize on this trend could collectively generate $230 billion in net new revenue by 2025.
Banking as a Service embedded finance is taking hold and is not a trend or fad. Its digital technologies make it more convenient for clients to access the services they need when they need them, and they can do it all in one place — the point of service. Like buying a large screen television and electing a BNPL payment plan and an extended warranty.
How will Banking as a Service Embedded Finance Solutions Benefit your Bank
With customers demanding the latest digital banking products and solutions, here are some thoughts on how embedded finance products and services can benefit your bank:
- New revenue sources – to remain relevant and competitive, banks will need to develop new strategies around embedded finance products and services.
- Attract new customers - attracting new customers is challenging enough but offering new innovative embedded payments products will keep your bank in the consideration set allowing you the opportunity to grow.
- Retain your existing customer base – after you invested time and money in nurturing a relationship the last thing you want is for your customers to find another service provider.
- Increase client engagement - according to Lightyear Capital, 87.5% of U.S. nonfinancial providers of embedded banking that say it has increased client engagement.
- Lower the high costs of doing business – with rich API libraries, getting started with embedded finance offerings can happen quickly and cost effectively. Most solutions are scalable so you can start small and expand as market acceptance warrants.
- Increase profitability – creating new revenue streams, retaining and attracting clients, keeping product development costs low and fast speed to market are all ingredients to improve your bottom line.
Get Out in Front of Banking as a Service Embedded Finance Solutions
A recent article in The Financial Brand, states, “for much of the past five years, as more consumers use payments, lending and banking services that are part of non-traditional banking apps, the traditional banking relationship had been increasingly fractured.” The ability to engage with banking services without going to a bank is what consumers and businesses desire, especially for transactions.
There is too much at stake for banks not to jump in the water. Banking as a Service (BaaS) embedded banking solutions has taken time to catch on, but now more than ever banks need to get in front of the growing wave to remain relevant with its customers.
Editorial Note: This article was originally published in August 2021. It has been updated for accuracy and comprehensiveness.