Digitization is revolutionizing data across businesses, resulting in additional transparency and improved user experience. Technological advances are allowing growing companies and third parties accessibility to legacy systems and in some cases, placing data directly in the hands of customers.
With the rise of many financial institutions and business platforms in the financial services sector, trying to wrap your head around the many technical terms might make you feel giddy. Banking as a Service or BaaS is one such field that is relatively difficult to understand. In our comprehensive overview, we'll help you navigate the linguistic maze of modern banking business models, BaaS providers, and BaaS trends in India and the global market.
What is BaaS?
Banking as a Service (BaaS) refers to the distribution of banking products and services by third-party distributors who connect directly to banks' systems via APIs to develop banking services on top of the banks' regulated infrastructure. BaaS products enable innovative, specialized offers and bring them to market faster by combining non-banking enterprises with regulated financial infrastructure.
How does BaaS work?
If you did not understand the BaaS model from the aforementioned definition, no worries, the following example will easily explain the game.
Consider yourself the CEO of an airline for a moment. You're up against the stiff competition, and you'd like to boost client loyalty. Providing your clients with a debit card can be a feasible option as you can reward them with loyalty points every time they spend. Moreover, customers would interact with your brand every time they used their cards, helping you better understand your consumers and provide them with more personalized services by analyzing their buying habits.
Another option can be to offer online loans to your customers to pay for their tickets. In this manner, your consumers may pay for their vacation without having to stop their shopping experience, enabling you to sell more tickets and have a direct impact on how much money your clients spend. In comparison to a single transaction, a loan reflects a considerably deeper client relationship with significantly more connections.
These and many other options are available for non-banking companies to boost their user experience while simultaneously increasing revenue. However, if you want to provide financial services, practically every government on the planet demands a banking license. And, because of banks' systemic importance to the economy's running, obtaining such a license is tough. Obtaining a license necessitates not just considerable capital requirements, but also adherence to stringent money laundering, banking secrecy, and deposit protection laws, to name a few. It is where Banking as a Service (BaaS) enters the picture.
Using BaaS, you can carry on with your business, providing the financial services your customers require, without reverting to the banking business.
BaaS providers in India
Banking as a Service is, by no means, a new concept that has emerged as a consequence of COVID-19. Its beginnings may be traced back to 2012, when French bank Credit Agricole launched its app store. However, Yes Bank and RBL Bank were the first to introduce BaaS in India in 2013 by providing many APIs (Application Programming Interfaces) to developers.
Other big Indian banks that provide BaaS include:
Citibank
J.P. Morgan Chase Bank (JPMC)
Wells Fargo
Barclays Bank
HDFC
ICICI
Kotak
Apart from these private Indian banks, many FinTech startups also provide Banking as a Service:
Zeta
Setu
Yap
Use of BaaS in India
Following are examples of some established banks in India, making use of BaaS to take its customer service and user experience to the next level:
RBL and Bajaj Finance are working to provide car loans across India, leveraging RBL's safe and regulated digital infrastructure and Bajaj Finance's pan-India reach to assist consumers with financing and purchasing in one location.
OPEN, a financial services company, uses ICICI Bank APIs to give entrepreneurs credit choices for managing vendor payments, billing, and accounting.
JP Morgan Chase partnered with On deck, a fintech firm, to expedite the processing of small business loans.
Advantages of BaaS
Banking-as-a-service, or BaaS, is an ideal opportunity for banking institutions, insurance companies, and financial advisors to reach a larger number of consumers for lesser money by partnering with non-financial companies.
BaaS propels both banks and non-banks to new heights, which of course, benefits the consumer on both fronts. Here are a few advantages of Banking as a Service:
Increased Revenue
BaaS enables banks to exchange information through third-party banking institutions via APIs, providing new revenue streams for banks as open banking becomes the norm.
FinTech and IT firms are ahead of the curve in terms of innovation and speed. Banks, on the other hand, have the trust of their customers and a vast amount of funding capacity at their disposal. So, the amalgamation of both these sectors will create new revenue streams for both the sectors individually and collectively.
Cost-efficient Initiative
Banks can benefit from BaaS not just in terms of income generation, but also in terms of cost reduction. Banks are not required to invest in technological advancement.
Consequently, they may profit from third-party collaborations because they already have ready-made solutions. In reality, this can assist banks in making additional investments and earnings estimates.
Bypass Banking Regulation
Non-banks and third-party suppliers have limited access to client data and banking capabilities. As previously stated, obtaining a banking license implies significant capital requirements. Furthermore, not everyone has the resources necessary to sustain legacy systems and comply with regulatory laws.
BaaS allows fintech companies and individuals to sidestep banking licensing rules by interacting directly with a bank. Financial startups can get off the ground much faster without having to deal with a bank's IT infrastructure.
Conclusion
All-in-all, BaaS might seem like the conceptualization of a great idea but its execution is not a piece of cake. Go to synlabs.io if you need help understanding the BaaS/FinTech market or if you require FinTech solutions for your startup.
SynergyLabs is a cutting-edge technology consulting organization specializing in enterprise-grade financial startup solutions, including ready-to-deploy PODs. It is a well-funded business that provides solid and scalable solutions to help FinTech companies accelerate their expansion. It was established in 2017, providing end-to-end product development services for Banking, finance, and insurance sector. If you're a FinTech startup or corporation looking to develop cutting-edge solutions, send us an email at info@synlabs.io to learn more about what we can do for you.
