Confused about Banking as a Service (BaaS)? Read our guide, which explains how it works and what problems it solves, and which companies are key players.
What is Banking as a Service (BaaS)?
Banking as a Service (BaaS) is essentially a (regulatory, tech, user interface, etc.) 'solution' that provides banking processes.
BaaS can let many different types of businesses provide financial products to their customers, whether the business is a financial service provider, FCA-regulated business or Fintech company that wants to offer payment and banking services to their customers, or another type of business that wants to embed financial products into the sale of their main products and services for their customers.
Many types of businesses can use BaaS to embed financial products like insurance or payment services like buy now pay later. Offering complementary financial products to their customers enables them to earn extra revenues and boost customer loyalty. An example of this might be British Airways offering travel insurance protection for a trip when a customer buys a plane ticket. Or a retailer offering buy-now-pay-later terms to their customers.
How does BaaS work?
Let's say a fintech wants to provide money transfer services and bank accounts to its customers; or a large furniture company wants to offer loans to their customers. How do they do it? These businesses don't have the banking licence needed; they don't have expertise in the product or the technical and regulatory complexities of banking. This is where BaaS providers comes in—they serve as the financial services partners to provide not only the financial product and expertise, but also to meet regulatory requirements.
BaaS providers have expertise and provide the required elements (banking licence, compliance, risk management, a user interface, provision of the actual product, etc.) in a modular fashion. For example, one BaaS provider might provide the banking licence, another the user interface and know your customer (KYC) compliance. Some BaaS providers can supply multiple elements; they each have their own strengths and capabilities.
Businesses that use BaaS typically pay a fee to access the BaaS platform, which is done via APIs—an application programming interface (API) is essentially a software interface that forms a connection to share access to a service or other software. BaaS providers use APIs to give their customers access to the systems needed to provide these financial products.
Why BaaS is needed from a regulatory perspective
In order to sell financial products like insurance, bank accounts, credit and debit cards, and more, a banking licence is required.
It's difficult to become a bank—there's a massive amount of time, money and regulation required to get a banking licence. But nearly any business (e.g. e-commerce site, retailer, transport company, travel company, fintech, etc.) can pretty easily act like a bank (that is, offer embedded finance banking services to its customers) by partnering with a real bank that will essentially share its banking licence—and offer the products and tools required.
What do BaaS providers actually provide?
As mentioned above, there is a wide array of services and tools that BaaS providers can supply. These are often referred to as a 'stack'—and you can build your stack to cover all of these elements by going to one or more BaaS providers. Some BaaS organisations provide the banking licence if they have it, while others focus on other elements of the stack.
- Banking licence
- Compliance and regulatory reporting for KYC, AML, PSD2, and GDPR
- Risk management
- User interface
How long does it take to set up BaaS
BaaS providers supply modular elements that can be brought online in just a few hours, in some cases.
Why is BaaS taking off?
BaaS is becoming very popular, which is down to some major consumer shifts, regulatory trends and technological advancement.
In recent years, customers have become more receptive to using financial products offered by non-financial businesses. For example, buying insurance to cover expensive concert tickets or taking advantage of a buy-now-pay-later offer when buying a big-ticket household item.
Not only that, but the shift to online shopping has been amplified during the pandemic, with customers not only shopping more online but becoming comfortable sharing their personal preferences and details with businesses they trust. Brands with high customer trust and loyalty can deepen their customer relationships by offering financial products that help their customers, complementing sales of the main business. Primarily, this means embedding financial products that help customers pay for or protect (i.e. with insurance) whatever it is they are buying.
Recent regulatory changes have spurred to development of BaaS. For example, PSD2 is legislation that was put in place to tackle fraud by improving customer authentication processes. With banks having to invest heavily in satisfying PSD2 requirements, they are looking to help recoup some of these costs by expanding their business models and using these tech builds in new ways (e.g. providing BaaS solutions).
And the advent of open banking lets banks, third-parties and technical providers simply and securely exchange data to the benefit of their customers.
BaaS players are a mix of companies that use their own banking licences (some of which have their own retail customers as well, some don't) and companies that use the banking licence of another institution (e.g. Cambr). Here are quick overviews of some of the leading BaaS providers in the market today:
- EMBank. A Lithuanian digital bank, the European Merchant Bank (EMBank) offers traditional banking services as well as financial technology solutions. Their total BaaS package for embedded finance consists of a European banking license and a single API-based software.
- solarisBank. The first Banking-as-a-Service platform with a full banking license. They provide APIs for digital banking and cards, lending (splitpay, customer lending, frontint), payments, KYC (including Bankident) and crypto services.
- Bankable. A global BaaS provider that enables financial institutions, corporates and fintechs to develop and deploy bespoke or turnkey banking solutions, as white-label or via APIs. Specialises in real-time payments, cross-border payments and virtual account services, e-ledgers, virtual & plastic card programmes and e-wallets. They do not have a banking licence but work with multiple sponsor banks, processors and card manufacturers in the payments ecosystem.
- Treezor. A one-stop shop payment solution for FinTechs, Treezor provides both a regulatory license and an API-based offer for payment payment servicing, plus card issuance, x-Pay and KYC. Acquired by the Societe Generale group in 2019. In its early days, fintech success story Qonto used Treezor as a third-party banking partner. Treezor now has more than 40 clients.
- 11:FS Foundry. Consultancy 11:FS has started subsidiary 11:FS Foundry to specialise in core banking solutions (upgrades and overhauls).
- Cambr. US-based Cambr provides a full-stack banking service with a network of over 850 community banks. They offers basic deposit accounts, compliance, payments, banking, and debit cards.
- ClearBank. The UK's first new clearing bank in 250 years, Clearbank uses their banking licence and tech solutions to enable financial service providers, FCA-regulated businesses, and fintechs to build their own payment and banking solutions and services. No retailcustomers of their own, ClearBank is a 'bank for banks'.
- Starling Bank. A UK-based digital challenger bank that focuses on current and business account products; they've also launched their own BaaS platform. They now have over 30 BaaS clients, including SumUp, CurrencyCloud, Moneybox and Standard Chartered. Their first BaaS client was Raisin and they were awarded a UK government contract to provide payment services for the Department for Work and Pensions.
- Fidor Solutions. Sold by Fidor Bank, a German online bank to Sopra Steria in 2020. Fidor specialises in digital banking including middleware solutions, community based-banking, customer support, marketing and customer acquisition services. They serve a wide range of sectors including banks, telecoms and commerce. Clients include Banxy Bank and Abu Dhabi Islamic Bank; until May 2020, Fidor provided O2's mobile banking service in Germany.
- BBVA. Multinational Spanish bank Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) spent years developing its core digital banking platform, now available to third parties via API. Services include: Move Money, Identity Verification, Account Origination, and Card Issuance.