The rapid technological development has left no industry untouched. The banking industry is also heavily affected by it. And with the pandemic revolutionizing the way industries and customers interact, the banking industry has undergone huge transformations.
With the increasing demand for integrated services, the Banking as a Service (BaaS) model gave the banking sector to cater to this increasing demand. Did you know that the BaaS industry is predicted to reach $11.34 billion by 2030?
But what is BaaS? Is it as advantageous as it seems? Let’s discuss this and more in this blog.
What is Banking as a Service?
The number of BaaS providers in India has exploded in recent years. And India is not the only country to witness this change. But first, let us first learn what BaaS is.
In simple terms, BaaS allows organizations to provide financial services to their customers. This is made possible with API integration. On the surface, it might not seem like much since all of us are habitual in using financial services on all types of platforms. But let’s understand this with an example.
Suppose you have a cab business (like Uber). You want to provide your customers with more incentives and personalized services like an online payment platform, loyalty points, or one-click loans for car rentals. While these services are beneficial for your customers, it is not so easy to avail of them. You need licenses to provide them, which is not easy.
This is where BaaS helps. BaaS removes the need to get these licenses. All you have to do is integrate with banks to provide the services you want, such as offering insurance, accepting payments, offering debit/credit cards, etc. This API integration helps your business become an intermediary in the process without the pressure of getting certified as a banking service.
Benefits of BaaS
BaaS has endless benefits for all the parties involved in the process. Let us discuss them one by one.
For banks
- Increase revenue
BaaS has increased revenue sources for the bank due to easy API integrations. Not only will they reach more customers, but they will also earn fees from the businesses using their services. They will also be able to expand their product offerings. However, the most profitable collaborations would be with highly scalable business model businesses.
- Saves cost
The BaaS model has enabled banks to reach a wider audience at lower costs. This is because they benefit from partnerships with third parties through access to already prepared solutions. With this access, they don’t have to invest in technological developments separately.
- Increase sources of customer insights
More and more customers today prefer personalized services. BaaS not only allows banks to serve more customers but also get insights. Banks can receive insights about customer behavior, journey, and buying habits. This allows them to customize their services to meet the customers’ needs.
For non-bank companies
- Faster service
The biggest problem that non-bank companies faced was the high resource requirement for getting licenses to provide banking services. This also distracted their focus from their core business activities. However, with BaaS, businesses can directly integrate with banks without worrying about licenses. This enables them to provide faster services to their customers.
- Increase customer satisfaction
Banks command customers’ trust. Integration with banks allows businesses to use that trust and increase customer satisfaction. It also improves customer loyalty and enables superior customer experience. Just like banks get increased customer insights, businesses also get better insights into their customers, allowing them to offer personalized services.
For customers
The overall customer experience significantly improves because of BaaS. They can access the products/services easily and quickly. They also receive several payment options and banking services without having to interact with banks separately.
For fintech companies
With BaaS, fintech companies can produce financial solutions quickly and cost-effectively. They also don’t need to spend time getting a banking license. BaaS has also eased the flow of data from Fintech companies to banks and customers.
Challenges of BaaS
Despite being a revolutionary technology, BaaS comes with a fair number of challenges. Let us discuss some of them.
– Modernizing traditional banks
The biggest challenge is modernizing the banking systems. Most banks have outdated systems that need to be upgraded and modernized before BaaS can be enabled. The more updated the architecture, the easier API integrations will be.
– Well-defined API strategy
Developing an API strategy is a difficult task. API strategies primarily focused on the ease of integration. The goal is to provide maximum value while keeping the process as simple as possible.
– Changing roles of people in the industry
The core of BaaS is a collaboration with third parties. This creates a possibility of duplication of many functional capabilities. In the long term, BaaS may lead to a shift in the role of banks. Apart from offering their core services, banks may become the assemblers of services offered by their partners.
With the customers turning digital, the banking sector also needs to undergo digital transformation, and BaaS is a key part of it. BaaS is a revolutionary option that has the power to transform the entire finance industry. From banks to businesses to customers, it has become a lucrative option for all the parties involved.