What is BaaS and How does it add value to banks and their corporate customers? Chapter - 2

I am hoping that by this time you have read Chapter 1 where I talked about what BaaS is all about, how it evolved and the three models of how bank’s are offering this to their customers. If you have not read it yet, you can access it here.

 So for this chapter, it only makes sense to go a little bit deeper to understand some finer dynamics of how BaaS works. 

Here’s what we will discuss in Chapter 2.

●     What makes Banking-as-a-Service different?

●    Who’s who in BaaS?

●    What is needed to enable a good BaaS solution?

1. What makes Banking-as-a-Service different?

 Traditional Banking as we had experienced in the past made the bank the sole and only center point across 3 key dimensions of their service offerings –

1.    The bank owned all the technology assets like the core banking system, payment applications, etc.

2.    The bank also owned all the digital channel assets and solutions like online banking, mobile banking, etc.

3.    And lastly, the bank also owned the relationship with the customers

 So consider a scenario of a non-banking firm that offers services to their customers, where they are fully online and digital, but still have to rely on a bank’s digital platform to manage transactions and settlements for their customers. On the other hand, while the bank has the necessary experience and assets to enable banking services, they lack direct access to the end customers of the non-banking firm. 

 In simple terms, what makes BaaS different is the fact that it enables the act of getting these parties together in an ecosystem where there is win-win for them by creating an ecosystem of enabling (or embedding) the banking services within the digital ecosystem of the non-banking firm.

2. Who’s who in BaaS?

In most cases, we will typically come across two key parties that work together to enable a BaaS solution – The BaaS Provider and the BaaS Partner

 THE BaaS PROVIDER – Which is typically a banking license holding institution offering various services to

•      Open and close deposit accounts

•      Perform KYC checks and manage regulatory compliance

•      Enable balance and transaction reporting

•      Process transactions via ACH or other payment rails

•      Accept transactions via checks or debit cards

•      Owns the technology assets like the core banking system, payment applications, etc.

THE BaaS PARTNER – Which is literally any business that would want to enable (or embed) banking services into their “non-banking” digital ecosystem, thereby providing their customers with significant ease of operations and making / receiving payments. The BaaS partner, hence

•      Owns the digital channel assets and solutions like online banking, mobile banking, etc.

•      Owns the relationship with the customers

 With that said, the BaaS Provider is at times unable to bring in all the technology components (we will talk about these components later in this blog) and needs some external support with a Fintech who can plug in those gaps in technology components. While not very common, we have seen banks in the market already working on these relationships to collaborate and enable an end-to-end BaaS solution. We call these Fintechs as BaaS INTERMEDIARIES

3. What is needed to enable a good BaaS solution?

A typical technology solution that addresses the key needs of the BaaS Partner, and more importantly the end customers, requires the BaaS solution to provide a robust framework to handle the ability to –

 1.    Create and manage the accounts for these end customer (also called as virtual customers / accounts)

2.    Manage balances, transactions, interest (where applicable) and reporting on these accounts

3.    Orchestrate the money movement and report on these activities, while managing exceptions

4.    Enable the ecosystem to manage all the API’s that can be embedded into the digital experience enabled by the service provider (your bank’s customer)

5.    Manage the complex end-to-end integrations between all applications

 Additionally, it is also vital for a good BaaS offering to be –

COMPOSABLE – To address the various use cases across the 3 BaaS models with a common infrastructure and not reinvent the technology every time a new business need comes up. This should also make it easy to implement a solution that can work for different market segments, again without having to reinvent the technology

CONTEXTUAL - Seamlessly blend banking into the user experience of end customers using digital systems of the BaaS Partner, and distinctly support the digital user journeys for end-customer segment and user persona

 HYPERSCALE – Ensure that the platform is scalable to significant volumes, is resilient across infrastructure and application layers and designed to securely work on the open internet

 The picture below will help understand the relationship between the various parties and the role that they play in a BaaS ecosystem

About The Author –

Balakrishnan Narasimhan

Senior Vice President and Head of Solution Consulting - Digital, Payments and Cash Management - Americas

Stay tuned for more details in Chapter 3 of this blog…. Coming soon…