According to Bain Capital Ventures, Banking-as-a-Service (BaaS) is set to become a US$3.6 trillion industry by 2030.

There are recent signs of serious BaaS momentum. Leading banks including BBVA and JPMorgan Chase have already ramped-up significant investment in to the unique API-type model, and Goldman Sachs has announced its own new BaaS portal for developers.

The first time I saw the serious potential of BaaS was in 2018 when NAB Bank and Xero teamed up to allow Australian small businesses to push and complete banking payments from within Xero’s interface.

It was alarming at the time. NAB Ventures had a reputation within Fintech circles as brave innovators, but removing the need for business customers to use NAB’s own internet banking portal seemed dangerous.

Fast forward two years, it’s becoming more dangerous for banks to ignore BaaS. According to VC firm Andreessen Horowitz, early adopter banks that have already embraced BaaS are experiencing a 2–3x above-market return on equity.

Banks, traditionally reluctant to surrender their customer touch points to anyone, are beginning to realise the scale of opportunity that BaaS presents.

What is Banking as a Service (BaaS)?

Defined by 11:FS Research, 'Banking as a Service is the provision of complete banking processes, such as loans, payments or deposit accounts, as a service using an existing licensed bank’s secure and regulated infrastructure with modern API-driven platforms'.

Before the existence of BaaS, it was nearly impossible for non-bank brands to create banking services to support their own customer experience. To do so would require brands to overcome significant barriers to entry including the need to obtain a banking licence, adhering to reserve bank compliance, balance sheet regulation, and building the technology infrastructure itself to support financial products.

Even tech giants with deep pockets, the likes of Apple and Amazon, have not yet convinced themselves on the return-on-investment to create their own banking arm.

Enter BaaS. A new way for banks and brands to integrate powerfully through APIs. BaaS allows banks to ‘share out’ their banking licence to brands by providing a ‘banking stack’ of financial products that can be integrated in to various customer experiences.

The beauty of this model allows financial products to now become accessible to consumers at the point of need. Not within the constraints of traditional banking models or rails. This is a powerful shift in the consumer experience.

Take for example Uber drivers, who track and manage their rides and earnings through their Uber app. At the same time, these drivers need to manage their own business banking, transaction and lending products outside of Uber’s app experience.

By taking advantage of BaaS, Uber can now integrate business current accounts and payments in to its app, allowing drivers a more full service end-to-end experience. Add to this Uber’s own expertise on data, and the potential is massive. Drivers could get powerful insights drawing on the combination of their driving activity and banking data; accessing better timed financial support that is to the minute.

Why BaaS makes sense

Enabling the accessibility of banking products at the customer’s point of need opens up a world of possibilities for both brands and banks.

Apple jumped on this opportunity early. Its partnership with Goldman Sachs in 2019 produced Apple Card, a new way for Apple to offer its own credit card to consumers. The card, made possible through Goldman Sachs’s underwriting and financial licence, has given Apple the ability to integrate its own smart data in order to provide consumers with more powerful insights and credit accessibility.

Amongst a growing list, there are three good reasons for banks to invest in to BaaS.

Data is still king. By providing BaaS services, banks can access the key and untapped potential of ‘reverse-flow’ data generated from consumer brand experiences. Allowing incumbents to strengthen their own financial products for customers.

Secondly, proving BaaS capability enables new income streams, allowing financial institutions to take a piece of the significant revenue that’s available within today’s expansive global tech market.

Finally, banks can also be selective about the type of banking stack they provide through BaaS APIs. For example, enabling access to only two, but well supported, financial products may make the best commercial sense. Brands in turn can also be selective about the financial products they choose to integrate; curating the best in breed financial products in to a customised stack made up of different banking providers.

Win-win-win

Imbedding financial products in to digital brands creates better customer experiences. End-users including Uber Drivers, using leading consumer-designed solutions, can now enjoy a more full experience where financial products become accessible and integrated in to their daily technology. That’s a win for customers, a win for brands, and it should be a win for banks.

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