What's BaaS? A flock of sheep or another annoying but potent banking acronym? BaaS is a way to modernize and grow the banking industry. It is about an open financial services ecosystem and the API orchestration for customer attention by banks and nonbanks. But the industry has yet to land on an authoritative definition of what it is, so I cobbled together what I believe to be the most apt description of what it delivers.

“Banking as a Service (BaaS) allows nonbanks (usually in the form of a brand) to embed financial services into its customer experience by selecting capabilities offered by BaaS providers (bank white-label products) in a modular fashion, usually delivered through an app.”

See illustration of Banking as a Service operating model at the end of the blog.

In the BaaS model, banks are left holding the banking license and, therefore, the regulatory obligations, while third parties deliver financial services at the point of customer need. It’s not a sexy role for banks, but it has the potential to drive new revenues, extend reach, and create new markets at low cost.

For banks to own the apps (front end), they would need to adapt their historied culture from a focus on governance, technology, and risk management to a culture of innovation with a focus on customer engagement, while still shackled with compliance. This is very unlikely to happen.

Providing white-label financial products, through a few lines of code and APIs, to myriad industries ─ communications, hospitality, retail, airlines, energy, card processing and payment, and much more ─ seems more realistic. It could prove to be a low-margin, high-volume business for banks. And, critically, it’s a maneuver that could stop the decline of the banking industry; an industry slowly morphing into a deposit and lending utility.  

Embedded finance

Bank’s data and products communicate with that of their chosen third party via APIs and webhooks. This allows the bank’s customers to access banking services directly through the third party’s websites and apps ─ known as “embedded finance.” And, as the third party never really touches the customer’s money ─ it simply white-labels and delivers the bank’s products ─ it does not have to comply with bank regulations.

There are many successful examples of BaaS already in the market:

• Amazon offers Amazon Payments, Amazon Go and Amazon Cash financial services.
• Shopify’s financial solution comprises 60% of the company’s revenues.
• Ikea’s purchase of 49% of its banking partners means it will soon offer a full suite of banking services instore and online – DIY for Banking.
• Walmart’s partnership with venture capital firm Ribbit Capital means Walmart will soon offer financial solutions within its stores.
• Revolut, a global payments app founded on the premise of making no-fee cash transfers in other currencies, is set to revolutionize the payment corridor between the US and Mexico – and to ease international travel for Americans, no doubt.

If banks want to play a part in this ecosystem, they must first and foremost be willing to share customer data. Further, they must complete their digital-first journey, which requires a well-governed, end-to-end analytics platform – and, equally critically, they must develop an API strategy that syncs with the API ecosystem.  

At the same time, regulators must make it easier for banks to share their data. Establishing universal standards would create a balanced and systematic approach to API development and help fuel innovations that could revitalize the industry.

It’s too early to tell how fast BaaS will evolve, but with a toolbox of AI techniques and a solid API strategy, banks can be important players in the ecosystem that open financial services ecosystem and the API orchestration for customer attention.