Banking-as-a-Service: Overcoming Limitations to Offer Unique Solutions

The Banking as a Service (BaaS) market has undergone massive growth in recent years.

It looks set to grow even faster in the decade ahead as banks seek to expand their customer reach and non-financial service companies fully embed financial services into their offerings. 

The latest research by A2Z Market found that global BaaS revenue is expected to grow at a compound annual growth of 17% over the next seven years to 2030, with the integration of artificial intelligence upping the ante in an industry that is undergoing a profound transformation. 

BaaS adoption is accelerating so quickly globally, particularly in the US, where it is harder to get a banking license, and because it offers traditional financial services companies the ability to digitize and optimize their services without having to overhaul their entire core software systems. 

The economics is also compelling for banks across the US, especially for banks under $10 billion in assets, according to CCG Banking Study. These banks are not required to adhere to interchange caps and are well-positioned to capitalize on customer swipes. 

A truly global industry, the BaaS providers have established themselves globally, and are servicing the burgeoning US market, including SolarisBankable, and ClearBank

BBVA was the first bank in the US to take full advantage of what this innovative technology offers by directly offering BaaS provider services. Its BaaS Open Platform enables companies to connect to its core digital banking platform via APIs and access services like Move Money, identify verification, account origination, and card issuance.

Another bank setting itself up to capture market share in the US is Mbanq, which expanded its relationship with Temenos in December on the expectation that embedded finance adoption in the US will grow to $7 trillion by 2030. The partnership combines Temenos’ composable banking platform and Mbanq’s multi-currency, digital wallet, and other financial services to service fintech and regulated partner banks. Mbanq’s target market includes Ivy League Universities, top sports teams, and celebrities, to which it offers branded deposit programs and debit cards, credit cards, lending, and payment capabilities.

The CCG survey found that 76% of C-suite US bank executives were “at least somewhat interested” in offering BaaS solutions if they haven’t already, and more than half were “very interested” in doing so. 

Driving their interest in integrating BaaS into their technology ecosystem is the desire to improve customer journeys – a weakness that fintech companies have exploited over the past decade. Other focus areas include extending their services by integrating with fintech that offers something different and staying on top of regulatory changes.

BaaS solutions are geared to enable banks to meet increasingly demanding regulatory requirements intended to combat money laundering and terrorism, protect customers’ data privacy, and ensure customer transparency with greater ease and at a far lower cost. Without these AI-driven digital solutions to compliance requirements, financial services companies would incur a growing need for compliance experts, the software systems to support them, and more complex and cumbersome client onboarding requirements. 

The power of BaaS lies in its neatly packaged start-to-finish technology platform, economies of scale if factored in as an imperative at the start, and the conversion of substantial potential upfront development costs into variable costs because clients pay a monthly cost for the BaaS platform. 

While there are many benefits to launching digital banking solutions off BaaS platforms, companies looking to participate in the explosive growth and ongoing innovation in the financial services sector opting for this technology solution instead of the alternatives also need to carefully consider the constraints that could hamstring their growth prospects down the line.  

Companies building their financial services solutions on a BaaS platform have limited control of their customer and users and are tied into one software provider after launch. The platform may also not offer certain financial services, products, and features that could expand and grow the business at some future point. Companies are exposed to a single point of failure by being tied to one software platform. In many instances, the BaaS provider owns the intellectual property of the BaaS platform.

Thus, the must-have features of any sustainable banking software platform include the following:

● API orchestration layer. The BaaS platform must intelligently coordinate APIs written in different languages and residing on different platforms to provide a seamless, error-free customer experience. 

To achieve this, a company needs to add a dedicated orchestration layer that ensures all APIs in the ecosystem communicate with each other in the same language simultaneously. 

● Customizations – To counter the lack of flexibility of most BaaS platforms, which are typically distributed as standard systems and don’t facilitate customization down the line, companies need to consider how they will attain the flexibility and means to adapt to future market demands.

● A single-tenant, self-hosted back-end for complete control over the data. BaaS offerings tend to operate as multi-tenant solutions rather than single-tenant software, giving each customer their independent database and the security and customization it offers. 

In contrast, while multi-tenancy may be affordable, allowing easy integration and easy maintenance, customers have less control over security because multiple users have access to the same database, and custom changes to the database are generally not an option.

● IP ownership. Customers don’t have access to the IP of the BaaS software platform because the vendor simply grants the customer access to the IP they own for the duration of the contract. Thus, while opting for a single vendor’s BaaS platform may seem compelling from a price and convenience point of view, it may prove more expensive and constraining in the long term.

The hallmark of players who have successfully transformed the financial services industry over the decade has been their ability to innovate and expand their offerings as customer needs have adapted and upscale easily. 

Thus, any new entrant to the market – be it a traditional firm looking to innovate or a fintech wanting to offer something unique – must recognize that their choice of a software platform will determine their ability to build a sustainable and future-proof business that moves with the times. So take the time to consider the many benefits BaaS platforms may offer against their constraints before scoping out the road ahead.