The financial services industry is undergoing a revolution lead by new, digital-centric neobanks and fintechs. Built from the ground up with user-friendliness and flexible functionality as their guiding principles, these new players are rapidly gaining traction. A report by AppRadar shows that neobanks are taking the lead in user growth with 18 million more downloads than legacy banks in 2023.

Free from outdated tech and rigid corporate structures, these neobanks and fintechs offer accessible, adaptable services tailored to modern needs. However, they can't do everything. Key financial services like issuing payment cards, holding deposits, and extending credit still require a fully licensed, chartered bank.

Some banks are using their licensing advantage to build their own digital services. But many have found it smarter and more efficient to partner with these new digital players. This is where Banking as a Service (BaaS) comes into play.

What is Banking as a Service (BaaS)?

BaaS is a partnership model where a fully licensed bank provides non-banks or fintechs access to its core systems and regulated infrastructure via APIs, for a fee. This lets non-banks offer a broader range of financial services to their customers without becoming a fully licensed bank themselves.

An important distinction is that Banking as a Service (BaaS) differs from open banking, primarily in their purposes and functionalities. BaaS allows non-bank businesses to integrate complete banking services, such as lending, deposit-taking, and issuing payment cards, directly into their own products. This is achieved through APIs provided by licensed banks, enabling non-banks to offer these services without needing a banking license. In contrast, open banking involves non-bank businesses using the bank's data to enhance their own products. These third-party service providers (TPPs) typically aggregate financial data from multiple bank accounts into a single application, providing users with insights or enabling transactions. Unlike BaaS, TPPs in open banking do not offer core banking services but rely on APIs to access and repurpose account information from existing banks. The EU's PSD2 directive supports open banking by mandating that banks open their data to TPPs to foster innovation and competition. Thus, while BaaS focuses on embedding full banking services, open banking leverages existing bank data to enhance financial products.

Meeting Digital Banking Demands

The banking landscape is changing. With digital services becoming ubiquitous in daily life, consumers expect fast, convenient, on-demand experiences from their financial services too. Traditional banks, with their siloed, inconvenient service models, can't meet these expectations anymore.

Banking as a Service (BaaS) is emerging as a key solution for meeting the growing digital banking demands of consumers. By allowing non-bank businesses to integrate comprehensive banking services directly into their platforms, BaaS enables a seamless user experience. Consumers can access banking services without leaving their favorite apps, whether they are shopping, traveling, or managing their finances. This integration makes banking more accessible and convenient, enhancing user satisfaction and engagement.

A prime example of the effective use of BaaS is the partnership between Thinslices and Solarisbank. This collaboration leverages Solarisbank’s BaaS platform to provide us with the banking infrastructure necessary to develop and deliver comprehensive financial services. Through this partnership, we can offer robust financial solutions embedded directly into their digital products, enabling a seamless user experience without the need for our customers to obtain a banking license or build banking infrastructure from scratch.

With our open-source mobile app Ivory, we’ve created a platform that combines innovative digital products with core banking functionalities, providing a seamless user experience and enhancing customer satisfaction. Using Ivory’s flexible modules, our clients can create a neobank in just a couple of months.

Highly personalized financial services

One of the significant advantages of BaaS is its ability to offer personalized financial services. Businesses can use APIs to gather and analyze customer data, enabling them to provide customized financial products such as personalized savings plans or investment advice. The increased level of personalization meets the specific needs and preferences of consumers, leading to higher customer satisfaction.

Faster time to market

BaaS also accelerates the deployment of new financial services, as it eliminates the need for non-bank businesses to develop and maintain their own banking infrastructure. This reduction in time-to-market allows businesses to respond quickly to changing consumer demands and stay competitive in the fast-paced digital economy. Furthermore, utilizing BaaS is often more cost-effective than building traditional banking infrastructure, as businesses can leverage scalable, cloud-based systems. These cost efficiencies can be passed on to consumers through lower fees or enhanced service offerings.

Continuous innovation

Innovation and flexibility are at the heart of BaaS, fostering the development of new and creative financial solutions. This flexibility allows businesses to continuously develop features that meet evolving consumer expectations, such as real-time payments, digital wallets, and instant loans. The ability to quickly adapt to market changes ensures that consumers receive cutting-edge financial services.

Robust and secure infrastructure

Security is another critical advantage of BaaS. By partnering with established banks, businesses can ensure that their financial services comply with stringent regulatory and security standards. This enhances consumer trust and security, as these services are built on robust and compliant banking infrastructures.

The benefits of BaaS for Banks

Banking as a Service (BaaS) presents several significant benefits for banks, making it a compelling strategy in the evolving financial landscape. By leveraging BaaS, banks can open new revenue streams, improve customer acquisition and retention, modernize their technological capabilities, and maintain continued relevance in a competitive industry.

New Revenue Streams 

One of the primary benefits of BaaS for banks is the creation of new revenue streams. By selling API-based access to their core services, banks can generate income through various models such as recurring fees, per-service charges, setup fees, or revenue-sharing agreements. This approach not only diversifies the bank's income but also allows for scalable growth, as more non-bank businesses integrate these services into their platforms.

Customer Acquisition and Retention

Customer acquisition and retention are also significantly enhanced through BaaS. By partnering with non-bank brands, banks can effectively reach new customer segments at a lower cost compared to traditional methods. These partnerships allow banks to tap into the existing customer bases of non-bank brands, which can be extensive and highly dedicated. Additionally, BaaS helps retain existing customers by integrating banking services into platforms they already use regularly. This seamless integration improves customer satisfaction and loyalty, as it provides a more convenient and cohesive user experience.

Modernizing Technological Capabilities

Traditional banks often struggle with outdated legacy systems that limit their ability to innovate and respond quickly to market changes. BaaS allows banks to utilize modern, API-based systems, which streamline development processes, reduce infrastructure costs, and enhance data security. This technological upgrade not only improves efficiency but also positions banks to offer more sophisticated and secure services, meeting the high expectations of today's digital consumers.

Continued Relevance

Finally, BaaS helps banks maintain their relevance in a rapidly evolving financial industry. The traditional model of banks as the central player in financial services is shifting towards a more integrated ecosystem. By adopting BaaS, banks can become a crucial part of this broader ecosystem, providing essential services across various digital platforms. This strategic shift ensures that banks remain competitive and can continue to meet the diverse needs of their customers in an increasingly digital world.

Conclusion

The financial services industry is transforming, and banks must adapt quickly to stay relevant. BaaS offers a promising path forward, allowing banks to innovate, expand their offerings, and meet the growing demand for digital financial services. The future of banking is digital, and those who embrace this shift will thrive in the new financial landscape.