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Banking As A Service (BaaS)

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What Is Banking As A Service (BaaS)?

The term “Banking as a Service” refers to when non-banks, such as fintech companies, offer core financial services to their customers by integrating with banks via application programming interfaces (APIs).

Deeper Definition

Banking as a Service (BaaS) allows banks and other financial institutions to reach more customers at a lower cost by teaming up with non-financial businesses. It is an end-to-end model in which licensed banks integrate their digital banking services directly into the products of other non-bank companies. For instance, with BaaS, a restaurant can offer payment services to its customers without owning a banking license.

The BaaS model allows third parties to connect with banks’ systems directly via APIs, granting them access to tools and necessary information to build banking services on top of the Banks’ infrastructure. As expected, whatever service third parties make must be in legal compliance with the banking laws in the jurisdiction where it serves.

When done correctly, Banking-as-a-Service offers many benefits to the non-bank businesses and licensed banks and to customers you use the services. Some of the benefits of the BaaS model include but are not limited to:

  • Exposes banks and non-bank businesses to more customers: In today’s world, convenience is king, and typically, customers flock to companies that offer them the most convenience. By teaming up with banks, a non-bank business can create services that make customers’ lives convenient. For instance, a supermarket can offer customers a special debit card that awards points when they shop, and you can then use the points to redeem gifts.
  • Fosters collaboration between existing banks and new fintech companies: The BaaS model allows existing banks to collaborate with new fintech companies instead of competing with them. Typically, most fintech start-ups develop innovative, better, and faster services than traditional financial institutions. By collaborating, both have better chances of standing the test of time.
  • Serves as a source of revenue for banks: Banks may allow fintech start-ups to integrate with banks’ digital banking services for an agreed fee. That could potentially serve as a source of revenue as demand grows and more businesses build with the banks’ infrastructure.

Banking As A Service (BaaS) Example

The Apple Credit is an example of a BaaS. iPhone users can apply for Apple Card, which essentially is a credit card that you can use to make purchases anywhere Mastercard is accepted. Goldman Sachs Bank issues the Apple Card.

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