The financial services industry is seeing dramatic changes, most notably with the rise of banking-as-a-service (BaaS). BaaS allows non-banks such as fintech companies, insurance providers, and major retailers to offer banking products and services. They can enter a space traditionally dominated by banks and broaden access to financial services for both customers and businesses, especially underserved populations. More non-banks are looking to integrate banking products and services, with the global BaaS market expected to grow from nearly $615 billion USD in 2023 to over $731 billion USD in 2024.

Below, we’ll explore how BaaS works, the types of banking services non-banks can offer, and the benefits and challenges of doing so.

What’s in this article?

• What is banking-as-a-service (BaaS)?
  
• How BaaS allows non-banks to offer banking products and services
  
• Common types of banking products and services non-banks offer
  
• What kinds of non-banks integrate banking products and services?
  
• How to provide banking products and services as a non-bank
  
• Challenges with offering banking products and services as a non-bank
  

What is banking-as-a-service (BaaS)?

BaaS is a model in which licensed banks and other financial institutions provide their banking infrastructure, products, and services to non-banks via application programming interfaces (APIs). This enables those non-banks to offer financial services directly to their customers without needing to become banks.

How BaaS allows non-banks to offer banking products and services

BaaS connects non-banks with the regulated banking world. It allows them to use the infrastructure and expertise of licensed banks while focusing on improvement, customer experience, and market expansion. Here’s how BaaS works.

• API integration: BaaS providers (usually licensed banks) share their core banking infrastructure and functionalities through APIs. Non-banks can then integrate these APIs into their own platforms for access to banking services such as account opening, payments, transfers, and lending. This integration allows non-banks to offer these services directly within their own applications or websites to improve user experience.

• White-label solutions: BaaS providers often have white-label solutions, meaning non-banks can brand the financial services as their own. This allows non-banks to maintain control over the customer relationship and experience while using the bank’s infrastructure.

• Regulatory compliance: Banks handle the complex regulatory and compliance aspects of financial services. By partnering with a BaaS provider, non-banks don’t have to obtain their own banking licences and navigate the associated regulatory hurdles.

• Speed and agility: BaaS enables non-banks to launch financial services quickly and efficiently. In turn, non-banks can focus on their core competencies and customer experience, rather than on the complexities of banking operations.

• Flexibility and customisation: BaaS providers often have a range of modular services, allowing non-banks to choose and combine the specific functionalities they need. This flexibility enables non-banks to customise their financial products and services to their target markets, and to differentiate themselves from competitors.

Common types of banking products and services non-banks offer

Here are the different types of products and services non-banks commonly offer.

• Lending and credit: Personal loans, business loans, mortgages, peer-to-peer (P2P) lending services, and credit cards

• Payments and money transfer: Money transfers, payment processing, prepaid debit cards, and cheque cashing

• Investment and wealth management: Personalised investment advice, asset management services, and brokerage services

• Insurance: Life insurance products, health insurance plans, and property and casualty insurance (e.g. car insurance, home insurance)

• Currency exchange: Possibly more competitive exchange rates in comparison to banks

• Microfinance: Small loans and other financial services for individuals and businesses in developing countries

• Factoring: Possibly factoring services, which involve purchasing a company’s accounts receivable at a discount

What kinds of non-banks integrate banking products and services?

Although technology companies often provide banking products, other business types can as well. Here are the different kinds of businesses that can integrate banking products and services.

• Fintech companies: These companies use technology to offer services such as mobile banking, P2P payments, personal finance management, and automated investment platforms. They often use BaaS to provide more traditional banking products such as savings accounts and loans without needing a banking charter.

• Technology companies: Big tech companies – such as those specialising in e-commerce, social media, or technology services – incorporate financial services such as payment processing, digital wallets, and credit facilities into their offerings.

• Retailers and e-commerce platforms: Retailers and e-commerce platforms often have branded credit cards and financing options for purchases. By providing these services, they increase customers’ purchasing power and gather valuable data on spending habits. They can then use that data to refine marketing strategies and boost customer loyalty.

• Telecommunications companies: Telecommunications companies worldwide have started integrating financial services. With their widespread mobile network infrastructure, they can offer features such as mobile money accounts, transfer services, and payment processing to a broad customer base.

• Insurance companies: Beyond their traditional offerings, some insurance companies provide investment products and retirement accounts. They might also provide loans and savings products, using their financial insights and customer base to build a broader financial services portfolio.

• Automotive companies: Through their financial services divisions, auto manufacturers and dealerships offer financing options such as loans and leases for vehicle purchases. This makes it easier for customers to afford new vehicles and provides the company with an additional revenue stream.

• Startups and small and medium-sized enterprises (SMEs): Startups and SMEs in the BaaS space provide niche services such as crowdfunding, investment for startups, and financial services customised to specific industries or customer segments.

• Real estate companies: Some real estate firms have mortgage lending and related financial services. This can simplify the home-buying process for customers and provide the company with vertical integration advantages.

How to provide banking products and services as a non-bank

By teaming up with licensed financial institutions or by using BaaS platforms, non-banks can offer banking products and services such as digital wallets or payment processing without needing a banking licence. Here’s how your business can do so.

Market research

• Conduct surveys and interviews with potential customers to understand their specific banking needs and issues.

• Analyse customer demographics and behaviours. Use data analytics to gain insight into your existing customer base or target market.

• Find specific customer groups who might be underserved by traditional banks or existing fintech solutions.

Regulations

• Identify the appropriate regulatory framework. Research both federal and local requirements.

• Explore partnership options. Identify potential BaaS providers or licensed banks that align with your business goals and target market. Assess their compliance track records and experience in your industry.

• Consult legal and compliance professionals to ensure your business model and operations adhere to all applicable regulations.

Banking products or services

• Prioritise customer needs. Design your offerings based on the specific issue and needs identified in your market research.

• Instead of trying to replicate an entire bank, focus on a specific set of financial services that complement your core business and create value for your customers.

Tech infrastructure

• Select a BaaS provider with a reliable API infrastructure, secure data handling practices, and flexibility to support your growth.

• Develop custom integrations. Work with developers to integrate BaaS APIs into your existing platform for a convenient user experience.

• Invest in security. Implement industry-standard security measures such as encryption, multi-factor authentication, and regular vulnerability assessments to protect customer data.

Marketing and customer acquisition

• Communicate your unique value proposition. Demonstrate how your embedded financial services differ from those of competitors and solve specific customer challenges.

• Promote your banking services within your existing platform or product to reach your audience and drive adoption.

• Partner with complementary businesses in your industry to cross-promote your offerings and reach a wider audience.

Customer support and retention

• Provide dedicated support for financial services. Ensure that your customer support team is equipped to handle enquiries and issues.

• Use in-app notifications, emails, or text messaging (SMS) to keep customers informed about their transactions, account balances, and any relevant updates.

• Collect customer feedback on your banking services, and use it to make continuous improvements and enhance the user experience.

Challenges with offering banking products and services as a non-bank

Although offering banking products and services as a non-bank can provide many benefits, there are also inherent difficulties. Here are some possible obstacles you’ll need to be aware of.

Reliance on third-party providers

• Customers might get frustrated if the business’s BaaS provider experiences downtime or technical issues that affect operations.

• The business’s specific needs and future plans might not always align with the development of the BaaS provider’s banking functionalities.

• Businesses must negotiate favourable contractual and commercial terms; they must also ensure flexibility in the contract for long-term success and adaptation to changing market conditions.

Limited control over the user experience

• Providing a convenient, consistent user experience across the business’s platform and the BaaS provider’s interface might not be straightforward.

• Businesses might have a limited ability to customise the user interface or add unique features, which would make it harder to differentiate their services.

• If the transition between the business’s platform and the BaaS provider’s interface is not smooth, disruptions might occur in the user experience.

Revenue sharing and pricing models

• Sharing revenue with the BaaS provider or paying fees for its services can affect the business’s profitability. This is particularly true in the early stages when customer acquisition costs are high.

• Businesses might have limited control over the pricing of their BaaS providers’ financial services. This can affect their ability to compete on price or offer attractive promotions.

• Businesses must understand the full cost structure of the BaaS partnership, including potential hidden fees or variable costs, for effective financial planning and forecasting.

Customer acquisition and onboarding

• Businesses must acquire customers in a crowded market, which requires substantial marketing and advertising efforts to stand out.

• Businesses must navigate complex Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. This can be time-consuming and expensive, in addition to potentially affecting customer acquisition rates and creating friction in the onboarding process.

• Businesses must convince customers to share their financial data and conduct transactions with a non-bank. This requires clear communication and transparency about the business’s partnership with a licensed bank.

Customer expectations

• To avoid customer disappointment and potential complaints, businesses must clearly communicate the scope of their financial services and set realistic expectations.

• Quick, effective customer support for any banking-related issues is necessary to maintain customer satisfaction.

• Businesses must be transparent about their role as non-banks and their partnerships with BaaS providers. This builds trust and manages customer expectations.

Improvement and compliance

• Businesses must keep up with ever-evolving regulations. This requires constant monitoring and adaptation for ongoing compliance.

• New regulations or interpretations of existing rules might create uncertainty. It also might impact the viability of certain financial services or business models.

• Businesses that fall into regulatory grey areas must carefully navigate applicable rules and potentially seek guidance from legal and compliance experts.

Data security and privacy concerns

• Businesses must protect sensitive financial data from breaches and cyberattacks. This requires investment in security infrastructure and ongoing vigilance.

• Businesses must comply with data privacy regulations such as the EU’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA). This requires clear policies, data handling procedures, and potentially obtaining user consent.

• To avoid reputational damage and potential liabilities, businesses must ensure that their BaaS providers and any other third-party vendors handling customer data adhere to the same high standards of security and privacy.

Brand perception and reputation

• Businesses must establish credibility as a non-bank financial services provider. This requires consistent delivery of high-quality services and proactive communication with customers.

• To maintain a positive brand image and attract customers, businesses must address any negative perceptions or concerns about their legitimacy, security, or data handling practices.

• Businesses must clearly communicate their unique value propositions and the benefits of choosing their services over those of traditional banks or other fintech solutions to stand out in a competitive market.