Banking-as-a-service (BaaS) is the practice of banking systems allowing non-bank third-party businesses to offer their banking or financial services to customers through application programming interfaces (APIs). BaaS platforms act as intermediaries between traditional banks and companies that want to integrate banking services – such as payment processing, lending, or issuing debit and credit cards – into their offerings.

There is a growing demand for BaaS: the global BaaS market was valued at nearly $16 billion USD in 2023, and it’s estimated to achieve a compound annual growth rate of over 17% between 2024 and 2032. Below, we’ll explain how BaaS works, and what businesses need to know about the benefits – and challenges – it presents.

What’s in this article?

• What BaaS is used for and how it works
  
• Key components of BaaS
  
• Benefits of BaaS for businesses
  
• Challenges and considerations related to BaaS
  

What BaaS is used for and how it works

BaaS serves many purposes. Here are some of the most common BaaS use cases.

• Fintech startups: Fintech startups use BaaS to provide financial products such as bank accounts, loans, and payment services.

• E-commerce platforms: E-commerce businesses use BaaS to provide services such as embedded payments or buy now, pay later (BNPL) services directly on their platforms.

• Gig economy platforms: Companies operating in the gig economy use BaaS to manage payments to freelancers and contractors, and to incorporate more flexible payment solutions such as instant payouts.

• Traditional banks: Banks provide BaaS services to other companies to tap into new customer segments and additional revenue streams without direct customer acquisition efforts.

• Tech companies: Technology companies use BaaS to incorporate features such as in-app wallets, peer-to-peer (P2P) payments, and personalised financial advice.

Key components of BaaS

Here are the key features that BaaS solutions typically include.

• User management: This includes user registration, authentication (login), authorisation (access control), and profile management functions.

• Security: This often includes security features such as multi-factor authentication and password encryption.

• Data storage: BaaS solutions often provide cloud-based data storage solutions.

• Push notifications: These include real-time user notifications for alerts, updates, or reminders – even when the app isn’t actively running.

• Cloud code: This is the ability to execute custom code on the BaaS provider’s servers for server-side logic, background tasks, or data processing.

• Analytics: Built-in analytics track app usage, user behaviour, and other key metrics.

• API integrations: These involve integration with various third-party APIs.

• Social integrations: Solutions provide built-in support for social logins (e.g. Facebook, Google, Twitter) and social sharing.

Benefits of BaaS for businesses

By allowing non-bank businesses to provide banking services, BaaS offers multiple advantages. Here’s a closer look at some of the benefits businesses can gain from BaaS.

• Faster time to market: BaaS platforms expedite the process of integrating financial services into business models. Companies can typically launch new products and services much faster than if they had to build their own banking infrastructure, or if they had to independently navigate the regulatory landscape.

• Cost-effective scaling: Companies using BaaS can bypass the heavy financial burden of developing in-house financial services. BaaS scales with your business needs, so you can spend less while continuing to expand your offerings.

• Customisation: BaaS platforms come with powerful APIs that integrate into existing systems and support tailored, brand-specific financial solutions with optimised user experiences. This level of customisation can improve service delivery and yield valuable customer insights.

• Easier compliance: BaaS providers are experienced in financial regulatory compliance, and they can help businesses navigate this environment with less hands-on management.

• Advanced technology: Businesses using BaaS can access the latest technology in the financial sector, such as machine learning for risk assessment or blockchain for secure transactions. These technologies can provide a competitive edge in a crowded market.

• Strategic resource allocation: Businesses can use a BaaS provider to handle technical and regulatory concerns, freeing up their staff to focus on innovation and core business offerings.

Challenges and considerations related to BaaS

BaaS presents potential challenges around security, reliability, and integration. Here are the challenges to be aware of when working with BaaS.

• Security: Providing financial services means handling sensitive data such as bank details and personal identification information. Businesses must protect this data from data breaches and fraud. BaaS providers need to have strong security protocols in place and fortify their own systems against potential threats.

• Reliability and uptime: Any downtime from your BaaS provider can lead to transaction delays or service interruptions, which can erode customer trust. Confirm that your chosen BaaS provider has reliable uptime stats and contingency plans for technical failures.

• Integration: The BaaS integration process can be complex, especially if existing systems aren’t designed for integration with external services. Technical challenges can lead to prolonged development periods and increased costs.

• Customer support: Customer support for financial services can be intricate, especially when you’re co-ordinating with a third-party BaaS provider. Work with your provider to keep lines of communication open and responsibilities well-defined.

• Provider dependency: Factors such as changes in a BaaS provider’s strategy, unforeseen service disruptions, or business failures can affect operations. Establish clear terms of engagement to mitigate this risk.