How Banking-as-a-service is Enabling Financial Inclusion for Nonbank Companies

Banking as a service (BaaS) platforms are becoming vital in the financial industry in this rapidly evolving digital world. They are a part of open banking, which means companies make their APIs available for others to create new financial services and provide more transparency.

The World Bank, the US, and the EU have made efforts to increase access to traditional bank accounts to promote financial inclusion. While the number of unbanked adults has decreased, there is a flaw in these initiatives. They assume that access to a traditional bank account solves financial exclusion. However, it is possible that unbanked and underbanked individuals may not desire bank accounts at all.

A report from the Financial Conduct Authority reveals 56.2% of unbanked Americans express no interest in having a bank account, and one can observe similar trends in other countries as well.

Well, the great news is that traditional banks and fintech companies are no longer the sole providers of financial services. Furthermore, having a bank account is not the only means for people to access the financial system. With the advent of BaaS (banking-as-a-service), the unbanked and underbanked now have the opportunity to participate in the financial system on their terms and according to their specific needs and circumstances.

According to a Gartner report, BaaS will become mainstream in the next two years. The study predicts that 30% of banks with assets exceeding $1 billion will introduce BaaS as a means to generate additional revenue by the end of 2024.

Thus, BaaS players are ultimately the ones that are focusing on the value chain and witnessing exceeding business revenues, making Banking as a service software development one of the most profitable sectors to invest in.

This article will help you understand everything related to banking as a service technology and how it enables inclusion for nonbank companies. In addition to looking at the benefits of adopting the Banking as a service business model, we will cite multiple banking as a service examples of the organizations presently leveraging BaaS and achieving millions in revenues.

What is Banking as a Service?

Banking as a Service (BaaS) is a revolutionary platform that provides third-party companies and developers access to a financial institution’s core banking infrastructure and services through APIs.

This enables nonbank companies to create and offer their customers innovative financial products and services without investing hefty amounts in building and maintaining their banking infrastructure.

BaaS is a vital pillar of open banking, fostering financial transparency and driving innovation by granting third-party players wider access to banking data and services. By combining non-banking businesses with regulated financial infrastructure, BaaS enables the creation of unique and targeted offerings that can be brought to market more quickly. Robust BaaS solutions can pave the way toward enhanced collaboration and customer-centric financial solutions.

The three ingredients that are vital for BaaS include:

Banking license: One of the key elements of Banking as a service is having a banking license that can be utilized to offer financial services.

Technology facilitation: To enable the BaaS framework, a robust technology infrastructure is crucial, and this is where 10x Banking comes into play, providing the necessary technological solutions.

Diverse service offerings: BaaS model offers individuals a wide range of choices and options for their financial needs.

According to recent reports, Synectra, a California-based BaaS company, has recently raised $15 million in funding. The company will utilize these funds to expand its Banking as a Service platform, catering to new FinTech use cases and international markets. The growing revenue stream for Synectra can help you understand how investing in a BaaS software for your users is a lucrative business opportunity that can help you generate maximum ROI.

Embedded finance is a game-changer for the banking industry. It involves integrating financial services into various ecosystems, which has the potential to revolutionize the way banks operate. By leveraging BaaS, banks can generate new revenue streams by offering their services to new players. Additionally, they can enhance their end-to-end experiences, making banking more efficient and effective for everyone involved. Read this blog to learn about the embedded software development process. 

Banks can offer customers real-time, personalized product suggestions by utilizing data capture and machine learning. Insurance companies can also conduct more detailed credit assessments, reducing their risk. This integration improves efficiency and cost-effectiveness, paving the way for countless opportunities within the financial landscape.

According to Grand View Research, the banking-as-a-service market was valued at  $19.65 billion in 2021 and is expected to witness a CAGR of 16.2% from 2022 to 2030. This increasing market size can be attributed to the factors like the increasing demand for financial services, escalating digitization, and the wide availability of Application Programming Interfaces (APIs). These growing Banking as a service trends collectively project the growing demand for BaaS and how nonbank companies can leverage BaaS solutions to gain a competitive business edge in the evolving financial ecosystem.

Let us now move ahead and look at the multiple benefits that can help you understand BaaS for financial inclusion.

Benefits of Banking-as-a-Service (BaaS) for Nonbank Companies

Banking as a service (BaaS) empowers nonbank firms to enhance customer experience, diversify services, reduce expenses, hasten time to market, ensure compliance, and scale efficiently. Through BaaS solutions, these firms can capitalize on new financial prospects, promoting inclusivity and extending financial service access to their customers. Here are the multiple benefits of Banking as a Service for nonbank organizations:

Enhanced Customer Experience

Enhanced customer experience is one of the most sought-after banking as a service use cases. The BaaS model enables nonbank companies to seamlessly offer banking services to their customers. By integrating banking functionalities into their existing platforms, they can provide a holistic experience and cater to their customers’ financial needs without redirecting them to external banking services.

Access to a Wide Range of Financial Services

A partnership with established financial institutions allows nonbank companies to utilize their expertise and infrastructure to offer various financial services, including payments, transfers, and savings accounts. This allows nonbank organizations to expand their product offerings and provide greater customer value.

Cost Savings and Operational Efficiency

Two of the most vital Banking as a Service use cases are cost savings and operational efficiency. BaaS solutions offer nonbank companies the opportunity to avoid the expenses and time-consuming tasks associated with building and maintaining a full-fledged banking infrastructure. These solutions eliminate the need for extensive regulatory compliance, licensing, and infrastructure development, resulting in significant cost savings. This allows the nonbank companies to focus on their core competencies.

[Also Read: How Much Does Mobile Banking App Development Costs?]

Faster Time to Market

Nonbank companies can accelerate their entry into the financial services industry using BaaS platforms and APIs. They can quickly deploy and launch their financial products or services by leveraging existing resources. This eliminates the need to build their banking infrastructure from scratch.

Regulatory Compliance and Risk Management

Partnering with established financial institutions through BaaS allows nonbank companies to access strong compliance frameworks and risk management systems. These companies can depend on the banking partners’ expertise to navigate intricate regulatory requirements, which ensures compliance and reduces the risk of regulatory penalties or reputational harm.

Scalability and Flexibility

Banking as a service platforms provide scalable solutions that cater to nonbank companies’ changing needs. The flexibility of cloud-based Banking as a service solutions allows nonbank companies to scale their operations without significant infrastructure investments. With an expanding customer base, BaaS providers can handle increased transaction volumes and support expansion into new markets.

Regulatory Considerations for BaaS Adoption

Regulatory considerations in BaaS adoption encompass the legal and compliance aspects that nonbank companies must consider while implementing Banking-as-a-Service solutions. These considerations are crucial for ensuring adherence to regulations and compliance with applicable laws, enabling companies to operate within the defined boundaries of the financial industry.

Licensing requirements: Nonbank companies need to be aware of the licensing obligations and regulatory frameworks that come with providing financial services through BaaS. The requirements may vary as per the state jurisdiction, and it may be necessary for nonbank companies to obtain specific licenses for the same.

Data privacy and security: It is imperative to adhere to data privacy regulations such as GDPR or CCPA and PCI-DSS when dealing with sensitive financial data in BaaS. Robust security measures and protocols must be implemented to safeguard customer information.

Anti-money laundering (AML) and Know Your Customer (KYC): Nonbank companies are required to comply with AML and KYC regulations to prevent cases related to money laundering and verify the identity of their customers. Establishing effective due diligence procedures and maintaining accurate records is essential to achieve this goal.

Consumer protection: Companies must adhere to consumer protection regulations to guarantee fair practices, transparency, and effective dispute resolution mechanisms.

Cross-border regulations: Nonbank companies must navigate cross-border regulations when offering BaaS services across multiple jurisdictions. This involves understanding the regulatory requirements of each jurisdiction, complying with international financial regulations, and addressing any specific restrictions or obligations.

Regulatory changes and updates: Nonbank companies must stay informed about regulatory changes and updates to ensure compliance and minimize legal risks.

Baas for Financial Inclusion: Success Stories That Highlight How the Baas Model Benefits Non-banking Organizations

The success stories of M-Pesa, GrabPay, Chime, Revolut, and Alipay demonstrate the remarkable benefits that nonbank companies are experiencing through BaaS solutions. These companies are revolutionizing the financial landscape by empowering individuals who were previously excluded from traditional banking systems. Here are the few successful banking as a service examples:

M-Pesa: Safaricom’s M-Pesa is a successful BaaS (Banking as a service) model that has empowered financial inclusion in Kenya. With partnerships with local banks, it offers mobile banking services to unbanked individuals and allows them to make transactions and access other financial services with the help of their smartphones. M-Pesa’s impact on Kenya’s economy has been significant, reaching millions of previously unbanked individuals and driving economic growth.

GrabPay: Grab, a ride-hailing and delivery platform in Southeast Asia, has expanded its services to include GrabPay, a mobile wallet that offers financial services to its users. This partnership with banks and financial institutions allows users to make cashless payments, transfer funds, and access micro-lending services. As a result, users without traditional bank accounts in Southeast Asia can now participate in the digital economy and gain access to financial services.

[Also Read: A Checklist to Make Your Wallet App a Fintech Disruptor]

Chime: A US neobank, Chime has utilized the Banking as a service solution model to provide banking services to underserved individuals. Through partnerships with banks and financial institutions, Chime offers fee-free checking and savings accounts, early direct deposit, and other financial management tools via its mobile app. This strategy has allowed Chime to cater to younger and financially underserved populations, promoting BaaS for financial inclusion and accessibility.

Revolut: Revolut is a UK-based fintech company that uses Banking as a service architecture to offer multiple financial services to its customers. By partnering with licensed banks, Revolut can provide features such as multi-currency accounts, international money transfers, and budgeting tools. This has enabled users and businesses to effectively manage their finances while dealing with cross-border transactions.

Alipay: Alipay is a well-known mobile payment platform in China that has expanded its features to offer users a wide range of financial products and services. By partnering with banks and financial institutions, the platform has enabled millions of users to access banking services like savings accounts, wealth management, insurance, and loans. This initiative has been crucial in promoting financial inclusion in China, particularly in rural areas, by providing convenient and accessible financial solutions to a larger population.

Freo: Freo operates as a full-stack Indian neobank focused on providing digital banking services without physical branches. The company offers a range of financial products including digital savings accounts, credit lines, pay-later options, and credit score management tools. As a digital banking platform, Freo focus on providing customers with flexible and customised financial products. It is a financial app that allows users to pay, save, and borrow money. Users can pay with UPI, pay later with credit on UPI, and repay later. They can also save money and earn interest on their savings. Additionally, users can borrow money with a personal credit line and repay with easy EMIs.

How to Develop a BaaS Platform?

Developing a BaaS software solution necessitates proficiency in banking operations, software development, security, and compliance. Partnering with experienced developers and industry experts can simplify the development process and guarantee the success of your BaaS venture.

Define the scope and requirements

As a BaaS app development organization, we begin by clearly defining the objectives and scope of your BaaS software solution. We collaborate with you to determine the specific banking services you intend to offer, such as account management, payments, lending, or compliance. Additionally, we conduct thorough market research to identify your target market and gain a deep understanding of your needs, ensuring our development process is aligned precisely with your business goals.

Choose a technology stack

During this phase, we select the appropriate technology stack based on your requirements, scalability, security, and integration needs. Our expert team considers factors like programming languages, frameworks, databases, and cloud infrastructure to build a robust and scalable BaaS platform.

Develop core banking functionalities

During this phase, we implement the core banking functionalities of your BaaS software solution. This includes robust user authentication, account creation, transaction processing, and reporting features. We prioritize adherence to banking industry standards and regulatory requirements throughout the development process to ensure a secure and compliant system.

Integrate with third-party APIs

Next, we facilitate integration with external APIs to access crucial banking services, including identity verification, payment gateways, credit scoring, and compliance tools. We collaborate with trusted API providers to ensure seamless integration, enhancing the functionality and capabilities of your BaaS platform.

Ensure security and compliance

We prioritize implementing robust security measures to safeguard sensitive user data and financial transactions. We incorporate encryption, multi-factor authentication, and secure data storage practices during this phase. Our team ensures strict adherence to regulatory requirements such as KYC (Know Your Customer), AML (Anti-Money Laundering), and data privacy regulations, providing you and your users with a secure and compliant BaaS platform.

Design user-friendly interfaces

In this phase, we create intuitive and user-friendly interfaces for the customer and the admin. We emphasize delivering a seamless user experience, ensuring easy navigation, and presenting banking services and information clearly and concisely.

Test and QA

Our strongest quality assurance process involves comprehensively testing your BaaS software solution to identify and address any bugs or issues. This includes performing rigorous functional, security, performance, and usability testing. These tests ensure your platform’s stability, reliability, and scalability, providing a seamless and optimized experience for both users and administrators.

Deploy and monitor

During this phase, we deploy your Banking as a Service software solution on the selected infrastructure, whether it’s cloud servers or on-premises servers. We diligently monitor the system’s performance, security, and user feedback, ensuring optimal functionality. Furthermore, we embrace a continuous improvement by regularly updating and enhancing the software to align with evolving user needs, market trends, and regulatory changes.

Provide ongoing support and maintenance

We provide dependable technical support and maintenance services to ensure the seamless operation of your BaaS platform. Our dedicated team stays abreast of industry advancements, security patches, and compliance changes, ensuring your software remains up-to-date and secure.

[Also Read: Step by Step Guide to Developing a Successful Banking App]

How Can Appinventiv Help You with Financial Inclusion?

The Banking as a Service business model is highly significant in today’s digital world. It grants companies access to customer financial data, enabling them to create personalized products and services. Furthermore, it facilitates digital-only banking services, expanding its market presence and reaching a larger customer base.

Banking as a service is a sustainable and future-proof way to attract and retain clients through a vast financial services and ideas marketplace. The nonbank companies offering the most appealing and competitive platform will be the winners in this competitive ecosystem.

Also Read: How Sustainable Banking is Redefining the FinTech Landscape

Considering the increasing demand of nonbank companies to offer robust banking solutions to their users while gaining additional revenue streams, it is now time to hire a dedicated banking software development company like Appinventiv that can help you put things into perspective.

We recently helped Bajaj Finserv, a top Indian Fintech enterprise, enhance its merchant onboarding process. Our FinTech app developers created an advanced digital marketplace for the organization that seamlessly connects customers and merchants, providing customers with affordable finance options. The app has demonstrated remarkable success, processing over 300,000 transactions in a single day.

Our finTech app developers are experts in creating a cutting-edge BaaS platform that seamlessly integrates with external APIs, provides secure and scalable architecture, and delivers a personalized user experience. As a robust Banking as a Service software solution provider, our team of skilled developers works closely with you to analyze your specific business requirements, design a tailored solution, and ensure compliance with industry standards.

Get in touch with our experts to develop a robust cloud-based Banking as a Service solution custom to your business needs.

FAQs

Q. What is banking as a service?

A. Banking-as-a-Service (BaaS) is a model that allows banks or financial institutions to provide their core banking infrastructure and services to third-party companies with the help of APIs. This allows the latter to offer financial products and services to their customers without having to build their banking infrastructure. Banking as a service solutions allows for the seamless integration of banking functionalities into non-bank platforms, which fosters innovation and expands access to financial services.

Q. What are the key advantages of BaaS?

A. The key advantages of BaaS include:

• Enhanced Customer Experience
• Access to a Wide Range of Financial Services
• Cost Savings and Operational Efficiency
• Faster Time to Market
• Regulatory Compliance and Risk Management
• Scalability and Flexibility

Q. What are examples of BaaS?

A. Various examples of BaaS include:

• Stripe
• Marqeta
• RailsBank
• SolarisBank

Q. How long does it take to launch a BaaS platform?

A. The time frame for launching a BaaS platform varies as per the overall complexity of the platform. For instance, a highly complex BaaS app with multiple finTech features will take 10 to 12 months. On the other hand, a simple BaaS platform with minimal features will take around 5 to 6 months.

Q. What is the difference between BaaS and embedded finance?

A. Embedded finance and banking-as-a-service are two terminologies often considered the same, but they have different meanings. Embedded finance is a broader concept that involves integrating financial services into different environments, including investments and insurance. In contrast, banking-as-a-service is a specific approach within embedded finance focusing solely on providing banking services like bank accounts, cards, payments, and lending. This approach supports the integration of financial features into various platforms or applications.

THE AUTHOR

Peeyush Singh

DIRECTOR & CO-FOUNDER