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March 23, 2023

What is banking-as-a-service and what does it mean for businesses?

Banking-as-a-service (BaaS) is a widely misunderstood type of technology service. Often confused with its close relative, embedded finance, BaaS providers are different in several ways; through its unique qualities, BaaS providers can power revenue-generating financial user journeys to a range of industries that want to offer banking, payments and other financial solutions in a compliant, regulated way.

As a backend or middleware technology, the marketing around BaaS platforms is not always as straightforward or as sexy as embedded finance. Normally, the latter’s end-offering can be visualised in an easy, digestible way. We may be biased, but investing upfront with BaaS can ensure that time, money and energy is not wasted further down the line, can be very attuned to customer needs and be very profitable for everyone involved in the long-term.

In this short blog, we wanted to pin down the definition for anyone who may still be asking questions about what BaaS is, the history behind it and what the benefits are to a wider audience.

The history of banking-as-a-service

Over the past decade ago, almost every platform could be considered a part of the explosion of software that was born throughout the Web0.1 era. This could be as simple as technology that adds scheduling services for brick and mortar businesses, or platforms that generated monthly recurring revenue from customer subscriptions, such as Netflix, in its early days.

Today, platforms are facilitating the whole user journey from start to finish. From choosing products to buy, paying for it online, getting a digital receipt sent to a customer’s email and finally, receiving the actual goods, this is considered par for the course in 2023. However, we have not realised that this is a far cry from the online capabilities throughout the early 2000s. This enablement of adding a payments journey into e-commerce (as one example) increases revenue generation for any business whilst building brand loyalty by simplifying the buy and sell process for end-users.

Now let’s imagine what the future can look like with the rise in partnerships with banking-as-a-service platforms by building in additional financial features. Imagine the previous scenario — now add the choice to buy insurance for the products you bought that fits the end-user’s budget and lifestyle, or that is incentivised by future discounts, or the ability to create a holding account for money that can be used on that particular e-commerce site and other sister sites, and suddenly we’re seeing the birth of SaaS 3.0 throughout the Web3.0 era we are currently in.

So what should everyone know about banking-as-a-service?

There are some key points to know about BaaS and how it differs from the term embedded finance.

  • BaaS is a back-end process, providing financial services that allow non banks and fintechs to offer these products themselves.
  • Embedded finance is a use case of BaaS and focuses on the customer experience of embedding BaaS into existing product and service journeys.
  • BaaS is a regulated activity, and yet can also support clients who are unregulated by taking care of the compliance side completely.

What are the benefits and can any industry utilise the technology? 

The benefits are endless.

Finance touches every facet of life, and although unescapable, there’s no excuse for financial journeys that are not seamless, flawless, robust and secure.

Banking-as-a-service can create new revenue streams, improve customer retention and increase brand loyalty for any business, in any industry.

Take this an example: 

Business A is in the travel sector selling boutique, curated holidays online and in physical stores. They create holiday packages that includes car rental options to securing tickets to local attractions.

They find that many of their customers are repeat customers, some of them want to spread out the payments, some want to save money upfront and have it held by Business A to put towards future holidays. Others want to exchange currency with the best rates possible, and nearly everyone wants to pay quickly without the need for a physical card or cash.

Business A has become very used to using phone calls to manage the customer service element of their business and taking in-person payments or sending over bulky online payment journeys to collect money. By modernising their approach with a banking-as-a-solution platform, Business A can do several things:

  • Save money for future holidays: By creating a regulated account where people can hold and save their money, customers can be incentivised to save with Business A by getting discounts on future holidays. This then gives Business A more opportunities for future recurring revenue.
  • Spread out payments for future holidays: People may want the ability to go on holiday, but cannot justify the upfront cost with other life-expenses in the way. Giving the option to spread payments over a period of time, with better risk-assessment in place, Business A has more security in place to receive the funds and have secured revenue from their customer versus if the customer were forced to completely pay upfront.
  • Exchange currency without the need for cash: Having an account that allows you to always get the best exchange rate can give any business a competitive edge.
  • Pay for services and goods quickly and securely: Have multiple payment options embedded into the customer journey for quick, seamless checkout.

This is just one example of how businesses can create new opportunities from their current offering by integrating with a banking-as-a-service provider. Anyone from any industry can create powerful banking solutions within their offering by working with a BaaS provider.

How do you get started finding a BaaS provider? 

You can shop around, find recommendations, and keep an eye out for people who are talking about topics such as banking-as-a-service or fintech-as-a-service, plus through your own research you can find many providers who offer similar services. What you need to look at are the subtle differences between your list of BaaS platforms. Do they offer a compliant, regulated service? Does the price seem too good to be true? What is their history as a business and who are their current clients? 

Once you get that going, getting clarity through asking the right questions, going with your gut instinct about the relationship with their team and ensuring that the BaaS platform you work with understands your business and the benefits that you want to provide to your end-users is a great start. Detailing a six-week and three-month plan can ensure that both parties are being transparent about timings, costs and questions that may come up throughout the process.

If you need further insight, do not hesitate to contact us. Our next blog post focuses on the five questions every Commercial Team should ask when seeking a banking-as-a-service (BaaS) provider and should help anyone looking to enhance their offering through building in payment and banking solutions.

About Manigo

Manigo, a leading banking-as-a-service platform, provides a 360-package for any business who wants to incorporate modern, digital banking products such as smart payments, FX and accounts capabilities into their offerings.

In a matter of weeks, anyone can use our comprehensive API suite, whitelabel solution or program management to build in-app offerings that will delight and retain customers, boost revenues and increase brand loyalty.

From backend card and payment processing, to middleware integrations and frontend applications, we continue to be the only global, digital banking enabler in the region that covers the entire value chain.

Focus on your strengths and leave your #DigitalBanking transformation to Manigo.

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