How the banking-as-a-service industry works and BaaS market outlook for 2021
Banking-as-a-Service (BaaS) platforms provide more financial transparency options by letting banks open up their APIs for third parties to develop new services.
Techy-savvy legacy banks can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure.
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Across industries, digital transformation is democratizing data to enable greater transparency and better cusomter experiences. New technologies are opening up legacy systems to emerging startups and third parties and, in some cases, putting data directly in the hands of consumers.
In financial services, Banking-as-a-Service (BaaS) platforms have surfaced as a key component of open banking, in which firms provide more financial transparency options for account holders by opening their application programming interfaces (APIs) for third parties to develop new services.
Fintechs and digital banks have been encroaching on incumbent institutions in the banking game and disrupting traditional business models — but by moving into the BaaS space, tech-savvy legacy banks can turn this looming threat into an opportunity.
What is banking-as-a-service?
BaaS is an end-to-end model that allows digital banks and other third parties to connect with banks' systems directly via APIs so they can build banking offerings on top of the providers' regulated infrastructure, as well as unlock the open banking opportunity reshaping the global financial services landscape.
Techy-savvy legacy firms can fend off the encroaching threat of fintechs by moving into the BaaS space to share their data and infrastructure. In a matter of years, access to this level of information will become table stakes for digitally native customers — so banks that begin now will be ahead of the curve, and likely rewarded with high demand.
How does banking-as-a-service work?
The BaaS model begins with a fintech, digital bank, or other third-party provider (TPP) paying a fee to access the BaaS platform. The financial institution opens its APIs to the TPP, thereby granting access to the systems and information necessary to build new banking products or offer white label banking services.