What is Banking as a Service? Banking as a Service (BaaS) is an emerging business model, within which licensed banks and fintech companies provide banking infrastructure, products, and services to other businesses; those offerings then reach end users through the banks’ and fintechs’ own applications and under their own brand. The BaaS provider acts as the back end, handling regulatory compliance, security, and risk management. Providers can offer third parties such products as deposit accounts, cards, and payments, as well as loans—all of which are easily accessed through application programming interfaces (APIs). Nonbanking companies, often referred to in BaaS models as distribution partners or client firms, then integrate these services into their own offerings without the need for significant capital investment or regulatory overhead. (For more, see our Tech Translated explanation of embedded finance.)
What business problems can it address?
For challenger banks and would-be financial innovators, BaaS can significantly reduce the time to market for many offerings. That efficiency results in lower barriers to entry, because start-ups do not need to raise capital to wait out a prolonged license approval process (or build a substantial compliance team) before they start generating revenue.
“For existing banks and financial institutions without sophisticated digital-first offerings, BaaS provides a way to monetize existing infrastructure, regulatory licenses, and risk-management expertise by extending those services to customer-facing distribution partners in return for fees,” says Akhilesh Khera, a partner in PwC UK’s digital banking practice. “This allows existing banks to reach new customer segments, diversify revenue streams, and generate additional income.”
Fintech companies with expertise in infrastructure and technology can draw on BaaS to grow a banking business while dispensing with end customer–facing activity altogether. Companies such as Solaris, ClearBank, and Stripe, for example, have generated significant revenues in a short space of time by providing banking products to customer-facing banks and neobanks without seeking to market those products directly to end users.
BaaS encourages diversity in banking provision by allowing new companies to rapidly launch products while focusing on their core competencies, such as user experience or customer service. Risk management and infrastructure, meanwhile, are concentrated in regulated institutions.
How does it create value?
By promoting collaborations and partnerships between financial institutions and nonfinancial companies, BaaS encourages a more vibrant fintech ecosystem. “The increasing sophistication of BaaS approaches and digital banking tools enables business model reinvention across sectors, as well as greater potential for differentiation within banking, as different parts of the industry specialize in customer service, compliance, and technology,” says Khera. “This is already helping drive innovation, efficiencies, and new paths to growth and value.”
Some of the clearest examples of BaaS can be found in the emergence of neobanks like N26, Starling, Revolut, and Monzo. The neobanks relied on BaaS to offer banking products such as accounts, money transfers, and currency exchange before they secured banking licenses by purchasing those products from financial institutions and white-labeling them in their own applications.
In short, “BaaS allows for new types of financial institutions, focused on innovative customer service and digital experiences,” says Charles Richards, a senior manager at PwC UK who works on digital banking. “This creates the potential for financial products and services to be decoupled entirely from the regulated entities that actually deliver them, overcoming a major challenge for traditional banking business models.”
Who should be paying attention?
Established banks need to have a clear view of the opportunities BaaS can provide for growth, as neobanks, fintechs, and regulators are already paying close attention. Companies across multiple other industries—particularly retail—have also begun to explore the potential of BaaS for establishing new lines of business, and growth-minded leaders from most sectors should consider the possibilities on offer. CTOs, CIOs, risk functions, and customer experience teams should be at the forefront of these investigations.
How can businesses prepare?
BaaS business models are already driving new sources of revenue and growth, so seeking out best practices for inspiration and opportunity identification is a good first step. Because most BaaS services are digital, focusing on core back-end data and digital banking infrastructure needs, and then considering the potential cloud modernization requirements, would also be sensible—although some BaaS solutions can help with this core challenge.
Learn more
- PwC Global: Managing risks in the transition to integrated financial services
- 11:FS: Banking as a service: The future of financial services
- Forbes: How to be(come) a great partner bank in the BaaS space
- Sifted: Can BaaS start-ups find new ponds?
- The Fintech Times: What regulatory challenges should banks and fintechs be aware of when leveraging BaaS?
Last updated on 11 July 2024
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Tom Archer
Global Technology Consulting & Alliances Leader, Transformation Platform Co-Leader, PwC United States