How Banking-as-a-Service is Enabling DIY Payments, Personalized Credit, and More

It works with more than 8,100 companies around the world and enables a range of financial services that most would associate with traditional banks like Wells Fargo and Chase. Except it isn’t a bank. That’s because Finastra is, among other things, a banking-as-a-service (BaaS) provider, meaning it offers the technical backbone that supports a range of banking-type services that enable non-banks of all shapes and sizes – from retailers, to insurance companies, to car manufacturers – to offer financial services directly to their customers.

It’s a new segment of digital finance and it’s growing fast.

A large part of this growth is expected to come in the form of increasing demand for new types of digital banking services, which BaaS can now support. Think about options like payments processing done right within a retailer’s systems. Or personalized insurance quotes available in seconds, not hours. Or the growing availability of pay-per-use services. All are being built on the backbone of BaaS, integrating savings, credit, insurance and investing tools into a growing array of new, non-financial sites and apps.

What Exactly is Banking-as-a-Service?

At its core, banking-as-a-service (BaaS) is the use of technology to infuse banking activities such as lending, payments, and more directly into any business. More specifically, it uses APIs to connect regulated banking infrastructure to non-bank third parties who can then offer a range of both retail and wholesale banking products and even develop new services. That means that everything from B2B service providers to B2C retailers can now leverage BaaS to bring what looks and feels like financial services right to their own sites.

There are three primary parts of the BaaS ecosystem.

First, the providers, or traditional financial institutions that are licensed and regulated to offer financial products. They are the banks capable of actually supporting the digital banking services that BaaS customers use. Then there are the so-called enablers, or the tech firms that provide the APIs and other backbone infrastructure to help embed financial services into third-party platforms and apps. And then come the distributors, or the brands that get these embedded financial products in front of their end users and help turn them into customers.

The idea here is two-fold: To make it easier for consumers and businesses to work with brands by streamlining the financial side of any transactions, while offering banks and other institutions a new revenue stream by labeling their products and services. BaaS is simplifying the process of working with banking products by bringing them closer to where they’re needed, often at the point of purchase, and enabling the development of new, digital-first options.

Commercial applications are emerging as well. As easily as a shopper can now pay for a purchase directly via their retailer, businesses can also now take advantage of BaaS functionality to do things like set up a new bank account from within their accounting platform or leverage their cash flow data to auto-access a line of credit as needed.

New Talent Requirements

All that said, increasing adoption of banking-as-a-service is changing the skills that are needed to compete in the marketplace. Financial services firms need to level up their tech talent in order to meet new demands for products and services, while their fintech customers need to think strategically about how to best position these new offerings on their own platforms.

Risk & compliance talent, in particular, will be a critical need going forward, both to address potential regulatory oversight but also to shore up data security and other potential concerns. As this market continues to evolve, fintechs will likely become more selective about who they choose to partner with, and risk & compliance metrics could become a key criteria that customers use to make those decisions.

We’re already seeing both of those trends play out among clients at JM Search. After all, banking-as-a-service is a relationship business, and collaboration between both providers and customers is key to creating successful partnerships. Banks and fintechs need to be aligned not only on strategic initiatives, but also have the skills on both sides to execute on their plans.

Why Here, Why Now

As of 2023, there are 125 banks already providing banking-as-a-service functionality and dozens more that are in the process of developing it. So far, they are focusing on two primary applications: Fintech companies leveraging traditional bank services using the BaaS model, and online businesses integrating their own banking capabilities.

Regardless, BaaS is also emerging as an important source of revenue for banks that are still under threat from new fintech competition. For example, a fintech with a strong online presence might decide to start a new consumer bank offering checking and savings, or maybe even trading accounts. That could be seen as a threat to traditional financial service providers that might devalue the bank’s own brand in the marketplace. But, if those services are actually based on capabilities provided by Bank of America or another bank, for example, everyone wins.

And it’s not a moment too soon, either.

The concept of shared data and infrastructure is becoming the assumed expectation among consumers across many different industries, including financial services, because it enables more convenient, more personal, and more flexible products and services.

According to PwC, banking-as-a-service, and its related analogue embedded finance, represent a $54 billion market as of 2022 that’s expected to grow fivefold over the next decade to nearly $250 billion. It will soon be part of the embedded payments ecosystem, enabling hyper-personalized insurance, supporting instant credit decisions and much more across a range of non-financial apps and websites. Relevant talent is going to be in high demand as this space continues to scale. Hiring needs to start now.