How BaaS Startups are Changing Banking Forever

Software-as-a-service, where companies offer cloud-based applications to their clients on a non-ownership basis, allowing them to avoid splurging on expensive in-house infrastructures, has become thoroughly ingrained in our professional and personal lives. It’s certainly yielded rich rewards for the numerous SaaS startups that have sprung up in recent years, with the “as-a-service” model being continually adapted in eclectic ways.

A case in point is BaaS (like the tech world needed more acronyms). Short for banking-as-a-service, it’s shaping up to be a serious game-changer within fintech. Just take a recent survey which shows that more than 51% of European businesses expect BaaS to make legacy banking services obsolete. What’s more, a not-insignificant 39% said they’d already implemented BaaS products within their businesses, which will come as interesting reading for fintech founders eyeing new business opportunities.

Simply put, the BaaS model allows companies to provide banking services without actually being banks. In other words, thanks to BaaS, you could potentially create a startup that offers your customers branded current accounts, credit cards and loans without you having to go through the long and arduous process of obtaining a banking licence (with all the regulatory and compliance hurdles that process presents).

This is made possible by connecting your business infrastructure to that of a bank through an API (which is an interface that allows two different software systems to communicate and share data). You’d essentially be renting the bank’s services in order to pass them onto your customers. This can allow you to enhance the range of services you can offer, cross-sell with greater ease, and boost both customer loyalty and your revenues.

Let’s say, for example, you’re the founder of a B2B e-commerce company that provides tools and materials for tradespeople in the construction industry. Utilising the BaaS model, you might choose to diversify by offering your customers a series of tailor-made financial services. These could include business credit cards that allow your customers to accrue loyalty points when they purchase items, or loans for the setting up of construction companies. By doing so, you become a one-stop shop for your customers’ business needs, and a far cry from just another tools supplier.

It’s easy to conflate BaaS with open banking, another rapidly expanding space within fintech which we discussed in more detail in this blog post. The two models work in a similar way, with non-bank companies leveraging bank systems through APIs. Indeed, BaaS technically falls within the wider category of open banking, although in practice the two terms are typically associated with two different models.

Open banking is usually taken to specifically refer to non-bank companies accessing customer data held by banks. This data is then used to offer particular services to the non-bank company’s customers. For example, a financial management app might use open banking to aggregate bank and credit card information in one place, thereby allowing users to better oversee how they spend and save. The app isn’t actually providing banking services itself – it’s simply laying out the data in a useful way.

By contrast, BaaS means that the bank’s actual services are integrated into a company or app’s offering, and provided under that company’s branding. It’s for this reason that BaaS is often referred to as white-label banking.

A number of fintech startups have been capitalising on the growth potential of BaaS. Last year, the London-based fintech firm Griffin enjoyed a £12.5 million funding round “to innovate, scale our business, and focus on building the best banking platform possible” (in the words of its co-founder and CEO). Predicated on the idea that “API banking opens the door to innovation”, Griffin provides B2B BaaS solutions for fellow fintechs, including business current accounts, branded debit and credit cards, loans, and dedicated white label deposit accounts for their fintech clients’ customers.

Another London company that’s had investment windfalls of late is Banked. Raising  almost £30 million in separate rounds last year, Banked allows businesses and consumers to make real-time card payments online without having to input financial details, store sensitive bank details on internet browsers, or create third-party accounts. It does this by using an API to connect with the users’ bank accounts online. This makes the checkout process very slick and seamless. Its founder has noted the appetite which investors have for BaaS platforms, saying “there is a queue forming to be part of the new payment network and to help shape its future with a seat at the table.”

These examples highlight one stark fact: that the banking sector is undergoing a transformational moment. It’s an era that is seeing a new ecosystem of startups flourish, and providing new revenue opportunities for traditional banks which can provide packages of financial solutions for non-bank businesses to leverage.

In the words of a report published last year by international consulting firm Arthur D. Little, “As their traditional markets and margins come increasingly under threat from disruptors, we believe that BaaS will be the route to salvation for many incumbent banks. There are already signs that BaaS is being adopted by small and midsize banks operating at subscale and, as more do, we expect to see this segment of the market grow.” Little’s analysts predict that European revenues from BaaS may reach as high as $350 billion by 2030, “which would amount to about 20%-25% of total European banking income.”

Exciting developments indeed, whether you’re an executive at a long-established high street bank or a plucky entrepreneur setting up a tech firm in your bedroom. Watch this space.