Banking-as-a-Service: What You Need to Know

Updated on May 23, 2023

At a Glance: Banking as a Service (BaaS) is a financial concept that allows non-financial companies to offer financial services to customers using a financial institution’s infrastructure via an API. BaaS simplifies the process of accessing financial products and offers businesses faster and more cost-effective methods to leverage them. BaaS providers offer a range of services, including payment processing, card issuance, KYC services, and compliance services. Companies can leverage BaaS to accept card payments, issue virtual cards, and simplify KYC compliance. Some of the BaaS companies include Solarisbank, Marqeta, Railsbank, SynapseFI, and Stripe.

These days, traditional banking is falling behind and business owners must stay abreast of several financial terms to remain informed, including fintech, embedded finance, B2B payments, consumer finance, and others. Among these, one of the most crucial financial concepts that entrepreneurs should comprehend is Banking as a Service (BaaS).

In recent years, fintech firms have introduced groundbreaking technologies that have revolutionized the delivery and accessibility of financial services. BaaS allows non-financial enterprises to provide financial services to their consumers both during and after the point of sale. However, what exactly is BaaS, and how can it benefit business growth?

In this article, we will explore the definition of Banking as a Service, its significance, and examine some of the popular applications of BaaS.

What is Banking as a Service?

Due to its novelty, the concept of BaaS is not yet widespread, but it is not as complex as it may seem. Fundamentally, BaaS constitutes an environment in which a non-financial entity utilizes a financial institution’s infrastructure, typically in the shape of an API, to furnish banking services to its clientele.  

How Does BaaS Work? 

To comprehend the functioning of BaaS, let us consider a hypothetical situation. Assume that Company X is a renowned global retailer that wishes to offer a credit product at the point of sale but does not want to spend time and resources to create it in-house. Company X could collaborate with Bank Y and use its licenses and infrastructure to offer the credit product.

Although a credit product has several advantages for both the business and the consumer, BaaS can prove much more effective if utilized correctly. Suppose Company X desired to provide a debit account product to its customers. In that case, Company X would have access to all transactions made on those accounts, generating valuable insights into consumer behavior that would enable the business to adjust marketing strategies, respond quickly to market trends, and gain a potent and agile competitive edge.

In short, BaaS presents an enormous opportunity for businesses to obtain valuable and actionable insights while concurrently offering a plethora of advantages to their customers.

Who’s Offering BaaS and How?

There are several BaaS companies, each offering a unique product. Here are a few examples:

  • Solarisbank – Solarisbank provides BaaS solutions to companies across Europe, enabling them to offer financial services to their customers. The Berlin-based company provides APIs for banking services such as payment processing, digital banking, and KYC services.
  • Marqeta – Marqeta is a BaaS provider that specializes in card issuance and payment processing solutions. The Oakland-based company offers APIs that enable businesses to create customized payment cards and payment processing solutions for their customers.
  • Railsbank – Railsbank is a BaaS provider that offers a global platform for companies to offer banking services to their customers. The London-based company provides APIs for banking services such as payment processing, card issuance, and compliance services.
  • SynapseFI – SynapseFI is a BaaS provider that offers APIs for banking services such as payment processing, KYC services, and card issuance. The San Francisco-based company specializes in providing BaaS solutions to fintech startups and other businesses.
  • Stripe – Stripe is a BaaS provider that specializes in payment processing solutions for businesses of all sizes. The San Francisco-based company provides APIs for payment processing, subscription management, and other payment-related services.

These are just a few examples of BaaS companies and the products they offer. Each company has its unique set of services and solutions, catering to the needs of different businesses. But this is just a sample. There are many, many BaaS companies working to improve financial tools for healthcare professionals, merchants, and other business owners, too.

Why You Should Care about BaaS

Why should entrepreneurs and business owners be interested in BaaS? The answer is opportunity. The finance industry is among the most heavily regulated sectors, and accessing it necessitates a significant amount of time and resources, particularly from external sources. However, BaaS simplifies the process and provides a faster and more cost-effective method to leverage financial products than ever before.

In a fundamental transformation of financial services, BaaS providers and their APIs enable businesses to offer customers an extensive range of financial services and an enhanced experience overall. Still skeptical about the importance of BaaS? Consider examining Amazon’s aggressive investments in financial services. As perhaps the world’s leading commerce company, Amazon is offering new financial products such as Amazon Cash, Amazon Go, and Amazon Payments.

Banking-as-a-Service Use Cases

Having established the definition of BaaS and its potential benefits for businesses, it is time to explore several ways in which companies can leverage BaaS to capitalize on the opportunities it presents. These include:

  • Accepting Payments
  • Issuing Virtual Cards
  • Simplifying KYC Compliance

Below, we’ll dig into each of these popular use cases for BaaS. 

Accepting Card Payments

One of the most significant advantages of BaaS is that businesses can now accept credit card payments within their own applications. Only a few years ago, companies were required to comply with intricate regulatory requirements to accept card payments. However, with BaaS, the API provider manages compliance-related issues. Additionally, businesses can store users’ credit card information in a tokenized format for swift use in the future, and compliance regarding the handling of this sensitive data is once again managed by the provider, rather than the business.

Issuing Virtual Cards

The use of plastic credit and debit cards is rapidly becoming outdated. However, it is not just major financial institutions that can offer their cards in digital format. Businesses that leverage BaaS can offer their customers unique benefits through their own customer cards, such as points or discounts. This ability to issue cards provides several advantages for the business, including increased customer engagement and access to valuable client data. Nevertheless, BaaS offers more opportunities than traditional credit cards. For instance, with BaaS, businesses can enhance privacy and customer protection through temporary and disposable virtual cards. Additionally, companies can improve the customer experience with tokenized cards that work with Apple Pay and Android Pay. These are just a few of the many ways that issuing digital cards can benefit businesses.

Simplifying KYC Compliance

As part of regulatory requirements, financial institutions must adhere to “Know Your Client” (KYC) checks. These checks are designed to authenticate customers and screen them for potential money laundering. Apart from compliance requirements, financial institutions may need to provide KYC documentation to customers in certain circumstances. However, complying with KYC regulations can be a daunting task, and most businesses lack the resources to undertake such a complex responsibility.

Working with a BaaS provider automates the burden of KYC checks. The API incorporates KYC services, enabling due diligence to be conducted while customers engage with the product.

Final Thoughts

As a business owner, staying informed about the financial technology sector can be overwhelming. However, BaaS is an area of fintech that is undoubtedly worth comprehending. Collaborating with a BaaS provider can help businesses enhance their customer connections and services through financial products, without having to undertake the arduous and resource-intensive tasks of infrastructure development and complex compliance requirements. This allows businesses to better allocate their resources toward building and growing their business.

Read Next: How Fintech is Revolutionizing B2B Payments >>

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.